Taxability of consumption of materials: Services shall not be separately charged to ST: PRA

To facilitate contractors/service providers of exploration and production (E&P) companies, Punjab Revenue Authority (PRA) has endorsed the legal interpretation of a tax lawyer that a service shall remain and continue to be treated as service regardless of the fact it involves consumption of any product or not.
Sources told Business Recorder here on Thursday that the PRA Chief has clarified the issue regarding taxability of consumption of material and sales tax on services under the provincial sales tax laws to the lawyer, who had raised the issue. The PRA will shortly upload a FAQ on its website on the issue.
The tax lawyer had raised the question whether a service shall remain and continue to be treated as service regardless whether or not rendering thereof involves any use, supply or consumption of any goods like chemicals, cement, etc, either as an essential or as an incidental aspect of such rendering? Responding to the query, PRA endorsed this viewpoint of the lawyer.
Tax lawyer's viewpoint has also been confirmed by the PRA that service involving any consumption of products shall not be separately charged to tax under the Federal Sales Tax Act, 1990. The PRA opined that there is no concept of "Split Supplies". Supply is either service in totality or not. If it is not a supply of goods, then it is service.
Sources said that a Lahore-based tax lawyer Waheed Shahzad Butt has written a letter to the Chairman PRA, seeking clarification on the taxation status of service providers companies. In his communication to the Chief PRA, Waheed Butt stated that "attention is invited towards provisions of Section 2(38) of the Punjab Sales Tax on Services Act, 2012 which explains "Service" or "Services" means anything which is not goods or providing of which is not a supply of goods and shall include but not limited to the services listed in First Schedule; while a precise explanation has been added by the legislature to section 2(38) ibid, which says "A service shall remain and continue to be treated as service regardless whether or not rendering thereof involves any use, supply or consumption of any goods either as an essential or as an incidental aspect of such rendering".
The explanation is imperative because there are several categories of services where goods are involved for the purpose of rendering of services, which are not only essential but also used as an incidental aspect of such rendering. In case of contractors/service providers of E&P companies wherein services like cementation, coil tubing etc have been provided by the service providers with inevitable utilisation of chemicals, products etc, instead of provisions of Sales Tax Act, 1990 relevant law on the issue shall be tax on services chargeable under the relevant provincial legislation like Punjab Sales Tax on Services Act, 2012. They are not selling the chemicals or products to the E&P companies but consumed/utilised these products to complete their jobs (Services) as per contracts awarded by E&P companies.
The nutshell of specific laws governing sales tax on Services is that sales tax shall be charged and levied on the services rendered or provided by the contractors/service providers of E&P companies while all other ancillary activities like utilisation of chemicals, products etc are out of the ambit of Sales Tax Act, 1990, resultantly not liable to pay sales tax at standard rate of 17% but chargeable to sales tax under relevant provincial sales tax legislations and ultimately question of chargeability of sales tax @ 17 percent under Federal legislation does not arise.
In the light of above tax lawyer had requested the PRA to clarify: Whether a service shall remain and continue to be treated as service regardless whether or not rendering thereof involves any use, supply or consumption of any goods like chemicals, cement etc either as an essential or as an incidental aspect of such rendering? Whether consumption of any goods like chemicals, cement etc in the above scenario shall be separately charged to tax under the Federal Sales Tax Act, 1990?
The PRA's clarification to the tax lawyer said that "Explanation to section 2(38) of the Punjab Sales Tax on Services Act, 2012 is clear. Credit for Federal sales tax paid on cement and chemicals shall be admissible subject to the Punjab Sales Tax on Services (Adjustment of Tax) Rules, 2012 etc. In such scenario, title of construction materials is transferred to the service recipient as inseparable part of the provision of service. There is no concept of "split supplies" under service VAT. Supply is either service in totality or not. If it is not a supply of goods, it is a service.