4 Currently, there are 160 countries in the world that have implement VAT / GST. Number of country based on region are as follows:-No.RegionNo. of Country1ASEAN72Asia193Europe534Oceania5Africa446South America11Caribbean, Central & North America
5 Countries working towards VAT / GST * AfghanistanPrincipeBahamasSyriaBhutanBahrainKiribatiKuwaitMarshall IslandsQatarMicronesiaSaudi ArabiaPalauOmanSao TomeUnited Arab EmiratesChinaIndia* Source: Malaysian Tax Authority
6 SCOPE OF SALES TAX ON SERVICES – INTERNATIONAL PRACTICES.
7 Pakistan Services liable to sales tax, if they are specifically listed and taxed under the respective Provincial statutes. Except for Punjab & Khyber Pakhtunkhwa, services are solely taxable on the basis of origin, i.e., in the Province / Territory in which the service originates. India Service tax is applicable on the supply of services provided in a taxable territory. W.e.f. July 2012, service tax is levied on all services, other than those specifically exempt under the negative list. With the introduction of negative list, all definitions of ‘services’ which were earlier provided in the law have become redundant. Australia GST is applicable on taxable supplies of goods and services, which are supplied in Australia and made for consideration in the course of a business enterprise by an entity that is registered or that is required to be registered for GST.
8 Canada Canada’s federal government imposes a 5% sales tax known as the Goods and Services Tax (GST). When a supply is made in a “participating province,” the tax rate includes an additional provincial component of 7%, 8% or 10%, depending on the province. The combined 12%, 13% or 15% tax is known as the Harmonized Sales Tax (HST). France VAT applies to the supply of goods or services performed in France by a taxable person and intra- Community acquisition of goods from another EU member state by a taxable person. Japan Consumption tax applies to the supply of goods or services made in Japan by a taxable person and importation of goods into Japan. Malaysia Sales tax is a single-stage tax, applied to sales of locally manufactured taxable goods as well as to taxable goods imported for domestic consumption.
9 European UnionUnder the ‘Single Market’ rules, goods may move freely between member states without hindrance, including customs controls. As a result, the concepts of “import” and “export” no longer apply to cross-border trade between member states. “Nontaxable persons” are any persons or legal entities that are not registered for VAT. VAT is generally charged on supplies of goods made to nontaxable persons using the “origin principle,” which means VAT applies in the member state where the supplier of the goods is established. Consequently, VAT rate is the rate that applies to the goods in the supplier’s member state, not the rate that would apply in the customer’s member state. Business to-business (B2B) supplies of services are taxed at place where the customer is located.Business-to-consumer (B2C) supplies of services, the place of taxation continues to be where the supplier is established.
10 New ZealandGST applies to the supply of goods or services made in New Zealand by a registered person and importation of goods into New Zealand, regardless of the status of the importer. PhillipinesVAT applies to the taxable sale, barter, exchange, use or lease of goods or property by a taxable person, taxable sale or exchange of services by a taxable person and taxable importation of goods from outside the Philippines.TurkeyVAT applies to the following transactions:The supply of goods or services made in Turkey by a taxable person in the course of performing commercial, industrial, agricultural or independent professional activitiesServices received in Turkey or benefited from in Turkey by a taxable person or any other person responsible for payment of the taxGoods and services imported into Turkey
11 Singapore Taxable supplies of goods and services in Singapore, made in the course of a business by a taxable person and imports of goods into Singapore attracts GST. United Kingdom The supply of goods or services made in the United Kingdom by a taxable person, intra-Community acquisition of goods from another EU member state by a taxable person, reverse-charge services received by a taxable person in the United Kingdom and importation of goods from outside the EU attracts VAT. USA Sales tax is transaction-based tax, imposed on intra-state retail transactions (sales made between a buyer and seller located within the same state), and are calculated as a % of the receipts derived from the transaction.
12 Singapore Taxable supplies of goods and services in Singapore, made in the course of a business by a taxable person and imports of goods into Singapore attracts GST. United Kingdom The supply of goods or services made in the United Kingdom by a taxable person, intra-Community acquisition of goods from another EU member state by a taxable person, reverse-charge services received by a taxable person in the United Kingdom and importation of goods from outside the EU attracts VAT. USA Sales tax is transaction-based tax, imposed on intra-state retail transactions (sales made between a buyer and seller located within the same state), and are calculated as a % of the receipts derived from the transaction.
13 CONSTITUTIONAL POSITION &COMPARATIVE ANALYSIS OF SERVICES TAXED IN PAKISTAN
14 CONSTITUTIONAL POSITION 18th Amendment of the Constitution of PakistanAmendment XVIII (the Eighteenth Amendment) of the Constitution of Pakistan, was passed by the National Assembly of Pakistan on April 8, 2010.Under Entry No.49 of the fourth Schedule of the Federal Legislative List of the Constitution of Pakistan, as amended under Eighteenth (18th) Amendment Act 2010, the authority of the provinces regarding Sales Tax on Services has been accepted and re-asserted by adding the words "except Sales Tax on Services".
15 CONSTITUTIONAL POSITION Entry No.49 “Taxes on the Sales and purchases of goods imported, exported, produced, manufactured or consumed except Sales Tax on Services”. Article 142 (C) of the Constitution has further fortified the authority of the provinces on imposition and collection of the Sales Tax on Purchase and Sale of Services, which is reproduced as under: Article 142 (C) "A Provincial Assembly shall and Mujlis-e-Shoora (Parliament) shall not have power to make laws with respect to any matter not enumerated in the Federal Legislative List".
16 CONSTITUTIONAL POSITION With the 18th Amendment and the 7th NFC award, sales taxation on services jurisdiction has been reasserted and, for the first time, levy and collection rights have been regulated and administered by the provinces. Accordingly, the Provincial Assemblies of Sindh, Punjab & Khyber Paktunkhaw enacted Provincial Sales Tax Laws in Year 2011, 2012 & 2013 respectively for levy, collection and administration of sales tax on services provided, rendered or supplied in respective Provinces. A comprehensive list of services and service providers has been prescribed in 1st & 2nd Schedule of Provincial Laws for levy of sales tax. Constitutional Position needs be defined and elaborated whether the Provinces can levy sales tax on “services”, “service providers” or “both” !
17 ¶ (restaurants, marriage halls & lawns excluded) COMPARATIVE ANALYSISServicesSindhPunjabBaluchistan & ISB Capital TerritoryKhyber PakhtunkhawaServices provided by hotels, clubs , caterers , restaurants, marriage halls and lawns¶ (restaurants, marriage halls & lawns excluded) (restaurants excluded)Advertisement on television & radio¶Advertisement on cable television^Advertisement poles, billboards and othersOShipping agentsStevedoresShip management servicesFreight forwarding agents
18 COMPARATIVE ANALYSIS Services Sindh Punjab Baluchistan & ISB Capital TerritoryKhyber PakhtunkhwaCustoms agents¶Ship chandlersAdvertising agentsOSponsorship servicesBusiness support servicesServices provided by property developer & promoters^Courier servicesContractual execution of workServices provided or rendered for personal care by beauty parlours, beauty clinics, slimming clinics or centres and others
19 COMPARATIVE ANALYSIS Services Sindh Punjab Baluchistan & ISB Capital TerritoryKhyber PakhtunkhwaServices provided by banks, financial institutions insurances companies etc.^Architects & town plannersOContractors of buildingProperty developers and promotersLegal practitionersAccountants & auditorsManagement consultantsSoftware or IT based system development consultantsTax consultants
20 COMPARATIVE ANALYSIS Services Sindh Punjab Baluchistan & ISB Capital TerritoryKhyber PakhtunkhwaSecurity agencyOMarket research agencyStock brokers and commodity brokers^Money exchangersSurveyorsOutdoor photographers and video graphersManagement consultantsPort operators, airport operators, airport ground services & terminal operatorsAuto workshops including authorized service stations
21 COMPARATIVE ANALYSIS Services Sindh Punjab Baluchistan & ISB Capital TerritoryKhyber PakhtunkhwaWorkshop for industrial machinery, construction and earth moving machinery or other special purpose machineryOHealth care centre, gyms or physical fitness centresBody massage centrePedicure centreFranchise services^Construction servicesManagement services including fund & asset management servicesAirport services
23 COMPARATIVE ANALYSIS Services Sindh Punjab Baluchistan & ISB Capital TerritoryKhyber PakhtunkhwaOther consultantsOManpower & Recruiting agentsServices provided by tour operatorsServices provided in relation to Exploration & productionShare transfer servicesProperty dealersFashion designersRent a carCar/automobile dealersTelecommunication services^Laundries & dry cleaners
24 COMPARATIVE ANALYSIS^ Classified as service under the Baluchistan Sales Tax on Services Ordinance & Islamabad Capital Territory Sales Tax on Services Ordinance 2001 ¶ Administered under Federal Excise Act 2005
27 PECUILAR SERVICES BUSINESS SUPPORT SERVICES Tariff Heading 9805.9200 SindhPunjabSection 2(19) of the Sindh Sales Tax on Services Act, 2011Rule 27 of Punjab Sales Tax on Services (Definitions) Rules 2012Services provided in relation to business or commerce and includes evaluation of prospective buyers, telemarketing, call centre facilities, accounting and processing of transactions, processing of purchase orders and fulfillment services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, operational assistance for marketing, formulation of customer service and pricing policies, infrastructural support services and other transaction processing.Services provided in relation to business or commerce and includes evaluation of prospective customers, telemarketing, processing of purchase orders and fulfillment services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, accounting and processing of transactions, operational assistance for marketing, formulation of customer service and pricing policies, infrastructural support services and other transaction processing.
28 PECUILAR SERVICES BUSINESS SUPPORT SERVICES Tariff Heading 9805.9200 Very broad definition and implicationsVirtually includes every facet of economic activity which is supporting the operational existence of any businessGuidelines from provincial tax authorities for clarity and better understanding awaitedReimbursable expenses appear to be non deductible. Hence, service may be taxable on “gross value” charged to the customersNo exemption threshold has been definedSpecific rules for ascertainment and calculation of liability have not been framed
29 PECUILAR SERVICES BUSINESS SUPPORT SERVICES Tariff Heading 9805.9200 Overlapping services existing in the definition of BSS. Such services have distinct Tariff Headings under 1st Schedule but are otherwise non taxable:Call CentresAccounting ServicesData Processing and Provision of InformationRule 4A of Punjab Sales Tax on Services Rules 2012 !
30 PECUILAR SERVICES FRANCHISE SERVICES Tariff Heading 9823.0000 Ever since brought into the service tax, franchise services have been bone of contention among the Provinces and Federation.Even though franchise services are taxable / excisable under the three prevailing statutes of the country (with exception of KPK Finance Act 2013) and having similar definitions of franchise, there are still no clear guidelines for payment of sales tax on franchise on point of taxationIntense confusion exist among the taxpayers for payment of sales tax on franchise. This has already instigated litigation on many issues between the taxpayer and the revenue.
31 PECUILAR SERVICES FRANCHISE SERVICES Tariff Heading 9823.0000 “Franchise” means as an authority given by a franchise under which the franchisee is contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any other business activity in respect of goods or to provide services or to undertake any process identified with franchiser against a fee or consideration including royalty or technical fee, whether or not a trade mark, services mark, trade name, logo, brand name or any such representation or symbol, as the case may be, is involved.”Following elements are essential to establish a franchise arrangement under the law: Franchisee is granted any right to produce or manufacture;Franchisee is granted any right to sell or trade;Franchisee is granted any right to do other business activity is respect of goods identified with franchiser;Franchisee is granted any right to provide services possessed by a franchiser; andFranchisee is granted right to undertake any process identified with franchiser.
32 PECUILAR SERVICES FRANCHISE SERVICES Tariff Heading 9823.0000 Sindh ST Law 2011Punjab ST Law 2012Tax Rate 10%Tax Rate 16%SRB requires payment of Sindh Sales Tax on gross franchise / royalty payment of entire countryPRA requires payment of Punjab Sales Tax on franchise / royalty attributable to Punjab’s TurnoverIf royalty is paid under an agreement between local and foreign franchisor, sales tax to be paid on gross sum remitted or sum laid down in the agreement, whichever is higherSAMEIf no payment is made to franchisor, the assessable value shall be as per the agreementNOT APPLICABLEIf no franchise agreement in place or remittance not required, franchise will be deemed to be 10% of the franchisee’s turnover
33 PECUILAR SERVICES FRANCHISE SERVICES Tariff Heading 9823.0000 Sindh ST Law 2011Punjab ST Law 2012In case of beverages, if no agreement exists, sales tax is to be 10% of value of concentrate.In the case of food, if no agreement exists, the assessable value for sales tax shall be 10% of the turnover.If agreement is executed, sales tax is payable as per the agreed sum.In case of beverages, if no agreement exists, sales tax is to be 16% of value of concentrate.In case of food sector, if no agreement exists, sales tax is to be paid on net sales of the franchisee (Ambiguous)SAMEPayment of tax on 15th of the relevant monthIf no payment date is prescribed in the agreement or no agreement exists, tax is payable on 15th day on quarterly basis.NOT APPLICABLEInput Tax not admissible to Service ProviderInput Tax admissible to service providerRemitting bank is treated as WHT agent for recovery of sales tax on franchise
34 PECUILAR SERVICES FRANCHISE SERVICES Tariff Heading 9823.0000 Business IssuesBifurcation of sales tax on franchise among ProvincesFBR’s Claim on Franchise Tax accruing in Sindh & PunjabStatus of recipient of franchise under the Provincial statutes as “deemed registered person”Adjustment of input tax on franchise service paid on behalf on foreign franchisor – Invoice !!!Accruals vs. Actual payment – The Feasible Option !
35 PECUILAR SERVICES FRANCHISE SERVICES Tariff Heading 9823.0000 Business IssuesRegulatory and exchange restrictionsAgreement between the Franchisor and Franchisee for delay in paymentsExchange rate fluctuations between payment date and payable dateFranchise on the basis of Head Office or Provincial TurnoverDouble Taxation Issues
36 PECUILAR SERVICES SOFTWARE OR IT BASED SYSTEM DEVELOPMENT CONSULTANTS Tariff HeadingService taxable from 01 July 2013 onward.No specific definition of Software or IT Based consultants prescribed so far in Punjab & Sindh.Plain and literal reading of service suggests that services provided in relation to ‘system development’ are subject to sales tax.However, uncertainty prevails as to whether other services which are associated with the field of information technology are also taxable.
37 PECUILAR SERVICES SOFTWARE OR IT BASED SYSTEM DEVELOPMENT CONSULTANTS Tariff HeadingExamples of such other services could be as follows:implementation services in relation to licensed softwares;annual support renewals and software maintenance services;problem solving and software upgradation services;services in relation to network administration and information technology infrastructure;web development and web hosting services;advisory relating to design, implementation and operational assistance for hardware and software;implementation services in relation enterprise resource planning application system and management systems ; andoutsourcing of software or IT based personnel against services charges.
38 PECUILAR SERVICES SOFTWARE OR IT BASED SYSTEM DEVELOPMENT CONSULTANTS Tariff HeadingThe Punjab Revenue Authority, through its Circular No. 7 of 2013, has opined that every service provided by Software or IT based consultant is exposed to sales tax under the Punjab ST Laws 2012.Rendering of Exempt Services by IT Consultant !Software has already been declared as ‘goods’ under the Sales Tax Act Accordingly, sales 17% or 18%, as the case may be, is levied on supply of software. FBR’s Ruling !Practical issues emanate while making demarcation between supply of goods and rendering of service !Export of IT Services exempted from Sindh Sales Tax
39 PECUILAR SERVICES ADVERTISING AGENTS Tariff Heading 9805.7000 Sindh ST Law 2011Punjab ST Law 2012Advertising agents means a person engaged in providing any service connected with making, preparation, display, demonstration or exhibition of advertisement in any manner and includes an advertising agencySAME. Advertising consultant also taxableTax Rate 16%SAMEAdvertisement on building, poles, hoarding sites, billboards, digital boards, banners, vehicles, cinema, shops etc. are coveredAgency commission for advertisement on which sales tax on gross value of advertisement has already been charged and collected would not attract sales tax on commission. (Source: SRB Clarification)
40 PECUILAR SERVICES ADVERTISING AGENTS Tariff Heading 9805.7000 Sindh ST Law 2011Punjab ST Law 2012NOT APPLICABLESupply of goods and materials used in the preparation of advertisement are inclusive in the definition of services and accordingly subject to taxNo discounts are allowed, value constitute gross valueSAME
41 PECUILAR SERVICES CONSTRUCTION SERVICES Tariff Heading 9824.0000 Construction services were brought into the sales tax net by SRB since the month of November Initially, these services were subject to sales However, largely the construction industry did not obtain registration.Resultantly, to facilitate registration under the Sindh ST Laws 2011, the Sindh Government offered conditional sales tax rate of 4% on construction services w.e.f 01 July 2013.PRA also brought construction services into the sales tax w.e.f 01 July However, detailed procedure on construction services are yet to be prescribed by PRA.
42 PECUILAR SERVICES CONSTRUCTION SERVICES Tariff Heading 9824.0000 Sindh ST Law 2011Punjab ST Law 2012Rate of Sales Tax: 4% or 16%; Service provider may opt for reduced rate taxation upto 31 December 2013, subject to fulfillment of certain conditions as provided under SRB CircularCredit of Input Tax: No input tax available to service provider if he opts for reduced rate of taxValue of supply: Gross amount charged for the services.Rate of Sales Tax: 16%Input tax credit available (Rule 5 subjective)Gross amount charged for the services.
43 PECUILAR SERVICES CONSTRUCTION SERVICES Tariff Heading 9824.0000 Sindh ST Law 2011Punjab ST Law 2012Exemption:Projects of commercial and industrial nature where value of construction does not exceed Rs. 50 million provided value component of service does not exceed in such a project not exceed Rs. 10 million.Construction and development of EPZ, SEZ, diplomatic and consular buildings and such other buildings and structures of the organizations as are exempted from application of Income Tax Ordinance. 2001Projects of commercial and industrial nature where value of construction does not exceed rupees 50 million.Construction of industrial zones, consular buildings and other organizations exempt from income tax.
44 PECUILAR SERVICES CONSTRUCTION SERVICES Tariff Heading 9824.0000 Sindh ST Law 2011Punjab ST Law 2012Exemption:Construction of roads and repair of roads, railways, etc. as are not meant for commercial purpose or for commercial letting out on rent.NOT APPLICABLEConstruction of independent projects of private residential houses and apartments where the covered area does not exceed 10,000 sq feet and 20,000 sq feet in respect in respect of houses & apartment complexes respectively.NOT KNOWNGovernment civil works including Cantonment Boards.SAMECases where sales tax is otherwise paid as property developers or promotersConstruction work under international tenders against foreign grants-in-aid.
45 PECUILAR SERVICES CONSTRUCTION SERVICES Tariff Heading 9823.0000 Business Issues (Sindh ST Laws):Ascertainment of element of services in a construction contractBifurcation of tax rate where part of service under a contract was rendered prior to July 2013Criteria for exemption threshold [applicable to individual contacts or on total contracts]Overlapping of construction services with Contractors of building falling under the Tariff Heading ; andSub contracting of parts of construction contracts taxable under a different Tariff Heading
46 PECUILAR SERVICESTOLL MANUFACTURINGTariff HeadingToll Manufacturing previously covered under Section 2(33) of Sales Tax Act 1990 as ‘other disposition’. Sales Tax General Order (STGO) 3/2004 also elaborated the taxability of principal and vendor in toll manufacturing arrangementSindh High Court did not agree with FBR’s standpoint and held toll manufacturing as a serviceThe Federal Government changed the definition of supply under Section 2(33) and removed ‘other disposition’ as part of supply. The corresponding STGO, however, was not withdraw and still holds the field.Sindh Revenue Board and Punjab Revenue Authority have also classified “Toll Manufacturing” as “Service” and accordingly brought to sales 16% w.e.f 01 July 2013.SRO 1125 places sales tax on toll manufacturing activity within the 5 export oriented sectors. The textile industry is required to offer sales on toll manufacturing to FBR. Such tax is adjustable against their output tax liability.
47 PECUILAR SERVICES CONTRACTORS OF BUILDING, TURNKEY PROJECTS, ETC. Tariff HeadingTaxable in Sindh“Contractor of building (including water supply, gas supply and sanitary works), electrical and mechanical works (including air conditioning) multidisciplinary works (including turn-key projects) and similar other works”The definition aims to bring all civil, electrical and mechanical works which are ancillary to the completion of the construction projects (undertaken by way of a contract) or contracts other than construction contracts involving mechanical, engineering and similar works into the sales tax net.“Similar Other Works” Not DefinedWhether contracts of engineering, mechanical and similar works which are part & parcel of construction contracts are taxable under the Tariff Heading or ?
48 PECUILAR SERVICES CONTRACTUAL EXECUTION OF WORK & FURNISHING SUPPLIES Tariff HeadingUnique Tariff Heading !Taxable in Sindh since 2011 and in Punjab since July 2013Classification of services under this Tariff Heading is too cumbersomeSRB has opined that any service, which is not listed in either 1st or 2nd Schedule of Sindh ST Laws, is taxable under the Tariff Heading , if rendered through a contract.In the Indian Service Tax Laws, a Similar Entry titled ‘Work Contract’ exists whereby list of services taxed thereunder have specifically been defined.
49 PECUILAR SERVICESCONTRACTUAL EXECUTION OF WORK & FURNISHING SUPPLIES Tariff HeadingSindh ST Law 2011Punjab ST Law 2012Tax Rate 16%SAMENo Rules notified for computation of liabilityApplicable to both embedded contracts as well contracts for servicesNOT KNOWNIn case of embedded contracts and exclusive contracts for services, sales tax would be applicable on service componentAPPEARS TO BE SAMEServices specifically listed in the First Schedule are not taxable under (Source: SRB Clarification)No clarification todate; however, similar rule of law may apply
50 PECUILAR SERVICESCONTRACTUAL EXECUTION OF WORK & FURNISHING SUPPLIES Tariff HeadingSindh ST Law 2011Punjab ST Law 2012Exclusions:Contracts for works OR supplies where total value does not exceed Rs 50 million in a financial year subject to condition that the value component of services in such contract also does not exceed Rs 10 millionText books publication & distributionThe annual turnover would be the aggregate value of total contracts entered by contractor (Source: SRB Clarification).Exclusion:Annual total value of contractual works or supplies not exceeding Rs 50 million;Printing & supplies of booksThe aggregate value of total contracts will be examined for exemption criteria
51 PECUILAR SERVICES CONTRACTUAL EXECUTION OF WORK & FURNISHING SUPPLIES Tariff HeadingBusiness Issues:If total contract approach is adopted, it is practically not possible to charge sales tax on other contracts signed and executed earlierWithholding Tax issues would also arise for the payer (contractee) as he may not be aware of the value of other contracts handled contractorContracts executable over number of years
52 PECUILAR SERVICES LABOUR & MANPOWER / RECRUITMENT SERVICES Sindh ST Law 2011Punjab ST Law 2012Labour & Manpower Supply ServicesTariff HeadingManpower recruitment agentsTax Rate 16%In this arrangement, the service provider retains the employee or manpower on its own payroll and gets reimbursement for the actual expenses and fee mutually agreed between the partiesIn this arrangement, the service provider facilitates his client by using its skills & expertise to find suitable human resource or manpowerThe actual cost of manpower or employee which is reimbursed from the client is not included in the value of supply and only the consideration or commission is exposed to sales taxThe services are taxable on gross valueManpower recruiting agents are not taxable under the Sindh ST Law 2011Labour & manpower services may not taxable under the Punjab ST Law 2012
54 Rules, SROs, General Orders, Circulars have not been issued so far which causes a lot of confusion among the taxpayers and tax advisorsSpecific definitions of services brought under the tax net have not been definedIn the absence of SROs / Rules, it appears that sales tax has also been imposed on the following services which are otherwise exempt (either totality or partially) under Federal & Provincial Tax Laws:Services provided by RestaurantsMarriage LawnClubsAdvertisement in newspapers, periodicalsBeauty ParlousTelecommunications on international Leased Lines or bandwith software exporters registered under Software exporting BoardBanking and Non-banking Financial Institutions for services with respect to Hajj and Umrah passengers, cheque book issuance, Musharika and Modaraba financing and Utility Bills collectionInternet ServicesMarine, Life & Crop Insurance Services