Workshop on Sales Tax Laws on Services Part 1: Provincial Withholding Sales Tax on Services
This workshop conducted by Asif S. Kasbati covers topics such as Provincial Withholding Sales Tax in Sindh and Punjab, exemption and reduced rates in SST and PST, federal withholding sales tax, withholding agents, and the mechanism of withholding sales tax under SST and PST for different categories of service recipients and providers. The content provides a detailed overview of the regulations and procedures related to sales tax laws on services in Pakistan.
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Workshop on Sales Tax Laws on Services Part 1 Provincial Withholding Sales Tax on Services (SST & PST) Asif S. Kasbati, FCA, FCMA & LLB Head of Group Taxation & Legal Affairs Gatron Group of Companies Ex-Director Tax Services A. F. Ferguson & Co. PTBA & KTBA - March 21, 2014 At Marriott Hotel, Karachi 1
INDEX Provincial Withholding Sales Tax in Sindh & Punjab Exemption and Reduced rates in SST & PST Federal Withholding Sales Tax
CONCEPT in SST and PST Withholding Sales Tax is envisaged on acquiring taxable services falling under the Second Schedule Other services are not subject to WHT 4
Withholding Agents 1. 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; and 6. Recipients of advertisement services registered with Federal Board of Revenue for goods or with Sindh Board of Revenue for services. 5
Withholding Sales Tax SST & PST Service Recipient (withholding agents) Service Provider Nature of Services Rate of WHT under SST Rate of WHT under PST Reference to SSTR & PSTR Person registered in LTU and Govt Organization. Unregistered person Any taxable services 100% of Sales Tax 100% of Sales Tax 3(3) / 5 Person receiving advertisement services (Registered whether in LTU / RTO for goods or SRB / PRA) Person providing advertisement services. Advertisement services 100% of Sales Tax 100% of Sales Tax 3(4) / 6 Govt. Organization Registered service provider Any taxable services except advertisement 1/5th of Sales tax 100% of Sales Tax 3(2) / 4 Person registered in LTU Registered person in RTO Any taxable service except advertisement 1% of value of supply Amount of ST mentioned on Invoice 3(4A) / 7(1) 6
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: Illustration Rupees (Taxable services from unregistered person) Value of taxable services including sales tax Sales tax to be withheld @16% (Rs 1,000 X 16% 116%) Balance amount payable to unregistered service provider (Rs1000 less Rs 138) 1,000 (138) 862 7
MECHANISM SSTR 3(2) / PSTR 4 Govt. Organizations, on receipt of any taxable services (except advertisement services) from registered service provider: Illustration SST 1,000 160 PST 1,000 160 Value of taxable services excluding sales tax Sales tax chargeable @ 16% Sales tax to be deducted by the withholding agents (160 5) Sales tax payable by the withholding agent (160-32) 32 160 128 - Balance amount payable to the service provider 1,128 1,000 8
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: Illustration SST 1,000 PST 1,000 Value of taxable services excluding sales tax Sales tax chargeable @16% 160 1,160 (10) (160) 1.150 160 1,160 Sales tax to be withheld Balance amount payable to the service provider 1,000 9
CERTIFICATE A 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 10
Increase in list of Taxable Services Continuous tax burden on us 11
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 Fraud: @ 2% per month, of the amount of tax evaded, till such time the entire liability including the amount of default surcharge is paid. 12
Part 2 Exemptions and Reduced rates
Exemptions - SST Exemptions under Notification no. SRB-3-4/7/2013 dated June 18, 2013 subject to conditions therein Tariff Heading Services Restaurants and caterers having turnover not exceeding 3.6M Subject to conditions Advertisement through grant-in- aid Services by NADRA for utility bills collection Banks and NBFC for Hajj and Umrah , cheque book and others 9801.2000 & 9801.5000 Respective headings under 98.02 9809.0000 Respective headings under 98.13 14
Exemptions - SST Tariff Heading Services Services rendered by marriage halls 9801.3000 advertisement in newspaper and periodicals 9802.4000 hair cutting salons and beauty parlors 9810.0000 9813.1400/9813.1500/9813.1600 Insurance 15
Exemptions - SST Tariff Heading Services Services provided by clubs to its members and charges received as security deposit 9801.4000 & 9801.6000 9809.0000 Contractual execution of work Telecommunication and internet service charges 98.12 Auto workshop and authorized service stations 9820.1000 9824.0000 Specified construction services 16
Exemptions - PST Exemptions under the Second Schedule of PST - subject to conditions therein Tariff Heading Services Advertisement sponsored by an agency of the FG/PG / financed out of funds by Government under grant-in-aid / conveying public service message Internet services and charges for international leased lines Marine, life, health and crop insurance 9802.1000 & 9802.2000 98.12, 9857.0000 and 9858.0000 98.13 9824.0000 and 9814.2000 Specified construction services 17
Exemptions - PST Tariff Heading Services Actual purchase value or documented cost of land Contractual execution of work or Furnishing supplies Value of currency in respect of services provided by foreign exchange dealer Services provided by beauty parlors Amount received by way of fee under any law by port operating and allied services Hajj and Umrah services provided by tour operators 9807.0000 9809.0000 9813.9000 and 9819.2000 9810.0000, 9848.0000, 9847.0000, 9821.4000 and 9821.5000 9838.0000 9805.5100 18
Exemptions - PST As 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. 19
Reduced Rate - SST List of reduced rate services as per Notification no. SRB-3-4/8/2- 13 dated July 1, 2013 subject to conditions therein Tariff Heading 9805.3000 Freight forwarding agents Services Rate Rs. 500 per bill of lading Rs. 100 / Rs. 50 per square yard / square foot 10% 9807.0000 & 9814.3000 Property developers or promoters 9810.0000, 9821.4000 and 9821.5000 9815.2000 Beauty Parlors etc. Legal practitioners and consultants 4% 20
Reduced Rate - SST Tariff Heading Services Rate 9815.3000 Accountant and auditors 4% 9815.9000 Tax consultants 4% 9818.1000 Security agency 10% 9824.0000 Construction services 4% 21
Contractual execution of work or furnishing supplies - 9809.0000 KTBA 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. understands that the above As such, the entry be deleted from the Second Schedule. 22
Contractual execution of work or furnishing supplies - 9809.0000 1. Exemption If 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 23
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 taxableservices 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 24
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 25
SST issues & KTBA views (Letter dated November 27, 2013) Reduced rate on Construction contracts - 9824.0000 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 9824.0000 (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. 26
DRAFT NOTIFICATION Notifications 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. 27
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 the Injunctions of Islam and Doctrine of Expectation of Consultations Hon ble Justice Chaudhry Ijaz Ahmed 28
Workshop on Sales Tax Laws on Services Part 3 Federal Sales Tax Withholding Rules 2007 FST - SRO 660 of 2007 Asif S. Kasbati, FCA, FCMA & LLB Head of Group Taxation & Legal Affairs Gatron Group of Companies Ex-Director Tax Services A. F. Ferguson & Co. PTBA & KTBA - March 21, 2014 At Marriott Hotel, Karachi 29
Withholding Agents 1. Federal and Provincial Government Departments 2. Autonomous bodies 3. Public sector organizations 4. Companies as defined in the Income Tax Ordinance 2001, which are registered for FST, FED or income tax 5. Recipients of service of advertisement, who are registered for FST; and 6. Registered Exporters 30
Company as per Income Tax Ordinance 1. Company as defined in the Companies Ordinance 2. Body corporate formed by or under any law in force in Pakistan 3. Modaraba 4.Body incorporated by or under the law of a country outside Pakistan incorporation of companies relating to 5. Trust 6.Non Profit Organization 31
Company as per Income Tax Ordinance 7. Co-operative Society or Finance Society or any Other Society established or constituted by or under any law for the time being in force 8. Foreign 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; 9. Provincial Government; 10.Local Government in Pakistan; or 11.Small Company as defined in the Income Tax Ordinance 2001. 32
Advertisement Services, ST shown on the invoice i.e. from Registered person Description Amount Rs. Value of Advertisement services excluding ST 1,000 ST chargeable @ 16% 160 Amount as per invoice 1,160 ST to be deducted by the WA 160 Balance amount payable to the Service provider by the WA Rs 1,000 FED, BSTO, ICTO: 16% 33
Example : Registered service provider (service Example : Registered service provider (service other than advertisement, other than advertisement, if applicable) if applicable) Description Description Amount Amount Rs. Rs. Value of services excluding ST Value of services excluding ST 1,000 1,000 ST chargeable @ 16% ST chargeable @ 16% 160 160 Amount as per invoice Amount as per invoice 1,160 1,160 ST to be deducted by the WA ST to be deducted by the WA i.e. Rs. 160 i.e. Rs. 160 5 or Rs. 1,000 x 3.2% 5 or Rs. 1,000 x 3.2% 32 32 Balance amount payable to the supplier by the WA Rs 1,128. Balance amount payable to the supplier by the WA Rs 1,128. FED, BSTO, ICTO: 16% FED, BSTO, ICTO: 16% 34
Advertisement from Unregistered person Nature of Services Withholding Agent Rate of Withholding Tax Advertisement Services (received other than from Sindh, Punjab, KPK) Recipient of advertisement services, registered for sales tax Applicable rates of sales tax 35
Advertisement Services ,ST not shown on the Advertisement Services ,ST not shown on the invoice i.e. from Unregistered person invoice i.e. from Unregistered person Description Description Amount Amount Rs. Rs. Invoice value Invoice value 1,000 1,000 ST @ 16 % to be deducted by the ST @ 16 % to be deducted by the WA WA (1,000/116 x 16 ) (1,000/116 x 16 ) Balance amount payable to the Service Balance amount payable to the Service provider by the WA provider by the WA Rs Rs 862 138 138 862 FED, BSTO, ICTO: 16% FED, BSTO, ICTO: 16% 36
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. 37
Exemptions from ST WHT 1. Electrical energy; 2. Natural gas; 3. Petroleum products as supplies by petroleum production and exploration companies, oil refineries and oil marketing companies; 4. Mild steel products; 38
Exemptions from ST WHT 5. Products made from sheets of iron or non- steel alloy, stainless steel or other alloy steel; 6. Paper, in rolls or sheets; 7. Plastic products including pipes; 8. Vegetable ghee and cooking oil; and 9. Telecommunication. Issue: Interpretation may be link to the Tariff Heading. 39
Deposit of ST by Registered WHT Agents 1. 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. 2.Declaration of withheld tax shall be made in monthly tax return. Issue: Tax withheld by the buyer is not adjustable against own refundable. 40
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. 41
Other Legal, Compliance & Business Issues A. Adjustment of Tax Deduction and Certificate B. Conversion of Corporates to AOP / Individuals C. Multiple registrations of AOP / Individual D. Input Tax Credit vs. Tax Withholding E. ST on Advance F. Refund of withheld tax 42
Other Legal, Compliance & Business Issues G. Issues relating to Excisable services H. No WHT as per Baluchistan and Islamabad Service Ordinances I. Amendment required in Section 8B of FST J. Petition against FST and Interim relief K. Penalty for non-compliance 43
A1 Adjustment of Tax Deduction and Certificate 1. 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. 2.No specific format of such certificate is prescribed in the rules. Issue: Prescribed certificate is not notified. 44
A2 Monthly Certificate Suggested 1. Certification about tax withheld. 2.Certification to deposit withheld sales tax for the month by 15th of the following month. 3.Certification to provide copies of the relevant pages of submitted version of the e-Forms, if required by Seller SST: Only Point 1 Covered PST & FST : Format required 45
A3 Reason for certification format 1.Ensure timely deposit of tax withheld 2.Practical issue of following up for cheque first and then following up for certificate. 3.Avoid cash flow issue next month as applicable in case SST format which required to issue certificate after deposit of tax. 46
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. 47
C. Multiple registrations of AOP / Individual In many cases, businesses conducted by Individuals / AOPs registrations, e.g., importer-cum-wholesaler- cum-exporter, etc. However, such businesses may not be practically engaged in Exports at all. have multiple In such cases, such Individuals / AOPs may either need to change their registration particulars; otherwise considered as a withholding agent due to their status as Exporter too. they would be 48
D. Input Tax Credit vs. Tax Withholding 1. The registered buyer is entitled to claim input tax credit in the related tax period on accrual basis. 2. 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. restrictions do not allow such credit. However, system 49
D. Input Tax Credit vs. Tax Withholding 3. 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. 50
