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Sales tax on services exported

Service is an activity which provides satisfaction to a person or entity in which role of goods transfer is incidental. In many of the services, separation of goods from the services is inseparable, eg, sale of software on a CD is not separate from the CD.

Services differ from goods on numerous counts. Services cannot be transported when proximity of the supplier and acquirer/consumer is called for, eg, between the beauty parlour and the person requiring the doing. “Services are not separate entities over which ownership rights can be established. They cannot be traded separately from their production. Services are heterogeneous outputs produced to order and typically consist of changes in the condition of the consuming units realised by the activities of the producers at the demand of the customers. By the time their production is completed they must have been provided to the consumers.” – “All About Service Tax” by G.D. Lohani & Ataur Rehman (Page No 10)

Under General Agreement of Trade in Services (GATS) following transfers are defined as supply of a service:

(a). from one Member into the territory of any other Member;

(b). in the territory of one Member to the service consumer of any other Member;

(c). by a service supplier of one Member, through commercial presence in the territory of any other Member;

(d). by a supplier of one Member, through presence of natural persons of Member in the territory of any other Member.

In terms of contribution to GDP, ‘services’ are globally in fierce competition with production of goods. In Pakistan also, percentage-wise contribution of the services sector to GDP is on the rise. According to Pakistan Government’s ‘Economic Survey 2011-12’, GDP growth during the year was estimated at 3.7%. Services sector, however, recorded growth of 4%.

TAX FREE EXPORT OF SERVICES IN INDIA IS DESCRIBED AS FOLLOWS: “Exporters of taxable services are not liable for service tax. In addition to that all the credits of Central Excise Duty on capital goods, inputs and service tax on input services used for providing the taxable service exported can be availed. If such credits are not utilizable for domestic payment of service tax, available cash refund of the same can be applied for.”

—- “Service Tax Problems” by Madhunkar N. Hiregange (First Edition – 2009).

Zero rating

Zero rating of a fiscal levy means that rate of the sales tax or VAT levy on relevant goods or services will be computed at zero percent or at nil rate. Resultantly there is no levy on the relevant goods or services. Common feature between exempt and ‘zero rating’ is ‘no levy’.

Going a bit deeper, when ‘exempted’, with hands change of relevant goods or services movement forward of tax machinery stops. There is no impact of duty or tax on the amount payable by the purchaser or acquirer. In respect of deliveries of the goods or services nothing is payable by any party beyond cost. As against this, tax machinery starts movement in the reverse when deliveries are ‘zero rated’. Such travel of tax machinery in the reverse gear comes to a grinding halt with refund/adjustment of taxes or duties paid on the zero rated supplies at all the earlier stages of that supply.

The privilege of being levy free accrues to its supply at all of its prior stages (of supply). This privilege turns out to accrual of the right of refund of the tax / duty paid on the relevant supplies of goods / services prior to their becoming levy free. Thus if goods fit for zero rating under section 4 of the Sales Tax Act are supplied at a price of Rs 1,000 not only sales tax amounting Rs 160, otherwise leviable, would not be applicable, sales tax paid at all earlier stages of such supply (amounting (say) Rs 150) would be refunded to the supplier making the zero rated supply at a price of Rs 1,000. His (factual) revenue will be Rs 1,150 (1,000 + 150).


Zero rating of goods exported is catered by the Sales Tax Act under its section 4. According to section 5 of the Federal Excise Act, zero rate of duty and drawback of duty may be allowed on the goods exported or on such other related goods as may be notified by the government. The Sindh Sales Tax on Services Act (SSTSA) does not contain a provision to zero rate export of services. In disregard to their destination, local or export, all the services declared taxable by SSTSA call for payment of tax.

Text of the Punjab Sales Tax on Services Act-2012 (PSTSA) does not contain zero rating provision in relation to services exported. Section 76 of the PSTSA reads: “The Authority may, with the approval of the Government and by notification in the official Gazette, make the rules for carrying out the purposes of any of the provisions of this Act.” Under this provision ‘Punjab Sales Tax on Services (Adjustment of Tax) Rules-2012’ are framed. PSTSA rules contain Chapter-IV, with the title: ‘Export of Taxable Services’. The chapter has following rules:

—- Rule – 12 – Export of Service.

—- Rule – 12 – Export Without Tax.

—- Rule – 14 – Refund of Tax.

—- Rule – 15 – Records of Refunds.

—- Rule – 16 – Pre – audit of refunds.

—- Rule – 17 – Inadmissible refunds.

—- Rule – 18 – Reporting of refunds.

Thus, the Punjab Act provides: ‘no sales tax on services exported’. Khyber Pakhtunkhwa and Balochistan do not have sort of independent ‘sales tax on services laws’. In India, tax is not attracted on sub-contracted services if certain conditions are satisfied viz. the sub-contracted services are in the same category of services eg have identical PCT classification. Tax is payable if the sub-contracting is to a different service category. In Pakistan, these niceties are not catered by PSTSA and SSTSA.

Service tax in India is not attracted on services in relation to which payment is made to a supplier of the home country in convertible foreign exchange. Doing away with tax is not available when payment, received in convertible foreign exchange for services rendered, is repatriated or sent outside the country (from India). In India the tax is not attracted when a service provider incurs expenses such as travelling, boarding or lodging etc during the course of rendering services to his client and these expenses are reimbursed. One can expect refining PSTSA and SSTSA in view of the light available.

ADVANTAGES OF ZERO RATING There are enormous advantages of zero-rating of services on fibre of the country. Following points quickly occur to support induction of zero-rating provisions in fiscal laws devoted to services:

1. Services are taxed in the country where these are used, whereto these are exported.

If not zero-rated by the exporting country, because of taxation both in exporting and importing countries, there is double jeopardy to the importer/user, unjustly and illogically.

Cost of imported services to the users may be prohibitive, if exports are not zero-rated.

In case of non-zero-rating, volume of national trade is prone to shrink with a toll on the folk at home aspiring to export services not only for their living but also for demonstration of their muscles’ strength, skills.

2. Due to built in element of sales tax therein, services imported with a higher price tag may come to have a low ranking or may be (purposely) attributed sub-standard – adversely affecting flow of orders for both goods and services to the non zero rated services exporting country.

This may happen due to an adverse goodwill for produce of the exporting country – non zero rating of its services by the country causing the adversity.

3. Services from countries with lower price tags, facilitated by zero-rating, have an edge in the importing country.

With the passage of time, higher prices of services imported may culminate into customers’ diversion from/distaste for the costlier services rendered by ‘non green pastures’ ie countries not zero rating their produce. Reversal of this phenomena may be difficult or time consuming – if not impossible.

4. Despite severe handicaps, Pakistanis are confronted with, our professionals are high-rated world over. No wonder there is unflinching demand abroad for them, more particularly for doctors, IT experts, technicians, cost/chartered accountants and telecommunication professionals.

Sizeable percentage of the ones leaving or aspiring to leave homeland may stay back when strength, through zero-rating of services, is added to their pursuits to sell abroad their professional plays.

5. To augment export of services, service providers have to keep improving their quality. They have to also upgrade infrastructure for bringing their produce into being. Export of services not only down pours foreign currency, it germinates ideas on modes, models and structures for their production.

This helps upgrading, diversifying, beefing-up the volume of services’ export.

Demand pouring from abroad also imbibes advices for presentation, designing, tailoring, shaping and presentation articulation of the services desired.

Zero-rating of services has definite role on upgrading infrastructure for services rendering as well as in relation to quality of the produce.

6. Through reduction of cost to the user abroad, zero-rating is shot in the arm to the exporter.

It helps broad basing exportable services and addition to production at home of auxiliary goods and services.

Through incremental production of goods and services, the country stands to gain in terms of higher GDP also. This will be over and above other healthy effects on the economy.

7. Through play of economies of scale of production, it may go to lowering of related production costs.

8. Boost in export of services, ushered by zero-rating, also helps knowledge uplift and perceptions base at home through cross fertilisation of ideas with the importers.

9. Zero-rating widens avenues for sub-contracting, both in and out, helping specialisation and value addition at home.

10. Immediate loss in revenue to the exchequer due to zero-rating of services may be more than offset by incremental tax revenue, facilitated by rise in production of goods and services directly used and inputs auxiliary or incidental to export of services.

These auxiliary goods and services, production of which may increase sequel to rise in export services may be: packing material, other indirect material needed for production, advertisement, shipping, construction, banking services etc due to upping of their demand by the expanded zero rate sector. Such addition to production of services or additional revenue generated by way of increase in taxes.

(The writer is former Chairman of ICAP & ICMAP Joint Committee and former Vice President of ICSP and is a counsel practicing corporate laws)

Qaisar Mufti, "Sales tax on services exported," Business recorder. 2013-04-24.
Keywords: Economic system , Economic policy , Economic growth , Economic development , Tax policy , Tax reforms , Taxation , Sales tax , Excise duty , GDP