Concept/Issues Paper on Sales Tax on Services

CONCEPT NOTE ON SALES TAX ON SERVICES

A. Introduction

1.1 Sales Tax on services is a provincial tax with varying collection methodologies. In
Punjab, KPK and Baluchistan the Federal Board of Revenue (FBR) collects the tax on behalf
of the Provinces. The provincial nature of the tax has been reiterated both by the National
Finance Commission1 and the Constitution of Pakistan2.

1.2 The Provinces and FBR have discussed the issue of cross border services and services
that constitute input into other supplies and have agreed to deal with the issue by classifying
services into three groups and assigning collection duties with regard to them as follows3:

• Group I: Stand-alone services – services that do not involve transactions across the
province nor constitute a significant proportion as inputs into other supplies. Services
in this group can be levied and collected by the Provinces if they so desire. However
the provinces can delegate the collection of services in this group to FBR.
• Group II: Telecommunication services and such other services, whose origin is
clearly identifiable but require input/output adjustment and refunds, shall be levied
under provincial legislation in a single return.
• Group III: Services requiring input/output adjustments- services that constitute a
significant proportion as inputs into other supplies or involve transactions across
provinces, shall be delegated by the Provinces to FBR for collection. The following
services have been identified to belong to this group: a) Financial services including
insurance b) advertising services c) construction services d) Franchising services.
FBR will deposit the collection of GST from this group into a separate fund, which
will be distributed amongst the provinces. FBR will provide input/output adjustment
and refund for services in this group.

1.2 This paper presents a brief overview of the imposition statutes, quantum of tax
collected and assessment and collection methodologies and options available to Government
of Punjab for collection of sales tax.

B. Sales Tax on services in Punjab

2.1 The levying statute -Punjab Sales Tax Ordinance 2000 -does not prescribe special
processes, procedures and/or dispute resolution mechanisms for collection of Sales Tax on
services but relies on the Federal Sales Tax processes and procedures for collection and/or
resolution of disputes.

Categories liable to pay Sales Tax

2.2 The categories of services liable to pay sales tax are listed in the Schedule to the Sales
Tax Ordinance, 2000. These categories include telecom services, financial services, giving of
advertisements, services provided by hotels, custom agents, stevedores, couriers, insurers and
stockbrokers. Key services not taxed are legal and paralegal services, engineering services
and medical services. Persons, which are liable to pay both Sales Tax and provincial
Professions and Trades Tax, are:

• Stock brokers

























































1
Paragraph 8, Distribution of Revenues and Grants-In-Aid Order, 2010 (also known as the 7th NFC Award)
2
See Federal Legislative list, Entry No 49, Fourth Schedule, Constitution of Pakistan, 1973
3
Record Note of meeting between the Provinces and FBR, September 28, 2010,
 • Companies
• Money changers (if interpreted as providing financial services)

2.3 The Federal Government also collects Federal Excise Duty under the Federal Excise
Act, 2005 on a number of services. The Provinces have requested the Federal Government to
withdraw duties on services, which are also taxed under their sales tax laws to avoid double
taxation. Services taxed under both heads are as follows:

• Advertisements on cable television4

• Ship chandlers/shipping agents5
• Telecommunication services6
• Insurance services7

Assessment and Collection Procedure

3.1 The assessment and collection methodologies used by FBR for collection of sales tax
on products are also used by FBR for collection of sales tax on services. These methodologies
are contained in the Federal Sales Tax Act, 1990. These methodologies/ procedures are as
follows:

Assessment

3.2 A Taxpayer required to file a tax return assesses his own tax liability unless he fails to
file a return, or pays sales tax less than the amount of tax actually payable, in which case, an
officer of the Inland Revenue undertakes the assessment8. Returns can be filed through e-
intermediaries9. Tax on imported goods is paid at the time of import and is paid in the same
manner as if it were a custom duty payable under the Customs Act, 196910.

3.3 The persons required to be registered under the Sales Tax Act, 1990 are11:

• Manufacturers
• Retailers whose value of supplies in any period during the last 12 months exceeds
Rupees five million
• Importers
• Wholesalers including a dealer and distributor
• Persons required to be registered under any other federal law or provincial law for the
purposes of any duty or tax collected or paid as if it were a levy of sales tax to be
collected under the Act
• Commercial exporters, who intends to obtain sales tax refund against his zero-rated
supplies.

Bookkeeping and invoicing processes

3.4 Record to be maintained by registered persons under the Sales Tax, 1990 is as
12
follows :


























































4
S. No 2, Table II, Schedule I, Federal Excise Act, 2005; No 5, Schedule, Punjab Sales Tax Ordinance, 2000
5
S.No 5, Table II, Schedule I, Federal Excise Act, 2005; No 3, Schedule, Punjab Sales Tax Ordinance, 2000

6
S. No 6, Table II, Schedule I, Federal Excise Act, 2005; No 7, Schedule, Punjab Sales Tax Ordinance, 2000
7
S. No 7, Table II, Schedule I, Federal Excise Act, 2005; No 8, Schedule, Punjab Sales Tax Ordinance, 2000

8
§ 11, Sales Tax Act, 1990
9
§ 52-A, Sales Tax Act, 1990
10
§ 6, Sales Tax Act, 1990
11
§ 14, Sales Tax Act, 1990 read with Rule 5, Sales Tax Rules, 2006
12
§ 22, Sales Tax Act, 1990



Concept/Issues paper on Sales Tax on Services 3



a) Record of supplies including the nature, quantity and value of goods supplied
along with names of persons to whom supplied were made
b) Record of goods purchased including the nature, quantity and value of goods
purchased along with names of persons from whom goods purchased
c) Record of goods imported
d) Record of zero-rated and exempt supplies
e) Double entry sales tax accounts
f) Invoices, credit notes, debit notes, bank statements

Audit

3.5 FBR is empowered to undertake audit of selected persons. Selection can however
only be made on the basis of random or parametric computer ballot13.

Dispute Resolution Procedures

3.6 Resolution of disputes arising out of assessment and collection of sales tax is by way
of appeals to the Commissioner of Inland Revenue (Appeals)14. A further appeal lies to the
Appellate Tribunal Inland Revenue15. Provision is also available for resort to ADR under
section 47A of the Sales Tax Act, 1990. The Act also establishes courts of Special Judges to
try offences under the Sales Tax Act, 199016.

Institutional Infrastructure

3.7 FBR has no dedicated infrastructure for collection of sales tax. It collects this Tax
through IRS field offices charged with the collection of inland taxes. These offices are
organized on the basis of territorial jurisdictions for non-corporate taxpayers and alphabetical
order in case of corporate taxpayers. Information about the actual number of IRS personnel
involved in collection of sales tax on services is not collected and the same is therefore
unavailable.

3.8 The broad FBR infrastructure charged with the assessment, collection and dispute
resolution of Inland Taxes including Sales Tax is as follows:

FBR

Chief Authorities
Chief Commisioner Commissioner
responsible for valuation
Inland Revenue IR( Appeals)
and dispute resolution

Commisioner Inland
Revenue

Addl Commissioner IRS Addl Commissioner IRS

Deputy Asstt Inland Inland

Comm Com RO AO

























































13
§ 472B, Sales Tax Act, 1990
14
§ 45A, Sales Tax Act, 1990
15
§ 46, Sales Tax Act, 1990
16
§ 37C, 37D, Sales Tax Act, 1990



Distribution formula of Sales Tax on Services

3.9 Distribution of sales tax on services is currently being undertaken in accordance with
the interim formula agreed in the Provincial Finance Secretaries meeting. Under the interim
formula provincial shares in GST are as follows:

Province Share in GST in Central Excise Mode Share in GST on provincial services
Punjab 53.9% 60.39%
KPK 23.6% 50%
Sind 13.5% 15.62%
Baluchistan 4.3% 10%
Total 95.3% 136.01%

The formula essentially means that the Federal Government pays out more than it collects.
This is due to a host of issues, which include input/output tax adjustments.

3.10 Sales tax on services is classified as Receipts from Indirect Taxes which also includes
Provincial excise, Stamp duties, Motor Vehicles Tax and electricity duty. Sales Tax on
services does not include Federal Excise collected from services, which forms part of the
Divisible Pool along with Taxes on income, custom duties, sales tax on products. Quantum of
tax collected on account of Sales Tax on services during 2010-11 was as follows17:
(In millions)
Year Budget estimate Revised estimates
2009-10 Rs. 3,388.508
2010-11 Rs 51,155.334 Rs 36,281.206
2011-12 Rs. 39,909.401

3.11 Item wise collection under sales tax on services in 2010-11 was as follows18:

Services Sind Other provinces Total

Courier services 1,082,983,701 65,776,549 1,148,760,250
Custom Agents 390,426,418 89,435,604 479,862,022
Shipping Agents 34,065,701 35,870 34,101,571
Stevedores 1,458,113,267 - 1,458,113,267
Freight Forwarding Agents - - -
Accountants and Auditors - - -
Credit Rating Agency - - -
Stock brokers - - -
Underwriters - - -
Indenters - - -
Commission Agents - - -
Total 2,965,589,087 155,248,023 3,120,837,110

C. Sales Tax on services in Sind

Assessment and collection Procedure


























































17
Punjab Budget documents, 2010-11, 2011-12, Finance Department, Government of Punjab
18
See www.srb.gov.pk. Accessed October 205,2011



Concept/Issues paper on Sales Tax on Services 5



4.1 Sind province promulgated its own law for assessment and collection of sales tax on
services in June 201119. It also established the Sind Revenue Board in January 2011.
Collection and assessment in Sind is now carried under the STS Act, 2011 by officers of the
Sind Revenue Board.

Assessment

4.2 Liability to pay tax is as follows:

• Where price is ascertainable tax liability is on persons providing services.

• Where price is not ascertainable liability shifts to the person receiving the
service20.

Taxable service is defined as a service provided by a registered person from his registered
office or place of business in Sind21. While the Act defines and explains a service extended
over a period of time22 it does not explain a service provided over a distance. Taxpayers pay
sales tax at the time of filing a return23.

4.3 Registration under the Sind Sales Tax Act, 2010 is required for all persons who are24

• Residents
• Provide taxable services from their registered office or place of business in Sind

Collection Infrastructure

4.3 The Sind Revenue Board established by the Sind Revenue Board Act, 2010
administers the Sind Sales Tax Act, 2010. However the provincial government can authorize
the Federal Board of Revenue or any other federal or provincial agency to administer, collect
and enforce the levy of sales tax on such services as the provincial government may notify25.
The Sind Revenue Board is comprised of a Chairman and not less than 4 members26. The
Board is subject to the directions of the Government27.

4.4 The infrastructure of the Sind Revenue Board is as follows28:


























































19
Sind Sales Tax on Services Act, 2011, Sind Act XII of 2011,
20
Section 9, Sind Sales Tax on Services Act, 2011
21
Section 3, Sind STS Act, 2011
22
See section 7(1), Sind STS Act, 2010
23
Section 17, Sind STS Act, 2010
24
Section24, Sind STS Act, 2010
25
Section 14, Sind STS Act, 2010
26
Section 3, Sind Revenue Board Act, 2011
27
Section 10(1), SRB Act, 2011
28
Section 34, Sind Sales Tax on Services Act, 2011



 Policy making and
supervision Board

Comm. Comm.
Operational Supervision
SRB Appeals

Collection and assessment Deputy Assistant

Comm. Comm.

The general structure of the Board is similar to FBR.

D. Issues

There are five main issues in the issue of collection of sales tax.

a) Collection Infrastructure

The Provincial Government needs to decide about the collection infrastructure of Sales Tax
on services. This decision depends on two factors, first the kind of collection duties the
Province wants to entrust to the Federal Government and second the extent to which the
province want to tax services – more specifically whether the Province wants to tax medical,
engineering and legal services most of which are undocumented and un-receipted. It is
estimated that currently the effective tax rate is less than 1%29. The Provincial Government
has the following options in this regard:

Option Advantages Disadvantages

Collection of sales tax through the Little additional cost in terms Collection will be affected by
Directorate General of Excise and of HR existing institutional culture and
Taxation outdated processes
Immediate provincial No dedicated structure or
collection of sales tax possible capacity to collect sales tax
Function may be neglected due to
other tax collecting
responsibilities
Will require restructuring of
office of DG E&T and devolved
offices
Collection through a Dedicated Will ensure dedicated Will delay provincial collection
Commissioner of Sales Tax and supervision and collection of of sales tax
officers subordinate to him sales tax
Will allow development of a Will require appointment of Sales
modern institution Tax officers in every district and
provision of offices and staff/
establishment of processes and
procedures


























































29
Sales Tax on services p 122




Concept/Issues paper on Sales Tax on Services 7



Supervision of collection through Will require little additional As in the case of collection of
Commissioner of Sales Tax with cost Sales Tax through DG Excise and
legal and administrative powers Taxation
over existing E&T staff who will Will ensure dedicated
collect tax supervision
Establishment of a Punjab Taxation Will provide a sound and Will delay provincial collection
Authority/Punjab Revenue Board sustainable institution for tax of sales tax
with dedicated/shared hierarchies collection
for collection of Sales
Will allow development of a Will require defining of
Tax/professional tax, Immoveable
modern institution management structures
property tax and MV tax


b) Collection and assessing procedures

The Provincial Government needs to take a decision regarding the collecting and assessment
procedures for sales tax on services especially where it proposes to collect the tax directly.

c) Resolution of issues pertaining to services provided over a distance, and services which
constitute a significant input into production of goods.

While this issue has been briefly addressed by the meeting between the provinces and the
FBR, the issue needs to be unbundled and a fair criterion of sharing developed. This issue is
however complex and may not be resolved early as Sind may object to criteria which reduce
its uptake of taxes.

d) Abolition of Federal Excise duty on services

The matter of abolition of FE Duty on services needs to be resolved to stop double taxation.
Delay in resolution may expose provincial sales tax/FE Duty on services to legal challenges
with unpredictable results. Sind Government has already agitated the matter with FBR albeit
without progress.

e) Use of professional tax record for sales tax purposes/resolution of issues of double
taxation arising from professional tax if any

The professions and trades tax imposed under the Punjab Finance Act, 1977 can provide
valuable data regarding certain classes of persons liable to pay tax on services. Accordingly
the provincial government should consider possibilities of using that information for purposes
of sales tax on services and interlinking the two taxes. Whether the two taxes amount to
double taxation also needs to be debated and resolved.