MONDAY JULY 04: Sales tax on services: revenue to be collected as per 'Record Note'

ISLAMABAD: The Federal Board of Revenue (FBR) and the provinces will collect sales tax on services in accordance with the 'Record Note' agreed between the federation and provinces on September 28, 2010.
Sources told Business Recorder here on Sunday that the services were divided into three broad categories as per 'Record Note' finalised between the Federal Government and provinces during a series of meetings held at the Finance Division on Sep 27-28 2010.
The 'Record Note' has clearly specified names of services and authority responsible for collection of sales tax on these services. The services were divided into categories of Group-I Standalone services; Group-II Telecommunication services; and Group-III Services requiring input/output adjustments.
The sales tax on services would be collected in line with the procedure specified in the 'Record Note' agreed between the federal government and provinces.
According to the 'Record Note' on the collection of sales tax on services, Group-I Services shall include such services that neither involve transactions across the provinces nor constitute a significant proportion as inputs into other supplies.
These services shall be deemed to be of a 'standalone' nature and neither input/output adjustment nor refunds will be provided for services in this group.
Provided that meaning and extent of 'significant proportion' shall be defined by a technical committee to be chaired by Federal Finance Secretary and comprising of at least one expert from each province as well as nominees of FBR.
Group-I Services may be levied and collected by provincial governments, if they so desire. Conversely, any province may delegate collection of taxes under Group-I services to FBR. The proceeds of these taxes shall be credited to each province on the basis of collection from each province.
In case where point to point collection is not clearly identifiable, these provinces would devise a distribution formula for such amounts as are not clearly identifiable.
Group-II shall include telecommunication services, given that the origin of these services is clearly identifiable. The proceeds of GST on telecom services shall be credited directly by telecom companies to the provinces on the basis of revenue generated on the basis of origin of service in each province.
The issue of GST on services provided by the LDIs/Telcos on destination basis shall be explored by the FBR and provinces. Other services, currently placed in Group-I but where the service constitutes a significant proportion as inputs into other supplies and the origin of the services are found to be clearly identifiable may also be included in Group-II, FBR will provide input/output adjustments for services in Group-II.
After mutual agreement between FBR and the provincial governments, on the input/output adjustment and refunds provided, the FBR will intimate to Finance Division (FD) and FD will deduct the specified amount from provinces' respective share of their future proceeds.
For purposes of further clarification, GST on telecommunication services (and such other services whose origin is clearly identifiable but require input/output adjustments and refunds) shall be levied under provincial legislation in a single return and a single audit mode to be managed by FBR with returns and audit data shared with the provinces.
Group-III shall include services that constitute a significant proportion as inputs into other supplies or involve transactions across provinces, shall be delegated by the province(s) to FBR for collection. Currently, these could include:
a) Financial services, including banking, insurance, stock market operations, etc.
b) Advertising services
c) Construction services
d) Franchising services
e) Other services that constitute a significant proportion as inputs into other supplies and involve transactions across provinces. The FBR will provide input/output adjustment and refunds for services in Group-III. Net tax proceeds from services in Group-III will be placed in a separate fund which will be distributed among the provinces, as an interim measure by accepting provisionally for one year.
The 'Record Note' further said that the broad principles agreed between the federal government and provinces are: 1. GST on Services is a provincial subject under the Constitution and as such is only leviable under provincial legislation.
2. 7th NFC recognised the right of collection of GST on Services by provinces, if they so desired. Where provinces agree to delegate the power of collection of GST on Services to FBR, collection charges of 1 percent of the net collected amount shall be deducted by the Federal Government.
3. The intellectual principle is inarguable that, to the extent where identification is not clearly possible, proceeds of GST on Services should accrue to the province from which GST on Services originates.
4. A 'Service' may be defined as anything that is not a 'Goods' and shall include but not limited to services Listed in Chapter 98 (Services) Pakistan Customs Tariff 2010-11.
5. For the purpose of levy and collection of GST on Services, and keeping in view the right of the provinces to levy and collect GST on Services as well as maintaining the concept of levying a 'reformed' GST wherein input adjustments and cross provincial transactions are integrated.