1. Pre-Budget Seminar 2015 Karachi Tax Bar Association Indirect Taxes Ernst & Young Ford Rhodes Sidat Hyder 601 Progressive Plaza, Beaumont Road Karachi 75530, Pakistan +92 (0)21 3565 7677 Presented by: Saud-ul-Hassan Senior Manager - Tax 28 April 2015

2. Page 2 Budget Recommendation KTBA Pre-Budget Seminar 2015 Federal Excise and Sales Tax on Services The Federal Excise Act, 2005 (the FE Act) The Sindh Sales Tax on Services Act, 2011 (the Sindh Act) The Punjab Sales Tax on Services Act, 2012 (the Punjab Act) The Khyber Pakhtunkhwa Sales Tax on Services Act, 2013 (the KPK Act) Sales Tax on Goods The Sales Tax Act, 1990 (the ST Act)

3. Page 3 Sales Tax on Goods The Sales Tax Act 1990 (The ST Act) KTBA Pre-Budget Seminar 2015

4. Page 4 The ST Act Adoption of a full fledged VAT KTBA Pre-Budget Seminar 2015 Conceptually Value Added Tax (VAT) system is adopted for documentation of economy. Presently the ST Act is a blend of numerous:- exemptions; zero-rating, subsidized / reduced rates; fixed tax regimes, extra tax, further tax, value addition tax; withholding provisions; various restrictions on claiming input tax; and various special regimes It is suggested that for proper documentation of economy and a genuine increase in the tax to GDP ratio, all the above distortions in VAT system should be removed and a full fledged uniformed VAT regime may be adopted.

5. Page 5 The ST Act Section 3 - Rate of tax KTBA Pre-Budget Seminar 2015 Rate of sales tax on goods is 17% which is at a higher side. Coupled with various increasing conditions and restrictions on claim of input tax, the sales tax cost is further enhanced. Such outlook on a tax compliant person promotes tax evasion in the masses. It is suggested that the tax rate may be brought down to 15% and gradually upto 10%.

6. Page 6 The ST Act - Section 3 Further tax & Extra Tax on Utilities KTBA Pre-Budget Seminar 2015 Further tax @ 1% and Extra tax (on commercial consumers of gas and electricity) @ 5% is charged on supplies made to a persons who have not obtained sales tax registration in terms of the ST Act. - Persons not required to be registered under the ST Act or - Persons registered under Sindh Act, Punjab Act and KPK Act or AJK sales tax or have a FTN are being levied with such further tax and extra tax. It is suggested that the expression ‘persons who have not obtained registration’ may be replaced with ‘persons liable to be registered but not actually registered’. Similar to Withholding Rules.

7. Page 7 The ST Act Special Procedures - Extra tax @ 2% KTBA Pre-Budget Seminar 2015 Through SRO 896(I)/2013 dated 4 October 2013, certain specified goods were subjected to the levy of extra tax @ 2% in addition to the standard rate of sales tax of 17%. Such extra rate is only applicable for manufacturers and importers of the specified goods and the subsequent supply of such specified goods is exempt. Manufacturers who acquired such specified goods as industrial input for the purposes of manufacturing of taxable goods are being faced with the increased cost of 2%. It is suggested that supply of such specified goods to a person registered as a manufacturer may be excluded from the purview of extra tax.

8. Page 8 The ST Act Section 2(44) -Time of Supply - Advance KTBA Pre-Budget Seminar 2015 Section 2(44) of the ST Act provides that a supply, would be considered to be provided at the event earlier of- - The time at which goods are delivered or made available to the recipient of supply, or - The time when any payment is received by the supplier in respect of that supply. There are neither any procedures for payments of sales tax on advance nor adjustments through returns are prescribed which has resulted in unnecessary problems in payments and adjustment of sales tax on advance This is also causing discrepancies in CREST system. There appears to be no revenue-benefit from such exercise. It is suggested that the previous position for chargeability of sales tax at the time of delivery may be reverted back.

9. Page 9 Sections 7, 9 and 73 Time Limit for Tax Adjustments and Payments KTBA Pre-Budget Seminar 2015 Section 7, allows input tax adjustment for upto 6 tax periods. Similarly sales tax debit / credit notes may be issued within 180 days (i.e. approx. 6 months) of the relevant supply. Section 73, requires payments against tax invoices to be cleared within 180 days (i.e. approx. 6 months). it is required that adjustments / payments should be made within 6 months, otherwise no input tax adjustment would be allowed. All the above three provisions are restrictive for the business environment. It is suggested that the rigid requirement bounding the businesses for adjustments and payments within 6 months may be increased to 1 year.

10. Page 10 The ST Act - Section 8 Tax Credit not allowed – SRO 490(I)/2004 KTBA Pre-Budget Seminar 2015 The list of taxable purchases against which input tax adjustment is not allowed (SRO 490(I)/2004) was enhanced in 2013, i.e. includes building materials, office equipment, electrical and gas appliances, wires, cables, etc. Further, amendments brought in section 8(1)(h)(i) through the Finance Act, 2014, whereby claim or adjustment of input tax has been restricted by general expressions like- - directly used in taxable activity - ​ goods ​ ​ and ​ ​ services ​ ​ acquired ​ ​ for ​ ​ personal ​ ​ or ​ ​ non-business ​ ​ consumption - ​ directly ​ ​ use ​ ​ in ​ ​ the ​ ​ production ​ ​ or ​ ​ manufacture ​ ​ of ​ ​ taxable ​ ​ goods ​ - goods ​ ​ and ​ ​ services ​ ​ not ​ ​ related ​ ​ to ​ ​ the ​ ​ taxable ​ ​ supplies ​ It is suggested that the new list of items increased in SRO 490 should be removed as the cost of doing business and litigation has been enhanced. Restrictions on claim of input tax through general expressions should be removed from section 8(1), as it restricts the taxpayers vested right to claim legitimate input tax.

11. Page 11 The ST Act - Section 8 Tax Credit not allowed – Various KTBA Pre-Budget Seminar 2015 Section 8(1)(ca) disallow claim of input tax on account of such sales tax which has not been deposited in the Government Treasury by the respective supplier. Similarly, input tax discrepancies arising out of FBR’s CREST system or which are not verifiable in supply chain are also not allowed for adjustment purposes. This procedure ultimately causes a burden on the compliant taxpayer who would have to bear any sales tax liabilities that are arising from such circumstances beyond his control. Presently, a mere discrepancy is providing grounds to the department to initiate recovery proceedings against more than one person at same time. It is suggested that these provisions of the Act may be removed for providing relief to the compliant taxpayer, since a simple discrepancy can result in disallowing significant input tax adjustment.

12. Page 12 The ST Act VAT on Imports KTBA Pre-Budget Seminar 2015 Special Procedures for Importers required payment of 3% sales tax in addition to sales tax payable under section 3 of the ST Act, on imports of goods being Value Addition Tax (VAT). (around 20% value addition) No refund is allowed against such VAT sales tax paid. Earlier, in case of no claim of refund by importer, no sales tax audit was required. Such higher rate of minimum value addition is encouraging under invoicing at import stage. It is suggested that VAT paid at the time of import if do not adjusted within a year, importer should be allowed to claim refund. The benefit of no sales tax audit in cases where no refund is claimed would be reintroduced.

13. Page 13 The ST Act, 1990 Sales Tax Return - Suggestions KTBA Pre-Budget Seminar 2015 1.Generally after promulgation of the Finance Act, updated return is uploaded at the e-FBR portal. However, there have been errors / miscalculations in formulas of the newly uploaded return. It is suggested that a draft return with formulas may be shared with the taxpayers before the same is made available online. 2.Details of Imports and exports (Afghanistan) sometimes do not appear even though the same has been automated with Customs database. Including, bill of additional duties. 3.Issues in payments and adjustments of sales tax on advance payments. 4.Sales Tax Withholdings are not adjustable against input tax. 5.Issues in declaring debit / credit notes in respect of supplies to unregistered persons. 6.Inter adjustment of sales tax withholding through debit/credit notes specially in case of unregistered persons.

14. Page 14 Harmonization in Sales Tax on Goods & Services KTBA Pre-Budget Seminar 2015 Presently, the scope of goods and services are not clearly determined under the ST Act and the respective Provincial sales tax legislation. In certain cases it is overlapping including: 1. intangible movable goods (i.e. software and other soft contents); 2. supply of goods involve reasonable consumption of services (i.e. restaurants, caterers, toll manufacturing); and 3. mixed nature of contracts (i.e. turn-key contracts, civil works). Resultantly, due to such confusion in scope of goods and services, tax authorities are trying to tax such activities being goods and services simultaneously. It is suggested that tax authorities should agree on methods or rules, which covers the grey area in this regard and taxpayers are certain about an activity that whether the same is to be taxed as goods or services.

15. Page 15 Federal Excise and Provincial Sales Tax on Services KTBA Pre-Budget Seminar 2015

16. Page 16 The FE Act - FED on Services Overlapping with Sales Tax on Services KTBA Pre-Budget Seminar 2015 Certain services are concurrently being taxed under the FE Act and the Provincial Sales Tax Legislations, which tantamount to double taxation. FED in sales tax mode is against the sprite of constitution of Pakistan. FED on services is against the spirit of levy of excise duty which is used as a tool to reduce consumption of unwarranted goods. FBR has now issued / initiated various orders and recovery proceedings of FED on such services, even though sales tax on such services has already been paid to the respective Provincial authorities i.e. Sindh, Punjab and KPK. It is suggested that FED on services rendered in Sindh, Punjab and KPK should be withdrawn retrospectively.

17. Page 17 Provincial Sales Tax on Services Overlapping in Cross Border Services ► Due to difference in Rules of Origin and Place of Taxation between Provincial sales tax laws of Sindh, Punjab and KPK in case of services rendered from one province and received in another province there is a overlapping of payment of sales tax due to the applicability of reverse charge. ► Sindh sales tax on services Act requires payment of sales tax on services on the basis of origin/ place rendering of service. ► Punjab and KPK Acts requires payment of sales tax in case of rendering of services in cross province borders on the basis of consumption or upon location of recipient of services. KTBA Pre-Budget Seminar 2015

18. Page 18 Provincial Sales Tax on Services Overlapping in Cross Border Services ……Cont’d ► In such scenarios both Provincial tax authorities demanding payment of sales tax from service provider or otherwise from recipient of service through reverse charge which increases the tax affect to 31% and if FED is considered also the effective tax rate would accumulate to 47% in some cases. ► It is suggested that all four tax authorities should reach an agreement on taxing of services where services are originated and terminated in different Provincial territories. KTBA Pre-Budget Seminar 2015

19. Page 19 Provincial Sales Tax on Services Overlapping in Cross Border Services ……Cont’d ► Some solutions are – ► Provincial authorities allow input tax of each other and settle payments within the Provinces later on - (EU and Canada Model) ► Service wise Rules for place of taxation should be agreed as already agreed in the case of telephone services.(EU Model) ► Cross border services should be fixed taxed –( Latin American Model) ► Sales tax on cross border services would be collected by Federal Government and distributed later on- (Indian Sales Tax on Goods Model) ► Sales Tax on Cross border services should be shared between two Provinces on an agreed ratio. (Indian Model) KTBA Pre-Budget Seminar 2015

20. Page 20 FED and Provincial Sales tax on Services Rate of tax KTBA Pre-Budget Seminar 2015 Rate of FED / Sales Tax on Services is 15%/16% which is at a higher side. The persons rendering services on reduced rate are not allowed to claim input tax adjustment thereby must be awarded with exemption from levy Sindh sales tax and sales tax on purchase of goods/services Ratio of input tax claimed against services is very low as compare to goods. Coupled with various conditions and restrictions on claim of input tax, the sales tax cost is further enhanced. Such outlook on a tax compliant person promotes tax evasion in the masses. It should be brought down to single digit.

21. Page 21 Sales Tax on Services Minimum registration threshold KTBA Pre-Budget Seminar 2015 ► Presently in respect of certain services minimum registration threshold with certain conditions is available in Sindh and Punjab. ► It should be considered in most of the cases as the list of taxable services is increasing the number of services are now taxable which are rendered by small businesses. ► It is suggested that there should be a minimum general registration threshold for sales tax registration with Provincial authorities for service provider having annual turnover up to Rs. 10 million.

22. Page 22 Sales Tax on Services Contractual Services / Business Support Services KTBA Pre-Budget Seminar 2015 ► As per charging section of all three Provincial laws, specified services have been listed in the Second Schedule will be treated as taxable services. ► However categories of services namely “Contractual Execution of Work or Furnishing supplies” have been interpreted by the Provincial authorities to include those services under this head which are not listed in the First and Second Schedule i.e. numerous services which are otherwise not taxable but are being covered under this heading. ► Similarly Sindh and Punjab introduced a new category of taxable service named Business Support Service (BSS). The definition of BSS covers all services rendered in relation to business or commerce and includes numerous other services which are otherwise not taxable.

23. Page 23 Sales Tax on Services Contractual Services / Business Support Services.Cont’d KTBA Pre-Budget Seminar 2015 ► Such treatment of taxation is against the settled principles of charging provisions that charging provision should be specific and explicit. ► As various services listed down in the definition of BSS already list out as a specific services in the First Schedule or Second Schedule of the Act which is against the concept of indirect taxation ► Indirect taxes are levied on goods or services and not on persons. Likewise each goods or service should be distinct and can not fall under two separate HS codes / PCT codes. ► It is suggested that such Contractual execution and BSS should be withdrawn from the list of taxable services.

24. Page 24 Withholding of Sales Tax Federal and Provincial KTBA Pre-Budget Seminar 2015 ► Under the Provincial Withholding Rules i.e. Sindh and Punjab, taxable services acquired from unregistered persons is subject the withholding at the applicable rate i.e. generally 15%/16%. ► Generally the burden of the amount of tax is borne by the withholding agent which increases the cost of doing business. ► It is suggested that the rate for sales tax withholding from unregistered person should be removed or reduced to 1% in line with the provision of Federal sales tax withholding Rules.

25. Page 25 Withholding of Sales Tax Federal and Provincial KTBA Pre-Budget Seminar 2015 ► FBR and SRB assessing officers has issued various orders against taxpayers failed to withhold sales tax as per withholding rules and creates sales tax demands and initiated recovery proceedings in respect of non withhold amount of sales tax. ► Without understanding that payment of sales tax on taxable supplies or services is liability of person supplying the goods or rendering the services. Therefore, if supplier of goods or provider of services have already paid the amount of sales tax. Recovery of non withhold amount of sales tax from withholding agent is tantamount to double taxations. ► It is suggested that like income tax law should be provided in the Federal and Sindh sales tax withholding rules that if amount of tax required to be withheld already paid by the supplier or services provider no recovery of such amount of tax would be mad from withholding agent.

26. Page 26 Sindh Sales Tax Act Recovery of demand and Rectification of mistakes-SRB KTBA Pre-Budget Seminar 2015 ► Under section 23(5)(6) and 76 of the SSTS Act, 2011, the assessing officer is empowered to correct only clerical or arithmetical errors in any assessment or adjudication made by him or decrease/increase sales tax demand or service activity escaped from assessment. ► Federal or Provincial sales tax Acts, provides bar of 30 days from recovery of assessed sales tax demand from the service of order to taxpayer. However, Sindh Act does not bar the tax officers in respect of recovery of sales tax demand raised through an order by any period. ► It is suggested that the scope and jurisdiction of the assessing officers of SRB be enhanced in respect of rectification of any mistake apparent from record in the assessment or adjudication order. ► It is also suggested that like Federal and Provincial sales tax Act a time period of 30 days should also provide to taxpayers for payment of tax in Sindh Act.

27. Page 27 Khyber Pakhtoonkhwa Sales Tax on Services KTBA Pre-Budget Seminar 2015 ► KPK sales tax law has been introduced from July 2013 however it suffers from following issues - ► No sale tax rules have been prescribed (only draft rules are placed) ► No definition of services in the Act ► No input tax adjustment rules or procedures have been prescribed ► Exemptions have not been provided as compared to Sindh or Punjab who have specifically listed out the services which are exempt ► No exemptions in regards to insurance service provided by banks ► Positively no sales tax withholding provisions. It is suggested that the KPK revenue authority should expedite in addressing the above issues.

28. Page 28 Thank You KTBA Pre-Budget Seminar 2015