Sales tax laws on distribution: PBC approaches NTC for resolution of federation-provinces dispute

ISLAMABAD: The Pakistan Business Council (PBC) has approached National Tax Council (NTC) for resolution of dispute between federation and provinces on the issue of sales tax relating to purchases and sales of goods by distributors.

According to a communication of the PBC to Finance Minister and Chairman NTC Muhammad Aurangzeb on Thursday, the said issue concerns overlapping of sales tax on economic activity undertaken by distributors.

Thus, it falls under the terms of reference (TORs) of the NTC, and requires collaboration among federal and provincial tax authorities to develop consensus based guidelines for taxpayers concerning the application of sales tax laws on distribution and subsequent supply arrangements.

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The PBC has also sought clarifications on Sindh Sales Tax on Supply Chain Management or Distribution Services from the Federal Board of Revenue (FBR) and Sindh Revenue Board (SRB).

The PBC has informed the FBR/SRB that the issue is related to the payment of Sindh Sales Tax on Supply Chain Management or Distribution Services as outlined in Tariff heading 9845.0000 of the Sindh Sales Tax on Services Act 2011.

The PBC acknowledged and appreciated the SRB’s attention to the potential ramifications of recent judgments on distribution arrangements across the nation. It is evident that these implications could significantly affect tax revenues at both the federal and provincial levels, highlighting the necessity for clear guidelines and clarifications to prevent double taxation and maintain a favorable business environment.

The PBC advocated strongly for the issuance of comprehensive guidelines by the SRB & the FBR to address the central question regarding:

(i); The segregation of the price of goods received by the manufacturer, in accordance with Federal Board of Revenue provisions.

(ii); The imposition of sales tax on distributor’s margins or income.

(iii); The implementation of guidelines for tax adjustments at different levels (i.e., Federal and Provincial) to ensure the harmonization of input and output tax adjustments between manufacturers and distributors (viz-a-viz between Federation and Provinces).

(iv); The guidelines should differentiate between third schedule and non-third schedule items, considering that manufacturers are subject to federal laws under the Sales of Goods Act, while distributors may fall under provincial services tax regulations.

Additionally, the guidelines should take into account goods listed in the Third Schedule of the Federal Sales Tax Act, 1990 (‘FST’), wherein manufacturers are already subject to sales tax based on retail value,which encompasses the distributor’s margin.

Levying provincial sales tax on the supply of these goodswould lead to double taxation. Moreover, consumers of items currently under zero-rating and exempt regimes of the FST, particularly in the dairy and pharmaceutical sectors, would be adversely affected by any supplementary taxes. It is imperative to mitigate unintended consequences on these critical sectors.

The breakdown of transactions into sub-transactions introduces complexity for tax purposes, and we seek clarification on the rationale behind such practices.

Furthermore, the PBC requested clarification on the stance of Federal and Provincial tax regulators regarding scenarios where a sale is considered not to have occurred upon the delivery of goods. Such assertions could have adverse implications for accounting practices and the existing VAT system.

The PBC stressed the importance of aligning arrangements with the predominant nature of economic transactions.

Considering the potential implications, the PBC proposed collaboration between Federal and Provincial tax regulators to develop consensus-based guidelines for taxpayers concerning the application of sales tax laws on distribution and subsequent supply arrangements. It is crucial to engage with other provinces, including Islamabad, to ensure consistency in tax regulations across regions.

In light of these considerations, the PBC believed that formulating guidelines encompassing methodologies for post-sale services and place of supply rules would facilitate the identification and taxation of relevant services in the future.

The PBC added that further discussions and collaborative efforts aimed at tackling these challenges and enhancing our tax regulatory framework.

Copyright Business Recorder, 2024