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 • 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
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 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 Govt. Organizations, on receipt of any taxable services (except advertisement services) from registered service provider: Illustration
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 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-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.
Part 2 Exemptions and Reduced rates
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.
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.
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
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
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) 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 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 “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
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
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
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
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.
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%
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%
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 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.
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;
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.
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.
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 • 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 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
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.
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
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 • 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 • 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.
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.
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.