Sales tax on services – II

Vide Section 4 of PSTSA, the Punjab Assembly legislated a unique concept of ‘Principle of Origin’ of service. This principle implies that if a registered person is providing taxable services outside Punjab through a tax invoice to an unregistered recipient of Punjab, the service provider shall pay the amount of related sales tax to PRA. Likewise, if such recipient is himself registered under PSTSA, he shall withhold/deduct the whole amount such sales tax and deposit the same to PRA.

On the other hand, both Sales Tax Special Procedures Rules 2007 and SSTSA do not acknowledge or reciprocate this legal position adopted by Punjab Assembly. Accordingly, when a service provider issues a tax invoice either in Islamabad or Karachi, he is legally obliged to pay sales tax thereon to FBR or to SRB respectively, irrespective of the territory or province where such a service would be enjoyed or consumed. This anomaly in 2 provincial tax laws has created a lot of confusion for the business community.

To address unending queries on the issue by service providers based in Sindh, the SRB issued its Circular 8 of 2012 dated 24th September 2012 over Principle of Origin envisaged under Section 4 of PSTSA. In such circular, SRB stated that it has already taken up this matter with FBR and PRA with the request that status quo may be maintained until the issues arising pursuant to the enactment of Section 4 of PSTSA are clarified. Therefore, SRB advised registered service providers and withholding agents to act as per the provisions of SSTSA in relation to services provided or rendered by them in Sindh or from Sindh and to continue to e-deposit sales lax on origin basis. The SRB also clarified that if, as a result of settlement between FBR, SRB and PRA, it is determined that tax payment deposited by the service providers and withholding agents was actually payable to PRA; such payment shall be appropriately adjusted between SRB and PRA directly.

However, soon after the issuance of above circular, PRA issued a counter representation to SRB on 25th September 2012 wherein PRA has differed with SRB’s circular and termed it as misapplication of VAT’s principle of origin. While disagreeing with SRB’s interpretation of the Principle of Origin, PRA referred towards ‘Record Note’ dated 27th September 2010 signed between the Federation and the provinces on Principle of Origin based upon consumption doctrine, ie, tax will go to the province where service is consumed and incidence of tax is borne irrespective of the place of its rendition.

PRA maintains such tax is an inalienable right of the province where service is consumed and incidence of tax is eventually borne because identifiable consumption or expense of one province cannot be taxed by another province. PRA contends that mere request or suggestion of SRB to PRA/FBR to discuss/resolve the issue does not mean that PRA has agreed on any understanding with SRB on the continuation of the previous legally unsustainable practice. On this analogy, the PRA has termed SRB’s circular as factually and legally unacceptable to PRA and called for its withdrawal.

The above position clearly depicts the deep tug of war between Sindh and Punjab and signals ongoing frictions between the two tax authorities on the issue of sales tax collection where service is rendered in one province/territory and crosses into other provinces/territories. Obviously, the taxpayers are exposed to penal action under either of the provincial sales tax laws.

TAXABILITY OF FOOD In line with Chapter 98 of Pakistan Customs Tariff, both SRB and PRA started taxing services provided or rendered by hotels, restaurants, clubs, caterers/suppliers of food and drink. In this respect, both provincial tax authorities place their reliance on FBR circular wherein FBR had termed the supply of food as ‘service’.

The matter was confronted by various restaurants through food association. In this respect, SRB also approached FBR to exempt the federal sales tax on services provided by restaurants in Sindh. As expected, FBR partially disagreed and opined that presentation and serving of food may be considered as a service but supply of food falls within the definition of goods under Sales Tax Act, 1990. The latest ruling issued by Ministry of Law and Justice, also portrays a divided and complex proposition in the matter which will not go well with provincial tax agencies and the taxpayers. Despite this rift and divergent opinion, SRB and PRA adhere to their earlier views and require all restaurants operating within their jurisdiction to pay sales tax with them.

TAX CREDITS Except a few countries, all across the world VAT or GST operates with a central mechanism whereby all inputs of goods and services are repaid to taxpayers against their procurements/imports. When SRB started implementing its law in 2011, it specifically disallowed all tax credit inputs which were not exclusively used in rendering taxable services in Sindh. This compelled the service providers, having nationwide operations, to start claiming such inputs from FBR in their tax returns covering services for rest of Pakistan. On its part, PRA introduced a much narrower law which disallows input tax credits except which are exclusively related to rendering of service in Punjab.

The surmise of the foregoing conjectures means the service provider with nationwide operations may only claim such indirect input tax credits in FBR returns filed in respect of services rendered in Islamabad, Balochistan and Khyber Pakhtunkhwa. The most likely picture of such tax returns could be that as against output tax/duty attributable to Islamabad, Balochistan and Khyber Pakhtunkhwa, the service provider may be claiming input tax pertaining to all its business including that conducted in Sindh and Punjab which was specifically debarred in SSTSA and PSTSA, for example, tax credit on hardware, software, ERP solutions, fixed assets, etc which may not be associated or linked with any particular province. This way, the FBR may receive a much lesser revenue as compared to the tax credit it would award to taxpayers. This is another emerging development and gap among the three tax administrations and may become a burning tax dispute among all three agencies. Besides the foregoing issues and differences, there are certain other matters which have become bottleneck among the provincial and federal tax authorities and it is only the taxpayer who is suffering badly from these complexities.

CONCLUSION After the passage of the 18th Amendment and transferring the rights of service tax to provinces, the federal bureaucracy did not accept this shift in letter and in spirit. The increasing heat between the FBR and SRB started from 1st July 2011 onward also nourished such mindset which was further fuelled by row of disagreements initially between SRB and PRA and then among SRB, PRA and FBR.

This scribe was a speaker in a conference organised by SRB in May 2012 to evaluate its experience, weaknesses and strength as a tax administrative body in its 1st year of operations. Though at that time, SRB was only 11 months’ old; yet sensing the mood of federal bureaucracy and emerging disputes with FBR, Dr Kaisar Bengali, former Advisor to Chief Minister Sindh on Finance and Member NFC from Sindh, had warned serious threats to the existence of SRB. Dr Bengali had also warned that in view of fast depleting forex reserves and burgeoning budget deficit, the country might again look towards the international donor agencies such as IMF, which will not facilitate GoP for its failure in introducing and implementing a broad-based GST or VAT across the country. Dr Bengali recognised that such situation could be made a basis by GoP to pack up the provincial sales tax mechanism and resort to federal and single collection of sales tax on services. Accordingly, he had then suggested that provincial sales tax should be in single digit and without any adjustment/nexus against the federal sales tax, if provincial sales tax regime is desired to remain in existence.

The apprehensions and concerns shown by Dr Bengali, if viewed in light of foregoing growing disputes among SRB, PRA and FBR, warrant immediate review of all existing and emerging issues between SRB and PRA. There is a dire need that wisdom and sense prevail in both provincial tax bodies and efforts may be made to harmonise SSTSA and PSTSA to the benefit of all stakeholders including the taxpayers to avoid any ‘administrative adventurism’ from any quarter. This calls for harmonisation between SSTSA and PSTSA before a pack up call rings.

(Concluded) – The views expressed in this article are not necessarily those of the newspaper. (The writer is Partner, Shekha & Mufti – Chartered Accountants, CPD Convenor of ICAP Southern Regional Committee, Member of ICAP Taxation Committee and Honorary Advisor to Karachi Chamber of Commerce & Industry on GST matters)