Brief on Provincial Budgets

General: This note summarises salient features of the provincial governments' budgets and the Finance Bills presented in the provincial assemblies of Sindh and Punjab. Under the Constitution, taxing rights on rendering of services and immovable properties inter alia lie with the provincial governments.
Provincial legislation, except the concept of reverse charge, is applicable within the geographical boundaries of that province. Islamabad Capital Territory is governed by its separate Sales Tax Ordinance or other laws, as the case may be. Provincial governments are inter alia responsible for providing basic facilities of education, health, infrastructure, security and primary development for the province. This reflects the importance of provincial budget allocation for the respective heads.
At present, major source of revenue for the provinces represent the share allocated under the National Finance Commission Award. Provincial revenue generations, at present, are less than 20 per cent of the total resources available.
Major source of receipts for the provinces is sales tax on rendering of services. In the past, all taxes on rendering of services were also collected by the Federal Government under the procedures laid down in the respective provincial laws. However, from 2011 and 2012 collection of sales tax on services has been devolved respectively for Sindh and Punjab provinces and now such taxes are collected under Sindh Sales Tax on Services Act, 2011 and Punjab Sales Tax on Services Act, 2012. Khyber-Pukhtunkhua and Balochistan are expected to bring similar acts. At present, in their cases, right of collection has been conferred to the Federation.
In principle, provincial sales tax on services and Federal sales tax on goods are concurrently admissible as input tax against output tax liability. However, legal / procedural aspects on that matter are yet to be settled. Amendments have been proposed in Federal Sales Tax Act, 1990 on this matter, however, that have failed to address all the issues on this subject. Further clarity in law / negotiation / settlements on the matter is required.
Furthermore, the concept of reverse charge [collection of the taxes from the user of services even though the renderer of services falls outside the nexus of a particular province] which was present in Punjab legislation has now been expressedly introduced in Sindh legislation. Using the right conferred under that section, withholding tax provisions have been introduced for the payer of tax, resident in one province, for tax levied in other province. Unless, certain mechanism for adjustment against Federal or provincial tax or any other mechanism is introduced, duplication of incidence including other practical/procedural problems cannot be avoided. These matters have to be resolved.
Certain services like telecommunication, banking and insurance are concurrently taxable by the Federal Government under the Federal Excise law and by the provincial governments under their respective legislations. Procedures, specially those relating to right of taxation, allocation of amount to be disbursed to respective provinces and input tax adjustment need to be reinforced.
Another important feature of the provincial budget is the disparity between the kind, rate and basis of taxation by the provinces and the Federation, if applicable, as the case may be. This may lead to migration / possibility of arbitrage of the place of rendering of services and other similar issues. Stamp duties, registration fees, motor vehicle tax, property tax, agricultural income tax also inter alia fall within the ambit of provincial fiscal legislation.
SALES TAX ON SERVICES Unlike Federal Sales Tax Act, 1990 where there is a proposal to increase the rate of tax from 16 to 17 per cent, there is no proposal in the provincial Finance Bills to increase the present general rate of 16 percent. Some major amendments have been proposed in the sales tax on services by the Sindh Finance Bill, 2013. These are briefly identified as under:
1. Definition clause of the Act has been wholly substituted. The purpose of this change is to bring more persons within the ambit of tax and expand the scope of levy of law such as expressed reinforcement of reverse charge;
2. Powers to prescribe Special Procedures for Withholding have been introduced;
3. Some services which were previously not subject to tax have been included within the ambit of tax, such as:
a. Marriage halls and lawns, except those located on plots measuring 800 sq.yrds or more;
b. Advertising agents;
c. Sponsorship services;
d. Business support services;
e. Services provided or rendered for personal care by beauty parlours, beauty clinics, slimming clinics or centres and others;
f. Architects and town planners;
g. Commodity brokers;
h. Professional services of legal practitioners, accountants and auditors, management consultants, software or IT based system development consultants and tax consultants;
i. Services provided and rendered by specified persons or businesses to include surveyors, outdoor photographers and videographers and management consultants;
j. Services provided by specialised agencies being security agency and market research entity;
k. Auto workshops including service stations;
l. Workshops for industrial machinery, construction and earth-moving machinery or other special purpose machinery, etc;
m. Health care centre, gyms or physical fitness centers, body massage and pedicure centre;
n. Event management services and public bonded warehouses;
o. Labour and manpower supply services;
p. Services provided in the matter of manufacturing or processing for others on toll basis; and
q. Entry and other services of Race clubs.
4. Rate of tax for legal practitioners, accountants and auditors, tax consultants shall be 5 per cent of the value of services and 10 per cent for beauty parlours, slimming clinics, body massage centres and pedicure centre without any input tax adjustment for such service providers. For others, the rate is 16% after adjusting admissible input tax. Person receiving such services are, however, entitled to claim input for such tax, unless specifically restricted.
5. A special optional rate of 4 per cent of the gross consideration has been provided for construction services. Previously, in all cases, such services were taxable at the rate of 16 per cent with input adjustment.
6. All these amendments are applicable from July 1, 2013.
No amendment appears to be made in the Punjab Sales Tax on Services Act, 2012 as per the Punjab Finance Bill, 2013.
OTHER TAXES
Sindh
1. Infrastructure Cess: The rate of cess which is leviable on import of goods by the Government of Sindh is proposed to be increased to a maximum of 0.95 per cent of the total value of goods as assessed by the Customs Authorities plus one paisa per kilogram.
2. Rate of property Tax: It is proposed to increase to 25 per cent of the annual letting value in the manner laid down in the law.
3. Stamp Duty, Registration and Motor Vehicle Tax: No change is proposed.
4. Hotel Tax: It was leviable under Section 8 of the Sindh Finance Act, 1977. It is proposed that the hotel tax be abolished.
PUNJAB
1. Capital Gain Tax on Properties:
Punjab has introduced a tax on capital gain on immovable properties. This tax shall be payable by the transferor and shall be collected in the manner prescribed in the law.
The amount of tax shall be calculated on the difference in valuation at the time of acquisition and sale on the basis of valuation table notified or the recorded value in the transfer deed whichever is higher.
There will be no tax on gain on disposal of property after five years of acquisition.
In the case of sale within a year, the tax shall be 5 per cent of the capital gain as calculated in the manner referred above or 2 per cent of the recorded value, whichever is higher. For sale of properties held over 1 year upto 5 years, the rate of tax is between 4 to 1 per cent of capital gain respectively.
Through the Finance Act, 2012, Federal Government has introduced in the Income Tax Ordinance, 2001 a tax on gain on disposal of immovable properties. Concurrent application of such tax and the tax now proposed to be levied in the province will raise the issue of double taxation on same income.
Further, Federal Government under the Income Tax Ordinance, 2001 is entitled to tax as business income, the gain on disposal of immovable property by way of 'adventure in the nature of trade'. Concurrent application of the said provision, specially in the cases where the property sold is held to be for adventure in the nature of trade, will lead to double taxation of the same income.
2. LUXURY TAX: A one time tax equal to a fixed amount has been levied on urban properties above 2 kanals. The amount of tax is Rs 500,000, Rs 1,000,000 and 1,500,000 for properties between two to four, four to eight and above eight kanals respectively.
A widow will be exempt from the levy of this tax for one house provided she is residing in the said house.
3. Stamp duty and Registration fee: No change is proposed.