Court sets aside SRB order

Tax to now be applicable only to service charges and not on gross amount

The Sindh High Court has set aside the sales tax on gross amount of manpower supply services imposed by the Sindh Revenue Board (SRB) and restored it to its original form, according to which the tax is applicable only to service charges and not on the gross amount.

While hearing petitions, the court issued an order dated November 17, 2020, which stated that “all listed petitions are allowed by declaring that the value of service (of taxable supply) for the purpose of levy of sales tax on the petitioner’s/ service providers/ recipient (in respect of labour and manpower) shall be the amount of net receipt of service charges received on actual basis exclusive of all reimbursed amounts of salary and allowances.”

In 2017, the SRB had amended a rule regarding third-party contracts, in which it imposed 10% sales tax on the total amount billed by a manpower supplier, said Supreme Court of Pakistan Advocate Zaheer Minhas while talking to The Express Tribune. “Such a law was out of proportion to the profit of the service provider.”

SRB, through a notification dated June 5, 2017, amended Section 8(2) of the Sindh Sales Tax on Services Act 2011 (Act XII of 2011) and Rule 42-E of the Sindh Sales Tax on Services Rules 2011 (Rules). As a consequence, the companies were required to pay sales tax on the gross amount paid to the manpower supplier effective from July 1, 2017. He elaborated that if a person, rendering labour and manpower supply services, submitted a bill of Rs5 million, which included salaries and allowances of workers supplied, the SRB imposed sales tax on the gross amount and not on the profit of third-party contractor.

He added that the profit of the contractor was normally around 5-7% of the total amount and that was why the court scrapped sales tax on the gross amount of manpower supply services. According to a statement issued by the Employers Federation of Pakistan (EFP), the forum filed a large number of constitutional petitions in the Sindh High Court through Zaheer Minhas.

A division bench, comprising Justice Junaid Ghaffar and Justice Agha Faisal, heard the case on November 17, 2020 and accepted the constitutional petitions.

As a result, the sales tax payable to SRB on manpower supply has been restored to its original form ie only on service charges and not on the gross amount.

Published in The Express Tribune, November 18^th, 2020.

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