Presentation on theme: "Workshop on Sales Tax Laws on Services Part 1"— Presentation transcript:
1 Workshop on Sales Tax Laws on Services Part 1 Provincial Withholding Sales Tax on Services (SST & PST)Asif S. Kasbati, FCA, FCMA & LLBHead of Group Taxation & Legal AffairsGatron Group of CompaniesEx-Director Tax ServicesA. F. Ferguson & Co.PTBA & KTBA - March 21, 2014At Marriott Hotel, Karachi
2 INDEXProvincial Withholding Sales Tax in Sindh & PunjabExemption and Reduced rates in SST & PSTFederal Withholding Sales Tax
4 CONCEPT in SST and PSTWithholding Sales Tax is envisaged on acquiring taxable services falling under the Second Schedule Other services are not subject to WHT
5 Withholding Agents1. Federal and Provincial government, local and district governments;2. Autonomous bodies;3. Public sector organizations, public corporation, state owned enterprises and regulatory bodies;4. Organizations funded wholly or partly out of budget grants of Federal and Provincial Government;5. Taxpayers falling in the jurisdiction of Large Taxpayers Unit of Inland Revenue registered for sales tax, federal excise duty and income tax; and6. Recipients of advertisement services registered with Federal Board of Revenue for goods or with Sindh Board of Revenue for services.
6 Withholding Sales Tax – SST & PST Service Recipient (withholding agents)Service ProviderNature ofServicesRate of WHT under SSTRate of WHT under PSTReference to SSTR & PSTRPerson registered in LTU and Govt Organization.Unregistered personAny taxable services100% of Sales Tax3(3) / 5Person receiving advertisement services (Registered whether in LTU / RTO for goods or SRB / PRA)Person providing advertisement services.Advertisement services100% ofSales Tax3(4) / 6Govt. OrganizationRegistered service providerAny taxable services except advertisement1/5th ofSales tax3(2) / 4Person registered in LTURegistered person in RTOAny taxable service except advertisement1% of value of supplyAmount of ST mentioned on Invoice3(4A) / 7(1)
7 MECHANISM (cont..) – SSTR 3(3) & 3(4) / PSTR 5 & 6 Persons registered in LTU and Govt. Organizations acquiring any taxable services from unregistered person AND Persons receiving advertisement services:IllustrationRupees(Taxable services from unregistered person)Value of taxable services including sales tax1,000Sales tax to be(Rs 1,000 X 16% ÷ 116%)(138)Balance amount payable to unregistered service provider (Rs1000 less Rs 138)862
8 MECHANISM – SSTR 3(2) / PSTR 4 Govt. Organizations, on receipt of any taxable services (except advertisement services) from registered service provider: IllustrationSSTPSTValue of taxable services excluding sales tax1,000Sales tax 16%160Sales tax to be deducted by the withholding agents (160÷5)32Sales tax payable by the withholding agent(160-32)128-Balance amount payable to the service provider1,128
9 MECHANISM (cont..) – SSTR 3(4A) / PSTR 7(1) Person registered in LTU, on receipt of any taxable services (except advertisement services) from registered service providers:IllustrationSSTPSTValue of taxable services excluding sales tax1,000Sales tax1601,160Sales tax to be withheld(10)(160)Balance amount payable to the service provider1.150
10 CERTIFICATEA certificate of tax deduction under SST / PST is also required to be furnished to the service provider as per Rule 3(9) / 10 on Form SSTW-06 / PST - format of certificate is not yet prescribed
11 Increase in list of Taxable Services Continuous tax burden on us
12 PENALTY AND DEFAULT SURCHARGE Penalty- Varying penalties as provided under Section 43/48 of the SST/PST at serial nos. 2, 3 or 12. The exposure ranges from Rs. 5,000 to Rs. 10,000 and 3 to 5% of the amount of the tax involved.Default Surcharge- SST S.44&PST S.49(a) General Inter-Bank Rate plus 3% per annum of the amount of tax due; and(b) If default is on account of Tax 2% per month, of the amount of tax evaded, till such time the entire liability including the amount of default surcharge is paid.
14 Exemptions - SSTExemptions under Notification no. SRB-3-4/7/2013 dated June 18, 2013 subject to conditions thereinTariff HeadingServices&Restaurants and caterers having turnover not exceeding 3.6M Subject to conditionsRespective headings under 98.02Advertisement through grant-in-aidServices by NADRA for utility bills collectionRespective headings under 98.13Banks and NBFC for Hajj and Umrah , cheque book and others
15 Exemptions - SST Tariff Heading Services 9801.3000 Services rendered by marriage hallsadvertisement in newspaper and periodicalshair cutting salons and beauty parlors/ /Insurance
16 Exemptions - SST Tariff Heading Services 9801.4000 & 9801.6000 Services provided by clubs to its members and charges received as security depositContractual execution of work98.12Telecommunication and internet service chargesAuto workshop and authorized service stationsSpecified construction services
17 Exemptions - PSTExemptions under the Second Schedule of PST - subject to conditions thereinTariff HeadingServices&Advertisement sponsored by an agency of the FG/PG / financed out of funds by Government under grant-in-aid / conveying public service message98.12, andInternet services and charges for international leased lines98.13Marine, life, health and crop insuranceandSpecified construction services
18 Exemptions - PST Tariff Heading Services 9807.0000 Actual purchase value or documented cost of landContractual execution of work or Furnishing suppliesandValue of currency in respect of services provided by foreign exchange dealer, , , andServices provided by beauty parlorsAmount received by way of fee under any law by port operating and allied servicesHajj and Umrah services provided by tour operators
19 Exemptions - PSTAs per notification No. PRA/Caterers.21/2012 dated November 25, 2013, Exemptions from levy of Sales Tax has been granted to services provided by standalone caterers to the extent of 11% from the rate of tax subject to the conditions mentioned therein.
20 Reduced Rate - SSTList of reduced rate services as per Notification no. SRB-3-4/8/2-13 dated July 1, 2013 subject to conditions thereinTariff HeadingServicesRateFreight forwarding agentsRs. 500 per bill of lading&Property developers or promotersRs. 100 / Rs. 50 per square yard / square foot, andBeauty Parlors etc.10%Legal practitioners and consultants4%
22 As such, the entry be deleted from the Second Schedule. Contractual execution of work or furnishing suppliesKTBA understands that the above classification is considered too wide, vague and unwarranted as it virtually covers every facet of business. On the basis of this entry, entire 2nd Schedule becomes redundant.As such, the entry be deleted from the Second Schedule.
23 Contractual execution of work or furnishing supplies - 9809.0000 1. ExemptionIf both the following conditions are met:(a) total value of such work or supplies does not exceed Rs. 50M in a financial year and(b) the value of service component of such contractual execution of work or furnishing supplies also does not exceed Rs. 10M
24 SST issues & KTBA views – 9809.0000 (Letter dated November 27, 2013) (a) Services forming part of a composite contract is taxable only if the same fall under the “taxable services” listed in the Second Schedule and embedded in contract for execution of work or furnishing supplies (b) Value to each contract with Contractee (and not all contracts of a Contractor) is to be considered for the levy of SST; otherwise it will result in withholding tax issues, as the Contractee may not be aware of the value of other contracts of the Contractor
25 SST issues & KTBA views – 9809.0000 (Letter dated November 27, 2013)(c) Value to each contract entered into by the Contractor is to be considered separately (d) Exemption threshold is applicable on the basis of work performed in any financial year
26 SST issues & KTBA views (Letter dated November 27, 2013) Reduced rate on Construction contracts KTBA is of the view that services provided by a contractor engaged in a single contract for the construction of building including other works i.e. civil, electrical and mechanical works will fall under the heading (construction services). Such contractor may opt for charging sales tax at the reduced rate of 4% under notification No. 3-4/8/2013 dated July 1, 2013 for the whole of contract.
27 DRAFT NOTIFICATIONNotifications are generally being issued without first issuing the Draft for the same, for comments by the Stakeholders. It is recommended that prior to issuing Notifications, the Draft Notifications be issued for comments by the Stakeholders and final notification be issued after atleast 15 days.
28 DRAFT LAW“I wish that the law making body shall frame the laws after deliberations which is an additional duty cast upon the law making body in terms of the Article 2-A of the Constitution. The same is in accordance with theInjunctions of Islam andDoctrine of Expectation of Consultations …”Hon’ble Justice Chaudhry Ijaz Ahmed
29 Workshop on Sales Tax Laws on Services Part 3 Federal Sales Tax Withholding Rules 2007FST - SRO 660 of 2007Asif S. Kasbati, FCA, FCMA & LLBHead of Group Taxation & Legal AffairsGatron Group of CompaniesEx-Director Tax ServicesA. F. Ferguson & Co.PTBA & KTBA - March 21, 2014At Marriott Hotel, Karachi
30 Withholding Agents Federal and Provincial Government Departments Autonomous bodiesPublic sector organizationsCompanies as defined in the Income Tax Ordinance 2001, which are registered for FST, FED or income taxRecipients of service of advertisement, who are registered for FST; andRegistered Exporters
31 Company as per Income Tax Ordinance Company as defined in the Companies OrdinanceBody corporate formed by or under any law in force in PakistanModarabaBody incorporated by or under the law of a country outside Pakistan relating to incorporation of companiesTrustNon Profit Organization
32 Company as per Income Tax Ordinance Co-operative Society or Finance Society or any Other Society established or constituted by or under any law for the time being in forceForeign Association, whether incorporated or not, which the Board has, by general or special order, declared to be a company for the purposes of this Ordinance;Provincial Government;Local Government in Pakistan; orSmall Company as defined in the Income Tax Ordinance 2001.
33 Advertisement Services, ST shown on the invoice i. e Advertisement Services, ST shown on the invoice i.e. from Registered personDescriptionAmount Rs.Value of Advertisement services excluding ST1,000ST 16%160Amount as per invoice1,160ST to be deducted by the WABalance amount payable to the Service provider by the WA Rs 1,000FED, BSTO, ICTO: 16%
34 Example : Registered service provider (service other than advertisement, if applicable) DescriptionAmount Rs.Value of services excluding ST1,000ST 16%160Amount as per invoice1,160ST to be deducted by the WAi.e. Rs. 160 ÷ 5 or Rs. 1,000 x 3.2%32Balance amount payable to the supplier by the WA Rs 1,128.FED, BSTO, ICTO: 16%
35 Advertisement from Unregistered person Nature of ServicesWithholding AgentRate of Withholding TaxAdvertisement Services (received other than from Sindh, Punjab, KPK)Recipient of advertisement services, registered for sales taxApplicable rates of sales tax
36 Balance amount payable to the Service provider by the WA Rs 862 Advertisement Services ,ST not shown on the invoice i.e. from Unregistered personDescriptionAmount Rs.Invoice value1,00016 % to be deducted by the WA(1,000/116 x 16 )138Balance amount payable to the Service provider by the WA Rs 862FED, BSTO, ICTO: 16%
37 Receiver not registered for FST If the recipient of advertisement services is not registered under Sales Tax Act 1990, it can be argued that the recipient will not withhold tax. For instance, certain governments, autonomous bodies, etc. will pay off the gross sum back to the channel / agency.
38 Electrical energy; Natural gas; Exemptions from ST WHTElectrical energy;Natural gas;Petroleum products as supplies by petroleum production and exploration companies, oil refineries and oil marketing companies;Mild steel products;
39 Exemptions from ST WHTProducts made from sheets of iron or non- steel alloy, stainless steel or other alloy steel;Paper, in rolls or sheets;Plastic products including pipes;Vegetable ghee and cooking oil; andTelecommunication.Issue: Interpretation may be link to the Tariff Heading.
40 Deposit of ST by Registered WHT Agents Withholding tax agents registered under ST or FED shall deposit withheld sales tax on the 15th of the month following the month in which tax deduction was made.Declaration of withheld tax shall be made in monthly tax return.Issue: Tax withheld by the buyer is not adjustable against own refundable.
41 Deposit of ST by Unregistered WHT Agents Withholding tax agents, not otherwise liable to register under ST or FED, shall deposit such withheld tax on return set out in Annexure to SRO 660 and deposit such tax on the 15th of the month following the month in which tax deduction was made.
42 Other Legal, Compliance & Business Issues Adjustment of Tax Deduction and CertificateConversion of Corporates to AOP / IndividualsMultiple registrations of AOP / IndividualInput Tax Credit vs. Tax WithholdingST on AdvanceRefund of withheld tax
43 Other Legal, Compliance & Business Issues Issues relating to Excisable servicesNo WHT as per Baluchistan and Islamabad Service OrdinancesAmendment required in Section 8B of FSTPetition against FST and Interim reliefPenalty for non-compliance
44 A1 Adjustment of Tax Deduction and Certificate A registered supplier is entitled to claim tax credit of withheld tax on the basis of certificate of deduction issued by the corresponding withholding agent.No specific format of such certificate is prescribed in the rules.Issue: Prescribed certificate is not notified.
45 A2 Monthly Certificate Suggested Certification about tax withheld.Certification to deposit withheld sales tax for the month by 15th of the following month.Certification to provide copies of the relevant pages of submitted version of the e-Forms, if required by SellerSST: Only Point 1 CoveredPST & FST : Format required
46 Ensure timely deposit of tax withheld A3 Reason for certification formatEnsure timely deposit of tax withheldPractical issue of following up for cheque first and then following up for certificate.Avoid cash flow issue next month as applicable in case SST format which required to issue certificate after deposit of tax.
47 B. Conversion of Corporates to AOP / Individuals Corporate withholding agents might start / shift business in the name of AOP / Individuals; thus, corporatization would be hampered and adversely affected.Manufacturers / Importers might prefer sales to unregistered sectors or to AOPs / Individuals who not required to withhold tax.
48 C. Multiple registrations of AOP / Individual In many cases, businesses conducted by Individuals / AOPs have multiple registrations, e.g., importer-cum-wholesaler- cum-exporter, etc. However, such businesses may not be practically engaged in Exports at all.In such cases, such Individuals / AOPs may either need to change their registration particulars; otherwise they would be considered as a withholding agent due to their status as ‘Exporter’ too.
49 D. Input Tax Credit vs. Tax Withholding The registered buyer is entitled to claim input tax credit in the related tax period on accrual basis.WHT is to be deducted at the time of making payment to the supplier. Delayed payment to supplier does not affect the right to claim withholding tax credit. However, system restrictions do not allow such credit.
50 D. Input Tax Credit vs. Tax Withholding In respect of withholding agent (other than service provider) under SRB and registered under FBR, withholding SST is required to be deposited by 15th day of the month following the period in which he claims input tax adjustment in FBR Return or payment is made, whichever is earlier.
51 E. Sales Tax on Advances and Withholding Tax Section 2(44) requires collection of sales tax at earlier of the time the goods are delivered or the time any payment is received2. Sales Tax General Order (STGO) 1 of dated June 5, 2006:Chargeability, collection and deposit of sales tax against advance payment on the basis of “Advance Payment Receipt” which is deemed to be a sales tax invoice
52 E. Sales Tax on Advances and Withholding Tax (b)Sales tax is to be withheld and deposited on the basis of “Advance Payment Receipt”(c) Issuance of Sales Tax Invoice under section 23 of the Sales Tax Act, 1990 at time of actual delivery of goods
53 F. Refund of Withheld Tax Section 10 of the Act deals with input tax carried forward & export refundsSection 66 of the Act deals with refund cases where tax was paid in inadvertence, error or misconception or input tax adjustments not claimed within 6 months’ periodNo specific provision exists in the statute to claim refund of withheld tax !
54 G. Issues relating to Excisable services FED items under Sales tax mode are covered under SRO 550(I)/2006 dated June 5, These are not subject to Withholding Sales Tax due to ----Withholding tax regime is framed under FST and not FEDThere is no concept of Withholding ax under FED law
55 H. No WHT as per Baluchistan and Islamabad Service Ordinances In KTBA views, Services subject to Baluchistan and Islamabad Capital Territory Ordinances are not subject to withholding sales tax as __Withholding tax regime is under FST and not under the OrdinancesThere is no concept of withholding sales tax under these Ordinances
56 I. Amendment required in Section 8B of FST Registered persons are restricted to adjust input tax in excess of 90% of output tax i.e. 10% mandatory paymentWhilst e-filing the return, Sales tax 20% or 10% on own supplies is adjustable against the above, to which we agreeSection 8B is required to be amended to be in line with E-filing system
57 Petitions against FST and Stay order Be Be Jan Colours VS FBR – WP 11939/13 - LHC stay order of May 2013 – Suspended to the extent of petitionerAdnan Powers & Others – D-3445/13 – SHC order of August 2013 – No adverse action
58 FST WHT - Legal Grounds of Petition and Stay order Beyond the powers of the Federal Government (FG) as envisaged under Section 3(6) of ST Act to tax only supplies and goodsUltra vires to the Constitution as it only empowers the FG to levy sales tax on goods
59 FST WHT - Legal Grounds of Petition and Stay order Contradictory to exemption under Serial no. 3 of the Sixth Schedule available to retailers and cottage industry having turnover less than Rs 5MWithholding Rules are in violation of Article 18 (Fundamental Rights) of the Constitution.
60 FST WHT - Legal Grounds of Petition and Stay order Discriminatory and in violation of Article 25 (Fundamental Rights) of the Constitution, being applicable to selected registered persons;Impracticable to advertise / notify that the payment will be subjected to sales tax withholding;
61 FST WHT - Legal Grounds of Petition and Stay order Person deducting the tax is not allowed to take credit of tax withheld on payment to unregistered persons;Collection of sales tax more than amount that would be the actual sales tax liability;
62 Penalties For Non Compliance Non-compliance of the Withholding Tax may result in invoking of section 8A - Joint and several liability of registered persons in supply chain where tax remained unpaid as well as levying varying penalties as provided under Section 33 of the Sales Tax Act, 1990.Relevant Serials of section 33 are 5, 17 or 19. The penalty exposure ranges from Rs. 5,000 or 3% of the amount of tax involved to Rs. 10,000 or 5% of the amount of the tax involved, whichever is higher.
63 Penalties For Non Compliance Penalty should not be levied till it is proved that the supplier has also defaulted in his liability to the state and a revenue dent was caused to the exchequer.
64 _____________________ “Taxes, after all, are dues that we pay for the privileges of Membership in an Organised Society.”Franklin D. Roosevelt – 1936_____________________“In the world, nothing can be said to becertain except Death and Tax.”Benjamin Franklin