Service providers: Tax to be deducted on amount excluding reimbursable expenses: SHC

ISLAMABAD: In a landmark judgment, a division bench of the Sindh High Court (SHC) has held that in case of service provider the amount on which tax is to be deducted by a withholding agent is the net amount excluding the reimbursable expenses like salary.

Multiple writ petitions were filed before the SHC seeking declaration that withholding tax under section 153(1)(b) of the Income Tax Ordinance, 2001 has to be deducted on the amount of their service fee and not the gross amount received from the recipient of the services, which includes amount of salaries, contributions and insurance etc.

The petitioner had also sought a declaration that whether the word “turnover” has been used in this respect, including for obtaining an exemption certificate, it is only the gross service fee and not the entire amount of gross receipts.

When contacted, Muhammad Taimoor Ahmad Qureshi, Counsel of ASK Development Limited explained that the Company is a human resource and manpower service provider and renders such services to large corporate recipients by providing employees under agreement and employees so engaged work under the control of service recipient, whereas the Petitioner Service Provider are paid charges for such services, which includes their fee for services and the reimbursement of salaries and dues of employees. The recipient of services are deducting tax at source of the service provider on the gross receipts and not on their fee and as such excessive deduction at source is made on that part of gross receipt which are actually reimbursement of salaries of the employees.

Whereas, the tax deducted has been made minimum tax which means that neither it is refundable nor can be carried over whereas actual tax liability on the income of the service provider is much less than the tax deducted at source.

He explained that the learned Division Bench after an exhaustive discussion of the relevant provisions has accepted the writ petitions and the operative part of the order is as under: In view of hereinabove facts and circumstances of the case, the petitioners have made out a case and it is accordingly held hat for the gross amount referred to in section 153(1)(b) on which advance tax has to be deducted at the rate specified in Division III of part III of the First Schedule to the Ordinance, is the gross fee received in lieu of services excluding the amount of reimbursable expense. It is further held that for the purposes of clause 94 in Schedule II Part IV of the Ordinance (Since repealed) the turnover would be as defined in section 153(7)(b)(v) which is gross referred for rendering services excluding the amount of reimbursable expenses.

All petitioners are accordingly allowed to this extent. All impugned actions of the respondents stand modified accordingly.

Copyright Business Recorder, 2021