The Provincial Value Added Tax (VAT) Bill 2010 has proposed VAT exemption on supply of financial services, supply of educational services and services relating to land provided it is to be used for agricultural purposes. It is learnt on Saturday that the draft Bill prepared by the Federal Board of Revenue (FBR) will be dispatched to the provincial governments for their comments on Monday (January 4).
The Provincial VAT Bill 2010 contains more elaborate exemptions schedule (First Schedule), which may be used for furnishing detailed comments on VAT exemptions on services. A copy of the final vetted Federal VAT Bill 2010 has been deposited by the FBR with the Law, Justice Division for putting it before the National Assembly. The perusal of this Bill will help in harmonising the common provisions of the Provincial VAT Bill 2010 with those of the Federal VAT Law.
The FBR has urged provincial governments to sent views on the draft Provincial VAT Law early so that the core drafting team may finalise the Provincial VAT Act. Sources said that the purpose of the Provincial VAT Bill 2010 is to introduce and implement a broad-based tax on sales and purchases of services to be integrated with the federal taxes on sales and purchases of goods and terminal taxes on goods, or passengers carried by the railways, sea or air, taxes on their fares and freight, each tax to be cross-credited against the other to form a broad-based tax on consumption throughout Pakistan.
Under Provincial VAT Bill 2010, where a supply is exempt, it is exempt without credit. This means that exempted supplies are in fact partially taxed because the inputs to the supply are taxed but the supply itself is not. An exempt supply is thus an 'input taxed' supply. In contrast, an exempt import is a non-taxable import, which means that no tax is paid on import. Exempt imports therefore bear the same tax burden as zero-rated imports.
Where a supply is zero-rated, it is exempt with credit. This means that zero-rated supplies shall bear no tax, because the tax inputs to the supply are refunded to the supplier and the supply itself is not taxed. A zero-rated supply is thus fully exempt from tax, Provincial VAT Bill 2010 added.
The First Schedule (exempt supplies) of the Provincial VAT Bill 2010 has given VAT exemption on the following supplies: Funeral, burial or similar services; services by religious institutions exclusively for the observance or promotion of religion and services by [an approved non-profit charitable organisation]; financial services.
A supply of "education services", consisting of tuition or instruction for students provided by an institution duly registered by the [Minister of Education], being a pre primary, primary, or secondary school; a technical college, community college, or university; an educational institution established for the promotion of adult education, vocational training, improved literacy, or technical education; an institution established for the education or training of physically or mentally handicapped person and an institution established for the training of sports persons.
The VAT exempt supplies would cover the following supplies of immoveable property: A supply of vacant land; a supply of land to the extent that it is to be used for agricultural purposes; a supply of immoveable property to the extent that the property relates to residential premises, including land that is reasonably attributable to such premises; a lease, licence, hire or other form of supply, to the extent that it is a supply of the right to occupy or be accommodated in residential premises; provided to an individual (alone or together with other individuals) who resides therein under terms consistent with a landlord and tenant agreement and for a continuous period of more than [45] days (counting the first day on which the person is supplied the accommodation and disregarding the day on which the person ceases to be provided with the accommodation).
A supply of accommodation in, or the right to occupy as a residence, a caravan, houseboat, camping site, boat, marina berth, or similar place on terms commensurate with those of landlord and tenant if the accommodation is provided to an individual (alone or together with other individuals) for a continuous period of more than [45] days (counting the first day on which the person is supplied the accommodation and disregarding the day on which the person ceases to be provided with the accommodation).
The exempt supplies under the Provincial VAT Bill 2010 would also cover a supply by a condominium corporation to a member of the corporation, if the unit that is owned by the member, or the property the member is entitled to occupy as a consequence of its membership, constitutes residential premises (including any garage, storage space, or other space associated with the premises, so long as that space is of a type commonly considered to be part of residential premises). For the purpose of this Schedule; and except to the extent they are provided in return for an explicit fee or charge, the following supplies are "financial services":
-- Granting, negotiating, and dealing with loans, credit, credit guarantees, and security for money, including management of loans, credit, or credit guarantees by the grantor; transactions concerning money, deposit and current accounts, payments, transfers, debts, cheques or negotiable instruments, other than debt collection and factoring; transactions relating to financial derivatives, forward contracts, options to acquire financial instruments, and similar arrangements; transactions relating to shares, stocks, bonds, and other securities, other than custody services; management of investment funds.
Provision, or transfer of ownership, or a contract to provide: Life insurance; health insurance and crop insurance, or the provision of reinsurance in respect of such contracts; Provision or transfer of ownership of an interest in a scheme whereby provision is made for the payment or granting of benefits by a benefit fund, provident fund, pension fund, retirement annuity fund or preservation fund; a supply of credit under a finance lease, if the credit for the goods is provided for a separate charge and the charge is disclosed to the recipient of the goods.
The Second Schedule (zero-rated supplies) of the Provincial VAT Bill 2010, stated, "To the extent that it consists of a supply of services that would otherwise be taxable under this Act, the sale or transfer of an economic activity, or part thereof, as a going concern by a registered person to another registered person is zero rated.
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