Levy/collection of ST on supplies/services by restaurants: Jurisdiction issue crops up

The issue of jurisdiction for levy and collection of sales tax on supplies/services provided by restaurants has arisen after issuance of notices by Federal Board of Revenue (FBR) to restaurants registered with Sindh Board of Revenue (SRB).
Sharing details of the dispute between the SRB and the FBR, Arshad Shehzad, a prominent Karachi-based sales tax expert, told Business Recorder here on Tuesday that after promulgation of Sindh Revenue Board Bill 2011-2012, Sindh Assembly delegated powers for collection of sales tax on services to the SRB.
It is important to note that under the Constitution, sales tax on services is a provincial subject. However, except the province of Sindh no other province has yet formed a designated authority for collection of sales tax on services. The other provinces opted to delegate their powers to the FBR.
In order to regulate the law for sales tax on services, Sindh government introduced Sindh Sales Tax Act, 2011 wherein part-B of its Second Schedule, services of hotels and restaurants against H.S. code 98.01 were declared liable to 16 percent sales tax, he stated.
By virtue of above amendments all the restaurants operating in the province of Sindh were registered with SRB to fulfil their legal obligations as per SRB tax laws. On the other hand, it has been reported that recently Regional Tax Office, Karachi working under the administrative control of the FBR has started issuing notices to restaurants to file their sales tax returns with FBR. The RTO office has challenged the jurisdiction of SRB over restaurant on the grounds that restaurants are providing food to their customers, thus they are basically termed as supplier of goods and not services.
However, the Sindh Sales Tax Act, 2011 clearly talks about imposition of 16 percent sales tax on services provided by hotels and restaurants. Despite the fact that legally restaurants have obtained sales tax registration with the SRB as per relevant provisions of the Sindh Sales Tax Act, 2011, the RTO of the FBR has intervened to force the restaurants to start filing sales tax returns with the FBR.
Sources said that the SRB relies on historic treatment of restaurants as services by the FBR and thus claims that powers for collection of sales tax on restaurants rest with provinces. Arshad Shehzad pointed out that it is very unfortunate that such important policy issues were dealt in such a manner. According to him, there is an apparent lack of co-ordination between Federal and Provincial sales tax collection authorities. Dispute over definition of services and goods are not new in sales tax. In developed countries there are a number of precedence on the subject.
According to his observation, this is not the only issue: services providers whether banks, couriers, insurance, clearing forwarding or any other service industry, filing there sales tax returns with SRB is not accepted by the FBR, resultantly input tax adjustment/refund claimed by recipient of services is not validated by the system or appears in objection in the database of the FBR, since July 2011. Hundreds of notices for verification of inadmissible/illegal input tax adjustment involving billions of rupees issued by the FBR pertain to this single issue of non-verification only, he added. Policy and harmonisation of sales tax law on goods and services are need of the hour and FBR being a parent regulatory authority is required to discharge its responsibility, Shahzad concluded.