Franchise fee and royalty services: controversy brewing over amendments to ST regime

Another controversy is set to crop up between taxpayers and regulators as Sindh Revenue Board (SRB) has made significant amendments with respect to sales tax regime on franchise fee and royalty services rendered or acquired in the province.
Sources told Business Recorder that in pursuance of Section 3(2) read with Section 9 (2) of Sindh Sales Tax on Services Act 2011 and Rule 36 of Sindh Sales Tax on Services Rules 2011, a franchisee is liable to pay sales tax on reverse charge basis if he has entered into a franchise agreement with a non-resident franchiser. Such sales tax is payable @ 10 percent of the gross franchise fee remitted to the franchisor. The SRB has now issued Notification No 3-4/I/2013 dated January 31, 2013 and introduced the concept of presumptive tax in franchise services.
The SRO prescribes that if there is no franchise agreement between the parties or where the agreement does not require such remittance for a particular period, sales tax @ 10 percent would still be payable on the 1/10th turnover of goods or services sold by the franchisee in such period(s).
For the purpose of assessment of such turnover, the first 1 year of the commencement of franchise service or initiation of an agreement (whichever is earlier) has been excluded for the purpose of computing the said sales tax on franchise. In this way, the SRB has adopted an old tool for revenue generation purposes for which the FBR always faced criticism and wrath of taxpayers and tax consultants.
Through another amendment by way of a proviso added in Rule 36(i), the SRB has laid down that where no remittance of royalty/franchise fee is paid by the franchisee, sales tax would be levied @ of 10 percent of the value mentioned in the franchise agreement.
When contacted, Adnan Mufti FCA, Partner of Shekha & Mufti and Member ICAP Taxation Committee confirmed that such measures have been adopted by the SRB which never existed in provincial tax statute before. As regards the foremost amendment, he agreed with this scribe that it tantamount to presumptive taxation by SRB and is highly unjust.
He said the powers of provincial sales tax regime is restricted to provision or consumption of taxable services. In case(s) where there is no franchise agreement in place, one wonders as to how the SRB may collect sales tax on presumptive/deemed basis.
Besides, the subject amendment also does not find support from the definition of 'franchise' as laid down in the laws whereby 'consideration, fee, etc' is essential to establish the franchise arrangement. Likewise, under Section 5 of Sindh Sales Tax on Services Act 2011 'value of supply/service' is the money consideration received by the service provider from the service recipient. In the proposed mechanism, the focal element of money consideration is conspicuously missing. He added that in numerous cases, franchise arrangements are not based on turnover basis; rather on units produced by the franchisee or on fixed value.
Such key elements have also not been considered or catered while making the aforesaid amendment. Mufti showed his apprehension that unless such a discriminatory and unwarranted rule is rectified and withdrawn, likelihood of litigation between taxpayers and the SRB on this account by way of constitutional petitions being filed on the powers of Sindh Sales Tax on Services Act 2011 and powers of the SRB to make allied rules cannot be ruled out.
As regards payment of tax on the basis of agreement, he was of the view that it was a revenue generating tool which has been brought to address instances where in spite of a franchise agreement, the franchiser did not make any related remittance to the franchiser.
In this way, the framework of rules has been shifted to accrual based taxation. However, he said such change in legislation is likely to impact situations where franchise fee/royalty could not be remitted due to regulatory constraints from State Bank of Pakistan, Foreign Exchange Regulations, etc, or where due to any reason, the franchiser waived off or relaxed the schedule of payment of royalty/franchisee fee.
Mufti recalled that taxation of franchise has become a core dispute among the FBR, SRB & Punjab Revenue Authority (PRA), which are still not on same page vis-à-vis taxability of franchise service and its collection mode and each 3 of the tax agencies has its own interpretation and viewpoint on the matter. There is a dire need for settling the mechanism and facilitating taxpayers who are clueless and their businesses are suffering due to multiple elucidations of service tax laws, he maintained.