Harmonisation of sales tax laws – a ray of hope
photo: file
The National Tax Council (NTC) was established back in March 2020 by the federal government of Pakistan with the federal and provincial finance ministers as its members.
The NTC was formed with several terms of references (TORs), amongst them the most important was to create ease of doing business for taxpayers. One of the significant ways in which ease can be brought is to harmonise the sales tax laws on services of all provinces and the Islamabad Capital Territory (ICT).
It doesn’t portray a good image of Pakistan in general when the investor sitting outside of the country in particular, while considering the feasibility of investment in the country, sees the conflicting provisions of sales tax on services laws and when more than one tax authority demands sales tax on a single service just due to the dispute between them, which could ultimately result in excess cash outflow for the potential investor.
The primary and most important dispute that mainly prevails is whether the jurisdiction from where the service has originated would be collecting the sales tax on that service or the jurisdiction where that service is being terminated, ie, based on the destination principle.
This not only consumes a lot of time of the taxpayer and the tax administrator but also increases the compliance cost for the taxpayer and administrative cost for the tax administrator, as in case of disputes, the taxpayer will go into a legal battle and incur more legal costs to avoid paying double tax on the same service while the tax administrator will need more staff cost to enforce the same.
Not only there have been immense pressure from different tax bars and business associations to resolve these issues, but it also came from our main lender, the International Monetary Fund (IMF), to sort it out to complete the checklist for required financing.
Therefore, the NTC, considering the economic position of Pakistan, has finally started to bring about long-awaited harmonisation between the sales tax laws of services, which is evident from notifying the “Place of Provision of Services Rules, 2023” (the Rules) through consensus between all four provinces and ICT.
The Rules aim to provide clear guidelines on the situations in which sales tax will be charged based on origination and the circumstances under which the tax will be levied based on destination.
Initially, the services which have been covered through these rules include advertisement, advertising agents, insurance, insurance agents, franchise, transportation or carriage of goods, and electric power transmission services.
For other services, the provisions of relevant Act or rules of the respective province or ICT are to be applied.
Whereas in case the specified service of these rules is to be provided in more than one province, the service provider shall claim the attributable input tax in the same proportion attributable to the amount of declared taxable values of the service by the relevant Act or rules of the province/ ICT.
The Rules are applicable from May 1, 2023 to all the specified services except for electric power transmission services, on which they would be applicable from July 1, 2023 after the federal government brings necessary changes in the Sales Tax Act 1990 to exclude them from the definition of goods.
The Rules put more emphasis on the location where the service provider resides or the place from where services are rendered.
For instance, in case of an advertisement on a website or webpage or internet, the location of the person owning or managing such website or webpage or internet and in case of life insurance and health insurance services office, the branch of the insurance company providing the insurance service is considered as the place of provision of service.
However, the rights for taxation have been given to the destination jurisdiction. For instance, in case of franchise services and intellectual property services provided or rendered by a person, whether a resident of Pakistan or otherwise, the place of provision of service is the location of the resident person receiving or procuring such services.
Interestingly, in case of services of transportation or carriage of goods by road or, through a pipeline or conduit, both origination and destination jurisdiction would share the tax equally, thereby solving this dispute by settling it administratively.
Although the current initiative is something that should be appreciated, there is a lot more to be done, which could include similar sales tax rates across the country, similar principles and definitions of levying sales tax on services, data-sharing and access between different tax authorities and most importantly, what exactly should be covered in goods and what in services should be specified leaving behind no ambiguity for the taxpayers.
The writer is a tax practitioner, researcher, and corporate trainer. He has studied International Taxation from the Chartered Institute of Taxation in the UK and is a member of ICAP
Published in The Express Tribune, May 8th, 2023.
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