Federal Board of Revenue (FBR) has decided to halt input tax adjustments or refund process to hotels and restaurants following the ongoing rift between the federal tax authority and the Sindh Revenue Board (SRB) over revenue collection on services.
They said the point of contention is whether hotels and restaurants fall under the category of service providers or manufacturers. In the opinion of FBR hotels and restaurants were 'manufacturers' whereas SRB considers them 'service providers'. They said the issue came to light when the Karachi tax office initiated a drive against non-filers and short filers of sales tax returns in the last fiscal year. They said hotels and restaurants were either not filing sales tax returns, or if filing, not depositing sales tax in the national kitty.
Therefore, the FBR decided to put input tax adjustments of hotels and restaurants on hold. Officials said that hotels and restaurants, despite receiving several intimation letters from RTO-III to file returns, chose not to abide by the instructions, saying that they fall in the jurisdiction of the provincial revenue body and were depositing sales tax in SRB account.
They urged the authority concerned to take measures to resolve the issue and allow taxpayers to fulfil their statutory obligation of filing returns. The sources said 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 arose between the SRB and FBR whether businesses of hotels and restaurants be treated as manufacturing or services rendered? The sources said the 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 the Black's Law Dictionary says: "An intangible commodity in the form of human effort, such as labor, skill or advice as services". Therefore, the FBR termed restaurant business complete manufacturing process whereby many raw material items were mixed, cooked and converted into another distinct product wherein its ingredients could not be traced in the final product, the sources maintained. The sources said the RTO-III has therefore asked the board to clarify the matter, which has now become bone of contention between federal and provincial revenue bodies.