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Workshop on Sales Tax Laws on Services Part 1 Provincial Withholding Sales Tax on Services (SST & PST) Asif S. Kasb PowerPoint Presentation
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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

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slide1

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

index
INDEX
  • Provincial Withholding Sales Tax in Sindh & Punjab
  • Exemption and Reduced rates in SST & PST
  • Federal Withholding Sales Tax
concept in sst and pst
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

withholding agents
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.

mechanism cont sstr 3 3 3 4 pstr 5 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

mechanism sstr 3 2 pstr 4
MECHANISM – SSTR 3(2) / PSTR 4

Govt. Organizations, on receipt of any taxable services (except advertisement services) from registered service provider:

Illustration

mechanism cont sstr 3 4a pstr 7 1
MECHANISM (cont..) – SSTR 3(4A) / PSTR 7(1)

Illustration

Person registered in LTU, on receipt of any taxable services (except advertisement services) from registered service providers:

certificate
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

penalty and default surcharge
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.

slide13

Part 2

Exemptions and

Reduced rates

exemptions pst2
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.

slide22

Contractual execution of work or furnishing supplies - 9809.0000

KTBA understands that the above 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.

As such, the entry be deleted from the Second Schedule.

slide23

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

slide24

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 “taxable services” 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

slide25

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

sst issues ktba views letter dated november 27 2013
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.

draft notification
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.

draft law
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

slide29

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

slide30

Withholding Agents

Federal and Provincial Government Departments

Autonomous bodies

Public sector organizations

Companies as defined in the Income Tax Ordinance 2001, which are registered for FST, FED or income tax

Recipients of service of advertisement, who are registered for FST; and

Registered Exporters

slide31

Company as per Income Tax Ordinance

  • Company as defined in the Companies Ordinance
  • Body corporate formed by or under any law in force in Pakistan
  • Modaraba
  • Body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies
  • Trust
  • Non Profit Organization
slide32

Company as per Income Tax Ordinance

  • Co-operative Society or Finance Society or any Other Society established or constituted by or under any law for the time being in force
  • 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;
  • Provincial Government;
  • Local Government in Pakistan; or
  • Small Company as defined in the Income Tax Ordinance 2001.
slide33

Advertisement Services, ST shown on the invoice i.e. from Registered person

Balance amount payable to the Service provider by the WA Rs 1,000

FED, BSTO, ICTO: 16%

slide34

Example : Registered service provider (service other than advertisement, if applicable)

Balance amount payable to the supplier by the WA Rs 1,128.

FED, BSTO, ICTO: 16%

slide36

Advertisement Services ,ST not shown on the invoice i.e. from Unregistered person

Balance amount payable to the Service provider by the WA Rs 862

FED, BSTO, ICTO: 16%

receiver not registered for fst
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.

slide38

Exemptions from ST WHT

Electrical energy;

Natural gas;

Petroleum products as supplies by petroleum production and exploration companies, oil refineries and oil marketing companies;

Mild steel products;

slide39

Exemptions from ST WHT

Products made from sheets of iron or non-steel alloy, stainless steel or other alloy steel;

Paper, in rolls or sheets;

Plastic products including pipes;

Vegetable ghee and cooking oil; and

Telecommunication.

Issue: Interpretation may be link to the Tariff Heading.

slide40

Deposit of ST by Registered WHT Agents

    • 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.
    • Declaration of withheld tax shall be made in monthly tax return.
    • Issue: Tax withheld by the buyer is not adjustable against own refundable.
slide41

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.
other legal compliance business issues
Other Legal, Compliance & Business Issues
  • Adjustment of Tax Deduction and Certificate
  • Conversion of Corporates to AOP / Individuals
  • Multiple registrations of AOP / Individual
  • Input Tax Credit vs. Tax Withholding
  • ST on Advance
  • Refund of withheld tax
other legal compliance business issues1
Other Legal, Compliance & Business Issues
  • Issues relating to Excisable services
  • No WHT as per Baluchistan and Islamabad Service Ordinances
  • Amendment required in Section 8B of FST
  • Petition against FST and Interim relief
  • Penalty for non-compliance
slide44

A1 Adjustment of Tax Deduction and Certificate

  • 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.
  • No specific format of such certificate is prescribed in the rules.
  • Issue: Prescribed certificate is not notified.
slide45

A2 Monthly Certificate Suggested

  • Certification about tax withheld.
  • Certification to deposit withheld sales tax for the month by 15th of the following month.
  • 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
slide46

A3 Reason for certification format

  • Ensure timely deposit of tax withheld
  • Practical issue of following up for cheque first and then following up for certificate.
  • Avoid cash flow issue next month as applicable in case SST format which required to issue certificate after deposit of tax.
b conversion of corporates to aop individuals
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.
c multiple registrations of aop individual
C. Multiple registrations of AOP / Individual
  • In many cases, businesses conducted by Individuals / AOPs have multiple registrations, e.g., importer-cum-wholesaler-cum-exporter, etc. However, such businesses may not be practically engaged in Exports at all.
  • In such cases, such Individuals / AOPs may either need to change their registration particulars; otherwise they would be considered as a withholding agent due to their status as ‘Exporter’ too.
slide49

D. Input Tax Credit vs. Tax Withholding

The registered buyer is entitled to claim input tax credit in the related tax period on accrual basis.

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. However, system restrictions do not allow such credit.

slide50

D. Input Tax Credit vs. Tax Withholding

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.

e sales tax on advances and withholding tax
E. Sales Tax on Advances and Withholding Tax
  • Section 2(44) requires collection of sales tax at earlier of the time the goods are delivered or the time any payment is received
  • 2. Sales Tax General Order (STGO) 1 of 2006 dated June 5, 2006:
    • Chargeability, collection and deposit of sales tax against advance payment on the basis of “Advance Payment Receipt” which is deemed to be a sales tax invoice
e sales tax on advances and withholding tax1
E. Sales Tax on Advances and Withholding Tax
  • (b)Sales tax is to be withheld and deposited on the basis of “Advance Payment Receipt”
  • (c) Issuance of Sales Tax Invoice under section 23 of the Sales Tax Act, 1990 at time of actual delivery of goods
slide53

F. Refund of Withheld Tax

Section 10 of the Act deals with input tax carried forward & export refunds

Section 66 of the Act deals with refund cases where tax was paid in inadvertence, error or misconception or input tax adjustments not claimed within 6 months’ period

No specific provision exists in the statute to claim refund of withheld tax !

g issues relating to excisable services
G. Issues relating to Excisable services

FED items under Sales tax mode are covered under SRO 550(I)/2006 dated June 5, 2006. These are not subject to Withholding Sales Tax due to ----

Withholding tax regime is framed under FST and not FED

There is no concept of Withholding ax under FED law

h no wht as per baluchistan and islamabad service ordinances
H. No WHT as per Baluchistan and Islamabad Service Ordinances

In KTBA views, Services subject to Baluchistan and Islamabad Capital Territory Ordinances are not subject to withholding sales tax as __

Withholding tax regime is under FST and not under the Ordinances

There is no concept of withholding sales tax under these Ordinances

i amendment required in section 8b of fst

Registered persons are restricted to adjust input tax in excess of 90% of output tax i.e. 10% mandatory payment

Whilst e-filing the return, Sales tax suffered @ 20% or 10% on own supplies is adjustable against the above, to which we agree

Section 8B is required to be amended to be in line with E-filing system

I. Amendment required in Section 8B of FST
petitions against fst and stay order
Petitions against FST and Stay order
  • Be Be Jan Colours VS FBR – WP 11939/13 - LHC stay order of May 2013 – Suspended to the extent of petitioner
  • Adnan Powers & Others – D-3445/13 – SHC order of August 2013 – No adverse action
fst wht legal grounds of petition and stay order
FST WHT - Legal Grounds of Petition and Stay order

Beyond the powers of the Federal Government (FG) as envisaged under Section 3(6) of ST Act to tax only supplies and goods

Ultra vires to the Constitution as it only empowers the FG to levy sales tax on goods

fst wht legal grounds of petition and stay order1
FST WHT - Legal Grounds of Petition and Stay order

Contradictory to exemption under Serial no. 3 of the Sixth Schedule available to retailers and cottage industry having turnover less than Rs 5M

Withholding Rules are in violation of Article 18 (Fundamental Rights) of the Constitution.

fst wht legal grounds of petition and stay order2
FST WHT - Legal Grounds of Petition and Stay order

Discriminatory and in violation of Article 25 (Fundamental Rights) of the Constitution, being applicable to selected registered persons;

Impracticable to advertise / notify that the payment will be subjected to sales tax withholding;

fst wht legal grounds of petition and stay order3
FST WHT - Legal Grounds of Petition and Stay order

Person deducting the tax is not allowed to take credit of tax withheld on payment to unregistered persons;

Collection of sales tax more than amount that would be the actual sales tax liability;

slide62

Penalties For Non Compliance

  • Non-compliance of the Withholding Tax may result in invoking of section 8A - Joint and several liability of registered persons in supply chain where tax remained unpaid as well as levying varying penalties as provided under Section 33 of the Sales Tax Act, 1990.
  • Relevant Serials of section 33 are 5, 17 or 19. The penalty exposure ranges from Rs. 5,000 or 3% of the amount of tax involved to Rs. 10,000 or 5% of the amount of the tax involved, whichever is higher.
slide63

Penalties For Non Compliance

  • Penalty should not be levied till it is proved that the supplier has also defaulted in his liability to the state and a revenue dent was caused to the exchequer.
slide64

“Taxes, after all, are dues that we pay for the privileges of Membership in an Organised Society.”

Franklin D. Roosevelt – 1936

_____________________

“In the world, nothing can be said to be

certain except Death and Tax.”

Benjamin Franklin - 1789

slide68

Thank You &

Allah bless you