Transcript Title (Arial bold 30 point)

Pre-Budget Seminar 2015
Karachi Tax Bar Association
Indirect Taxes
28 April 2015
Presented by:
Saud-ul-Hassan
Senior Manager - Tax
Ernst & Young Ford Rhodes Sidat Hyder
601 Progressive Plaza, Beaumont Road
Karachi 75530, Pakistan
+92 (0)21 3565 7677
Budget Recommendation
Sales Tax on Goods
The Sales Tax Act, 1990 (the ST Act)
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)
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Sales Tax on Goods
The Sales Tax Act 1990 (The ST Act)
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The ST Act
Adoption of a full fledged VAT
Conceptually Value Added Tax (VAT) system is adopted for
documentation of economy. Presently the ST Act is a blend of
numerous:•
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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.
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The ST Act
Section 3 - Rate of tax
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%.
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The ST Act - Section 3
Further tax & Extra Tax on Utilities
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.
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The ST Act
Special Procedures - Extra tax @ 2%
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.
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The ST Act
Section 2(44) -Time of Supply - Advance
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.
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Sections 7, 9 and 73
Time Limit for Tax Adjustments and Payments
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.
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The ST Act - Section 8
Tax Credit not allowed – SRO 490(I)/2004
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.
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The ST Act - Section 8
Tax Credit not allowed – Various
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.
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The ST Act
VAT on Imports
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.
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The ST Act, 1990
Sales Tax Return - Suggestions
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.
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Harmonization in Sales Tax on Goods & Services
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.
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Federal Excise and
Provincial Sales Tax on Services
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The FE Act - FED on Services
Overlapping with Sales Tax on Services
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.
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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.
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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.
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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)
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FED and Provincial Sales tax on Services
Rate of tax
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.
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Sales Tax on Services
Minimum registration threshold
►
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.
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Sales Tax on Services
Contractual Services / Business Support Services
►
►
►
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.
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Sales Tax on Services
Contractual Services / Business Support Services .Cont’d
►
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.
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Withholding of Sales Tax
Federal and Provincial
►
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.
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Withholding of Sales Tax
Federal and Provincial
►
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.
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Sindh Sales Tax Act
Recovery of demand and Rectification of mistakes-SRB
►
►
►
►
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.
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Khyber Pakhtoonkhwa
Sales Tax on Services
►
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.
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Thank You
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