The international VAT experts of World Bank have recommended to the Federal Board of Revenue to draft a separate telecommunication tax law to clearly address issues of supply of services, origin of services, location of service suppler, tax adjustment and other legal issues for proper collection of sales tax on telecom services under the reformed general sales tax.
Sources told Business Recorder here on Saturday that the WB experts including Rebecca Millar and Christophe Wazerzeggers have submitted a preliminary report on the RGST to the Ministry of Finance and the FBR. According to the report of the WB experts, the most appropriate solution is to draft a separate telecommunications tax law keeping in view the fact that the telecom would be taxed under a separate regime as per RGST. The drafting of the separate telecommunications tax law would help in effectively dealing with the issues relating to the collection of sales tax on the said service.
They said that the draft laws impose tax on services on an origin basis (ie based on the location of the service supplier), except for telecommunications services which are taxed on a destination basis (ie based on the location of the person "initiating" the supply, which is essentially the person who pays for the service).
It is noted that, however, that the GST Agreement specifies that tax proceeds from telecommunications services (and other services classified in Group-II of the Record Note agreed among provinces) are to be credited directly to the Provinces" on the basis of origin of service in each province". The Agreement does not specify what the "origin" of a telecommunications service is for the purpose of revenue allocation, but it seems to suggest that the notion is based on the location of the service supplier. If this is indeed the case, then the draft laws do not reflect the revenue allocation agreement, which is problematic because the agreement specifically subjects these services to a separate regime of returns and audits for revenue allocation purposes. It is difficult to conceive how revenue from these services can be allocated in accordance with the location of the supplier, if those suppliers have to file returns based on the location of their customers.
Also, no thought has been given to the treatment of arrangements in which charges by telecommunications suppliers are effectively partly for supplies of goods (the purchase of a telephone) and partly for a supply of services (calls, texts, internet access etc). In such situations, invoices show charges for the telecommunications services and the phone is 'given away' provided that a contract of sufficient length is entered into.
Given the clearly stated intention that telecommunications will be taxed under a separate regime but collected by FBR on behalf of the Provinces, the most appropriate solution is to draft a separate telecommunications tax law. It is not clear, however, why such services would be collected by FBR rather than by the Provinces, particularly if the origin basis is in fact used.
Experts further stated that as indicated earlier, the drafts are silent on the treatment of supplies to and by Government. This means that all supplies to Government are taxed, and that supplies by Government are out of scope. In other words, the activities of Government will be effectively input taxed.
This also means that RGST will create additional financial transfers from the Federal to the Provincial budgets in the form of GST on services. For instance, telecommunications services purchased by the Federal government for the running of its ministries etc will be fully taxable at the RGST rate, and the proceeds will accrue entirely and directly to the Province in which the telecom operator supplying the service is located, international VAT consultants observed.
The report added that the agreement on GST introduction between the Federal government and the Provinces (the GST Agreement) envisages a hybrid system in which only certain services are brought into the GST net to be administered by FBR. The services that are to be brought into the GST net are further subdivided into two groups for the purposes of revenue sharing/distribution. The net revenue collected from so-called "Group-II services" is to be credited directly to the respective Provinces on the basis of their "origin", whereas the net proceeds from the so-called "Group-III services" is to be shared between the Provinces on a formulary basis, it added.
The Record Note on GST on services said that the Group-I Services shall include such services that neither involve transactions across the provinces nor constitute a significant proportion as inputs into other supplies. These services shall be deemed to be of a 'standalone' nature and neither input/output adjustment nor refunds will be provided for services in this group.
The Group-II shall include Telecommunication services, given that the origin of these services is clearly identifiable. The proceeds of GST on Telecom services shall be credited directly by telecom companies to the provinces on the basis of revenue generated on the basis of origin of service in each province. The issue of GST on services provided by the LDIs/Telcos on destination basis shall be explored by the FBR and provinces.
Other services, currently placed in Group-I but where the service constitutes a significant proportion as inputs into other supplies and the origin of the services are found to be clearly identifiable may also be included in Group II, ERR will provide input/output adjustments for services in Group II. After mutual agreement between FBR and the provincial governments, on the input/output adjustment and refunds provided. FBR will intimate Finance Division (FD) and FD will deduct the specified amount from provinces' respective share of their future proceeds, Record Note added.