Sales tax on services provided or rendered by construction industry

A builder, did ask our firm a specific question by stating that he is engaged in selling of apartments and buying of land for construction of buildings, and whether or not in the light of provisions of Sindh Sales Tax on Services Act, 2011,1 service rendered and provided by him (land development, sale of apartments and plots) do attract Sales Tax? This write up examines the legal position regarding the levy of Sales Tax on service provided or rendered by the construction industry.
In order to regulate the levy of Sales Tax on services provided, rendered, initiated, received or consumed in the province of Sindh, the provincial government enacted, the Sindh Sales Tax on Services Act, 2011, which became enforceable from the first day of July 2011.2
For the purpose of this levy, a service has been defined, it include (and does not limit), the activities listed in column (2) of the first schedule to the act read with Chapter 98 of the Pakistan Customs Tariff.3 A study of the said listed items shows that construction activities have been included in the schedule and Sales Tax is payable.4
Sales tax is chargeable, levied and collected on the value of taxable service at the rate specified in the schedule.5 The term taxable service has been defined to include a service which is listed in the second schedule to the Act,6 and for that an individual or a business engaged in rendering services is required get a registration with the Sindh Sales Tax Department. For the levy of tax, the term services include a service rendered even to a non-resident. A service provided by non-resident persons to resident person is also taxable.7 For the purposed of this act an office of a builder or of a construction company outside the province of Sindh will be a separate legal entity. For charging tax on service rendered by a non-resident, his services become taxable if they do fall within the definition of the term, 'economic activity'.8 The term 'service' also includes a business, supply of moveable property by lease, or other similar arrangements including license to use the property, and the trading business.9
The value of taxable service for the purpose of charging of tax is consideration in money (and includes all other taxes) received from the recipient of the service; however, deduction of trade discount is permissible from the sale price. Permissible consideration will be an open market price.10 The open market is to be determined in the prescribed manner.11 The service attracts tax at the rate of16%,12 and the tax is payable on a monthly basis.13
The liability to pay the tax is on the person rendering the services.14 Services provided or rendered by property developers or promoters are also taxable.15 The term services in respect of property developer and constructor includes: 16
a) Development of purchased or leased land for conversion into residential or commercial plots.
b) Construction of residential or commercial units.
Under the law, a builder engaged in the supply of service is required to be registered, that means a legal person engaged in the development of land and construction of residential or commercial units will get them registered with the Sindh Sales Tax department immediately after the commencement of the Act.
In respect of services relating to residential or commercial units, sale tax is chargeable under the provisions of the Act.
The tax is payable by taxable person at the time of filing of the tax return.17 The taxable services stands provided during a tax period in which it was provided, or when a tax invoice was served to the recipient of service, or when consideration for the supply was received.18 The mode, manner or time for the tax payment is chargeable by the competent authority.19 The tax is to be deposited in a designated bank on the prescribed payment challan as specified in Form SST-04 or through electronic payment system devised for this purpose.20 In case of sale or change of ownership tax is payable by the new purchaser.21
Where a dispute arises regarding payment of tax, the dispute will be resolved by an officer not below the rank of an Assistant Commissioner by adjudicating the issue in the prescribed manner.22
Application for registration (Form SST-01) shall be submitted electronically to the Sindh Board of Revenue23 (hereinafter referred to a board). The registration of service provider may be transferred from one jurisdiction to another jurisdiction by the Board.24
All registered persons shall file a return in the Form SST-03 along with required documents. This return shall be filed electronically in the specified manner.25 A revised return for making payment of tax is also permissible,26 in some cases it is subject to grant of permission by the competent authority.27 For the determination of Input Tax procedure has been laid down.28 For claiming Credit or Debit, mechanism has been provided in the rules.29
From the study of these legal provisions, it is evident that a number of issues will arise in the implementations of this enactment, and these issue include, capital goods schemes, issues of dwellings, residential and charity buildings, construction works, conversions, renovations, sales and lettings, refund schemes, and time of supply etc. The provisions of the act on these issues are wanting.
1. Sindh Act No XII of 2011, enacted on 10.6.2011.
2. See sub-section (3) of Section 1 of The Sindh Sales Tax on Service Act, 2011. (hereinafter referred to as 'Act')
3. Sub-section (35) of Section 2 of the Act.
4. Heading 9807.0000 of the Second Schedule to the Act.
5. Section 8 of the Act.
6. Section 3 of the Act.
7. See sub-section(2) of Section 3 of the Act.
8. See Section 4: Economic activity. - (1) An economic activity means any activity carried on continuously or Regularly by a person that involves or is intended to involve the provision of services to another person and includes -
a) an activity carried on in the form of a business, including a profession, calling, trade, or undertaking of any kind, whether or not the activity is undertaken for profit;
b) the supply of moveable property by way of lease, license or similar arrangement; and
c) a one-off adventure or concern in the nature of a trade.
2) Anything done or undertaken during the commencement or termination of an economic activity is part of the economic activity.
3) An economic activity does not include -
a) the activities of an employee providing services in that capacity to an employer;
b) a private recreational pursuit or hobby of an individual;
c) an activity of a person other than an individual, which is essentially carried on as a private recreational pursuit or hobby of a member, owner, or associate of the person; or
d) an activity carried on without a reasonable expectation of profit by an individual or an association of persons, all of the members of which are individuals.
9. Section 3 of the Act.
10. Section 5 of the Act.
11. Open market price. - (1) The open market price of a service is:
(a) the price the service would fetch in an open market transaction freely entered into between persons who are not associated persons; or
(b) if it is not possible to determine an amount under paragraph (a), the price a similar service would fetch in an open market transaction freely made between persons who are not associated persons, adjusted to take account of the differences between the similar service and the actual service, determined on the basis of the market conditions prevailing at the time and place at which the service is provided.
(2) If the open market price of a service cannot be deter mined under subsection (1), it may be determined using any method approved by the Board for calculating an objective approximation of the price the service would fetch in an open market transaction freely made between persons who are not associates.
12. Id n.7.
13. Sub-section (42) of Section 2 of the Act.
14. Section 8 of the Act.
15. Heading 9807.0000 of the Second Schedule to the Act.
16. Id n.7.
17. Sub-section (1).
18. Id n.19.
19. Id n.19.
20. Rule 14 of the rules. Where due date has been prescribed as 15th of a month, the tax due shall be deposited by the 15th and return shall be submitted electronically by 18th of the same month
21. Section 19 of the Act.
22. Section 23 of the Act.
23. Rules of the Sindh Sales Tax on Service Rules 2001 (hereinafter referred to Rules).
24. Rule 8.
25. The manner to file the return is provided below:
i. A registered person shall obtain a unique User-ID and password be e-Enrolling with. Sindh Revenue Board web portal and electronically file a return (available on the website) from the web portal. The return data shall be filled in a web form and will be submitted online to Sindh Revenue Board by using e-SRB Web portal at http://e.srb,gos.pk. The Sindh Revenue Board web portal would also provide instructions on how to fill this e return.
ii. The electronic return can be filed by a registered person (self) or through an e-intermediary licensed under rule 19 of these rules.
iii. To file the return, the registered user shall logon to e-portal of Sindh Revenue Board at http:// e.srb.gos.pk using the assigned User ID and password. Stepwise procedure for electronic filing of return would be as follows -
(a) select Sales Tax on Services return from declaration menu;
b) select the Tax Period, month, quarter from the drop down list;
c) click the monthly or quarterly return link to open the return Form;
d) return Form will be displayed which will be filled in accordance with the instructions provided;
e) taxpayer shall fill out the relevant Annexes of return Form by providing the invoices details, amount value and sales tax charged. The uploading facility for data files is available in all Annexure forms;
f) based on the details entered in the relevant annexes of return, the total values of main Return Form will be auto calculated;
g) the payable Sales Tax column will be showing the Sales Tax payable by the registered person;
(h) registered person shall verify all the details displaying in the prepared return Form;
(i) the e-payment Challan in-Form (SST-04) shall be generated automatically from the system after verification of the prepared return by the registered person.
Iv. E-filing can be completed in the following stages -
a) the user shall fill in all the relevant fields. (The return may be saved at any time during preparation process to avoid data loss);
b) the returns may be verified by the person having access to Personal Identification Number (PIN) code. He shall press the Verify Button given at the bottom of form and follow the instructions;
(c) this option may be availed by person opting to deposit tax amount in an National Bank of Pakistan branch or other designated bank which is online with Sindh Revenue Board server for e-payments. After verifying the return, epayment button can be clicked which will generate the payment Challan Form (SST-04) with payment slip identifier (PSID) and SID number. Registered person should print the Challan Form (PSID) and deposit the payable amount against the same. The bank shall accept the payment and provide computerised payment receipt, (CPR) to the registered person as an acknowledgement.
v. The user will be required to enter the CPR ID received from National Bank of Pakistan Branch on his return Form. On entry of CPR ID the submit button on Return will be enabled. The registered person will click the submit button and a message shall appear at the top of screen, stating that your return has been submitted. Acknowledgement shall be printed by clicking the Print Acknowledgement button. The submitted return shall also be printed and saved on user's computer in PDF format. The registered person are advised to quote the Computer generated number of the e-filing acknowledgement in all their future correspondence with Board.
vi. The responsibility for filing the returns and all the information contained therein is that of registered person. Registered person should hence keep his user ID and Password allotted by the department strictly confidential.
vii. The electronic Sales Tax return and its relevant attachment, if any, shall be kept in electronic record of the registered person and shall be produced to the officer-in-charge in demand along with supportive documents.
26. Rule 17
27. Id n.17
28. Rule 22
29. Rule 23
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates)