The government of Pakistan proposes to bring 50 more services into the general sales tax (GST) net. It is a good omen that the "working group" on the GST is also analysing revenue collection from the existing service providers.
I hope that the "working group" not only analyse the revenue collection from the existing service providers but also makes objective cost-benefit analysis (net revenue collection vs. additional expenses on net collection) of the proposed levy of GST on 50 more services, in the best interests of the country.
Each proposed service to be taxed is to be analysed individually. As we all know that if adequate net revenue cannot be generated out of a particular service, it would be an exercise in futility, resulting not only in a net loss to the country's exchequer but also reduced concentration on the tax collection from the existing registered persons.
The problems being faced with the existing registered persons are manifold and in a number of cases are pending with adjudication and at appellate forums.
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SERVICES TAX COLLECTION DURING 2002-03
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Luxurious clubs 00.58 million
Laundries & dry cleaners 02.44 million
Marriage halls, lawn 07.63 million
Beauty parlours, clinics, slimming centers 14.45 million
The following services have, however, on the face of it, show substantial revenue.
Hotels, restaurants, fast food & caterers 717.00 million
Courier services 416.70 million
Advertisement on television 214.15 million
Custom agents 241.79 million
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The existing reasonably low collection from the following services, (as reported in the daily, Business Recorder dated February 17,2004) from all the four provinces, reflects the error of judgement in bringing these services in to the tax net in the past.
But, except for custom agents, all the above services were already subjected to an unadjustable excise duty and provincial duties wherever applicable.
All such direct and unadjustable revenues were replaced by the VAT mode of the Sales Tax, which allowed input tax adjustment, particularly on electricity which forms a substantial part of the hotel, restaurant and fast food Industry.
If the above contribution is a net collection then the "working group" needs to get the figures of the net collection, ie, output tax charged by the above services less input tax claimed.
This net collection can then be compared with what the government was already earning on the excise duty and provincial taxes, (wherever applicable) on such services, so as to arrive at the incremental revenue.
As regards contribution from custom agents, the entire payment of the sales tax, by the custom agent, is the input tax of importers which is adjustable against the supplies by such commercial importers.
And in the case of importers of raw materials, against the supplies of finished goods by the manufacturers. So the ultimate (net) contribution from custom agents seems to be Zero.
However, the state has incurred expenses on the registration of custom agents, maintaining voluminous record of their monthly returns filed, maintaining their files/profile, and expenses on audit and the matters arising out of it, to be dealt with by adjudication/collectorate etc.
This shows that the government of Pakistan has to give serious thought before bringing in those services, against which the buyers of these services will have the undeniable right to adjust their output tax due. The appropriate cost benefit analysis should, therefore, be conducted.
The professional firms of accountants, consultants and lawyers, particularly of large and medium sized firms, provide services mostly to large and medium sized companies, that are already registered under the Sales Tax Act (except a few service providers) 1990.
If the sales tax is charged by these professional firms, to the buyer of the services, they may argue for claiming this expense as an input tax (the CBR may finally, under the logical pressure from concerned quarters, allow such adjustments and the cost of such adjustments may go unnoticed).
The admissibility of input tax paid on services is, however, disputed. Section 7, read with section 8, may be interpreted in favour of the registered person and input tax, paid for the purpose of making taxable supplies, will have to be allowed.
The root cause of any taxable supply is the carrying on of that business, which makes the taxable supply. If there is no business, there is no supply at all. All activities of a business-whether manufacturing, selling, finance or administration or for that matter any other relevant activities, must be put together to generate taxable or non-taxable supplies.
It transpires, that when any activity, whether consultancy, audit, taxation, legal services etc is acquired for the business, then it is for the purpose of making supplies.
These services do add value to the supply and any input tax, paid in acquiring such services, will have to be allowed. This is the gist of the VAT mode, in my opinion.
This finally may mean ZERO net revenue from such service providers, plus cost of registration, maintenance of the records and profile of such service providers, cost of audit, cost on adjudication and appellate officers etc.
This fact need to be explained to those pressure group urging that such services be brought under tax net.
The CBR is already short of sufficient staff to cater to the needs of audit and other matters pertaining to the existing registered persons.
Experience has shown that adding an army of auditor is not likely to result in increasing revenue.
However, it is likely that the auditors, taking advantage of the various vague provisions of the law, may generate more personal revenues.
It has been tried, at various forums, to convince the government to simplify the law to make them clear.
The back-door, purely budget oriented and hurriedly introduced legislation, is not only causing problems to the honest tax-payers, but also creating problems for the CBR, in the form of unwanted disputes.
It is, therefore, more important to build an effective system of taxation, incorporating simplified and duly legislated tax laws.
The audit, being an important component of any system of control, is effective only if introduced as a moral check and future guide to improve, rather than as a punitive tool in the hands of auditors, allowing them to detect irregularities to the extent necessary to serve their purpose only.
The purely punitive tool may only teach the registered persons to accumulate means and commit acts to meet such punishment on a net profit basis.
So far as the small-sized firms are concerned, they also provide services to the already registered persons and the impact of bringing them into the net would be almost the same as with the large and medium sized firms.
If by all means, the government of Pakistan is forced to bring in more services into the GST net, it should at least go for a gradual implementation with a justified policy for both the suppliers of goods and the providers of services.
A good number of the firms' gross revenue is not over Rs 1.0 million. Since the government has already exempted retailers with a turnover of not more than Rs 1.0 million, such small sized firms need also be exempted on the basis of their gross fee.
Furthermore, the turnover tax scheme may be extended to the service providers whose annual revenue is Rs 1.0 million and over, but do not exceed a certain sum.
The definition of whole-seller needs to be amended to accommodate their exemption or to qualify for turnover tax, as the case may be.
Since, in most of the cases, their receipts are subject to at a source income tax deduction.
The above step will enable the CBR to generate more revenue by making the least effort and with minimum expenditure.
Furthermore, the government needs additional/modified enactment's to exempt service providers from a number of provisions of the sales tax act, 1990, since they are not practical.
By tradition and under the Income Tax Ordinance 2001, such professional firms are allowed to account for their revenue on a receipt basis, due to the inherent risk in the receipts of such profession.
Therefore, the supply time of supply and a number of other provisions may not be practically applied in the case of such firms.
The revenue is not frequent and not on a daily basis. The requirements of section 22 and 23 of the Sales Tax Act may not be practically followed.
As regards indenting services, such firms whose commission is received from the foreign principal will have to be exempted.
By zero-rating their supply, the CBR may lose, as the input tax paid needs to be refunded plus the cost of registering them and maintaining their profiles.
It is interesting to note that the Sales Tax Act 1990 still has its firm roots in the repealed Sales Tax Act 1951, which primarily dealt with the sales tax on manufacturers in Pakistan.
The categories, such as that of importer, the wholesaler, distributor and retailer of goods, were also brought under the sales tax net under the Sales Tax Act 1990, which were all exempt under the repealed act.
The Sales Tax Act 1990 was, however, not modified to cater to the requirements of taxing these further categories. Issues relating to invoices, maintenance of records etc cropped up.
The present sales tax rate of 15% would be exorbitant to the services providers. The service providers would hardly benefit from the GST mode, as they would hardly have any input tax to adjust.
It is, therefore, important to bring in a distinct legislation on services before bringing in more service to the sales tax net.
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