The Federal Board of Revenue (FBR) and Sindh Revenue Board (SRB) are at loggerheads over collection of revenues from restaurants and caterers.
The point of contention is whether restaurants and caterers fall under the category of service providers or manufacturers. In the opinion of FBR, restaurants and caterers are manufacturers, whereas SRB considers them as service providers.
According to sources, the issue came to light when the Regional Tax Office-III (RTO-III), Karachi, initiated drive against non-filers and short filers of sales tax returns. They said that restaurants and caterers are either not filing the sales tax returns, or in case of filing, not depositing the sales tax in the national exchequer.
Reacting over this, the revenue arm of FBR issued notices to the registered restaurants and caterers, asking them to file returns and deposit sales tax in national kitty.
In response to the notices, the registered restaurants and caterers informed the department that they are filing returns and depositing sales tax in the account of SRB as the sales tax on services falls in the jurisdiction of provincial revenue body.
They also stated that the issue of correct classification of restaurants and caterers as either manufacturer or service provider should be settled between FBR and SRB, and clarified to them, so that they should fulfil their statutory obligation of filing returns along with tax due to the relevant quarters.
However, the FBR was of the view that in 1973 constitution, sales tax on goods was given to the federation while sales tax on services became the domain of the provinces as services were neither reflected in the federal legislative list nor in the concurrent list. Therefore, the jurisdiction of the provinces over sales tax on services was recognised in 7th NFC Award. However, the issue has arisen between the SRB and FBR as to whether businesses of restaurants and caterers be treated as manufacturing or services rendered?
Sources said that section 2(16) of the Sales Tax Act 1990 defines manufacture or produce as "any process in which article singly or in combination with other articles, materials, components, is either converted into another distinct article or product or is so changed, transformed or reshaped that it becomes capable of being put to use differently or distinctly and includes any process incidental or ancillary to the completion of a manufactured product; process of printing, publishing, lithography and engraving; and process and operation of assembling, mixing, cutting, diluting, bottling, packaging, repacking or preparation of goods in any other manner."
On the other hand, services were not defined in the Sales Tax Act 1990 but Black's law Dictionary says "an intangible commodity in the form of human effort, such as labour, skill or advice as services".
Therefore, the FBR termed restaurant business as complete manufacturing process whereby many raw material items are mixed, cooked and converted into another distinct product wherein its ingredients cannot be traced in the final product, the sources maintained.
Replying to a question, they said that the SRB has also admitted in its letter (SRB-STM-3-4/445/2011) that "if preparation of food articles is production, then it is a goods which is to be supplied and not a service".
Moreover, they said that the 'board' in its letter to the Law and Justice Division highlighted that "provision of services and supply of goods are not two mutually exclusive domains and the supply of food by restaurants is subject to sales tax as manufacturers and suppliers of food." However, the division in a holistic manner has classified it as services and the SRB is contesting with FBR on the basis of said letter. Sources said the RTO-III has therefore asked the board to clarify the matter, which has now become a bone of contention between federal and provincial revenue bodies.