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Workshop on Sales Tax Laws on ServicesPart 1 Provincial Withholding Sales Tax on Services (SST & PST)

Asif S. Kasbati, FCA, FCMA & LLBHead of Group Taxation & Legal AffairsGatron Group of Companies

Ex-Director Tax ServicesA. F. Ferguson & Co.

PTBA & KTBA - March 21, 2014

At Marriott Hotel, Karachi1

1INDEXProvincial Withholding Sales Tax in Sindh & PunjabExemption and Reduced rates in SST & PSTFederal Withholding Sales Tax23

CONCEPT in SST and PSTWithholding Sales Tax is envisaged on acquiring taxable services falling under the Second Schedule

Other services are not subject to WHT 4Withholding Agents1.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.

5Withholding Sales Tax SST & PSTService Recipient (withholding agents)Service ProviderNature of ServicesRate of WHT under SSTRate of WHT under PSTReference to SSTR & PSTRPerson registered in LTU and Govt Organization.

Unregistered personAny taxable services 100% of Sales Tax100% of Sales Tax3(3) / 5Person receiving advertisement services (Registered whether in LTU / RTO for goods or SRB / PRA)

Person providing advertisement services.Advertisement services100% of Sales Tax100% of Sales Tax

3(4) / 6Govt. OrganizationRegistered service providerAny taxable services except advertisement1/5th of Sales tax100% of Sales Tax

3(2) / 4Person registered in LTURegistered person in RTO

Any taxable service except advertisement1% of value of supplyAmount of ST mentioned on Invoice

3(4A) / 7(1)6MECHANISM (cont..) SSTR 3(3) & 3(4) / PSTR 5 & 6Persons registered in LTU and Govt. Organizations acquiring any taxable services from unregistered person AND Persons receiving advertisement services:Illustration

7Rupees(Taxable services from unregistered person)Value of taxable services including sales tax1,000Sales tax to be withheld @16% (Rs 1,000 X 16% 116%)(138)Balance amount payable to unregistered service provider (Rs1000 less Rs 138)862MECHANISM SSTR 3(2) / PSTR 4Govt. Organizations, on receipt of any taxable services (except advertisement services) from registered service provider:Illustration

8SSTPSTValue of taxable services excluding sales tax 1,0001,000Sales tax chargeable @ 16%160160Sales tax to be deducted by the withholding agents (1605)32160Sales tax payable by the withholding agent (160-32)128-Balance amount payable to the service provider1,1281,000MECHANISM (cont..) SSTR 3(4A) / PSTR 7(1)Person registered in LTU, on receipt of any taxable services (except advertisement services) from registered service providers:9SSTPSTValue of taxable services excluding sales tax1,0001,000Sales tax chargeable @16%1601601,1601,160Sales tax to be withheld (10) (160)Balance amount payable to the service provider1.1501,000Illustration CERTIFICATEA 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

10Increase in list of Taxable Services Continuous tax burden on us

11PENALTY AND DEFAULT SURCHARGEPenalty- 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.

12Part 2 Exemptions and Reduced ratesExemptions - SSTExemptions under Notification no. SRB-3-4/7/2013 dated June 18, 2013 subject to conditions thereinTariff HeadingServices9801.2000 & 9801.5000 Restaurants and caterers having turnover not exceeding 3.6M Subject to conditionsRespective headings under 98.02Advertisement through grant-in-aid9809.0000 Services by NADRA for utility bills collectionRespective headings under 98.13Banks and NBFC for Hajj and Umrah , cheque book and others14Exemptions - SSTTariff HeadingServices9801.3000Services rendered by marriage halls9802.4000 advertisement in newspaper and periodicals9810.0000hair cutting salons and beauty parlors9813.1400/9813.1500/9813.1600Insurance15Exemptions - SSTTariff HeadingServices9801.4000 & 9801.6000 Services provided by clubs to its members and charges received as security deposit9809.0000Contractual execution of work98.12 Telecommunication and internet service charges9820.1000Auto workshop and authorized service stations9824.0000Specified construction services1617Exemptions - PSTExemptions under the Second Schedule of PST - subject to conditions thereinTariff HeadingServices9802.1000 & 9802.2000 Advertisement sponsored by an agency of the FG/PG / financed out of funds by Government under grant-in-aid / conveying public service message98.12, 9857.0000 and 9858.0000Internet services and charges for international leased lines98.13Marine, life, health and crop insurance9824.0000 and 9814.2000Specified construction services18Exemptions - PSTTariff HeadingServices9807.0000Actual purchase value or documented cost of land9809.0000Contractual execution of work or Furnishing supplies9813.9000 and 9819.2000Value of currency in respect of services provided by foreign exchange dealer9810.0000, 9848.0000, 9847.0000, 9821.4000 and 9821.5000Services provided by beauty parlors9838.0000Amount received by way of fee under any law by port operating and allied services9805.5100Hajj and Umrah services provided by tour operatorsExemptions - PSTAs 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.1920Reduced Rate - SSTList of reduced rate services as per Notification no. SRB-3-4/8/2-13 dated July 1, 2013 subject to conditions thereinTariff HeadingServicesRate9805.3000Freight forwarding agents Rs. 500 per bill of lading 9807.0000 & 9814.3000Property developers or promotersRs. 100 / Rs. 50 per square yard / square foot9810.0000, 9821.4000 and 9821.5000 Beauty Parlors etc.10%9815.2000 Legal practitioners and consultants4%21Reduced Rate - SSTTariff HeadingServicesRate9815.3000Accountant and auditors4%9815.9000Tax consultants4%9818.1000Security agency10%9824.0000Construction services4%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.22Contractual 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(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

24SST 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 year25SST issues & KTBA views 9809.0000(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.26SST issues & KTBA views (Letter dated November 27, 2013)DRAFT NOTIFICATION27Notifications 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 LAW28 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 Honble Justice Chaudhry Ijaz Ahmed

Workshop on Sales Tax Laws on ServicesPart 3 Federal Sales Tax Withholding Rules 2007 FST - SRO 660 of 2007

Asif S. Kasbati, FCA, FCMA & LLBHead of Group Taxation & Legal AffairsGatron Group of Companies

Ex-Director Tax ServicesA. F. Ferguson & Co.

PTBA & KTBA - March 21, 2014

At Marriott Hotel, Karachi2929Withholding Agents

Federal and Provincial Government DepartmentsAutonomous bodiesPublic sector organizationsCompanies 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 Exporters30Company 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 Organization31Company 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 2001.32Advertisement Services, ST shown on the invoice i.e. from Registered personDescriptionAmount Rs.Value of Advertisement services excluding ST1,000ST chargeable @ 16%160Amount as per invoice1,160ST to be deducted by the WA160Balance amount payable to the Service provider by the WA Rs 1,000

FED, BSTO, ICTO: 16%

33Example : Registered service provider (service other than advertisement, if applicable)DescriptionAmount Rs.Value of services excluding ST1,000ST chargeable @ 16%160Amount as per invoice1,160ST to be deducted by the WAi.e. Rs. 160 5 or Rs. 1,000 x 3.2%32Balance amount payable to the supplier by the WA Rs 1,128.

FED, BSTO, ICTO: 16%34Advertisement from Unregistered personNature of ServicesWithholding Agent Rate of Withholding TaxAdvertisement Services (received other than from Sindh, Punjab, KPK)Recipient of advertisement services, registered for sales taxApplicable rates of sales tax 35DescriptionAmount Rs.Invoice value1,000ST @ 16 % to be deducted by the WA(1,000/116 x 16 )138Balance amount payable to the Service provider by the WA Rs 862

FED, BSTO, ICTO: 16%

Advertisement Services ,ST not shown on the invoice i.e. from Unregistered person36Receiver not registered for FSTIf 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.37Exemptions 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;

38Exemptions from ST WHTProducts 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; andTelecommunication.Issue: Interpretation may be link to the Tariff Heading.39Deposit of ST by Registered WHT AgentsWithholding 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.40Deposit of ST by Unregistered WHT AgentsWithholding 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. 41Other Legal, Compliance & Business IssuesAdjustment of Tax Deduction and CertificateConversion of Corporates to AOP / Individuals Multiple registrations of AOP / Individual Input Tax Credit vs. Tax WithholdingST on Advance Refund of withheld tax

42Other Legal, Compliance & Business IssuesIssues relating to Excisable servicesNo WHT as per Baluchistan and Islamabad Service OrdinancesAmendment required in Section 8B of FSTPetition against FST and Interim reliefPenalty for non-compliance

43A1 Adjustment of Tax Deduction and CertificateA 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.44A2 Monthly Certificate SuggestedCertification 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 SellerSST: Only Point 1 CoveredPST & FST : Format required

45A3 Reason for certification formatEnsure timely deposit of tax withheldPractical 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.46B. 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 / IndividualIn 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. 48D. 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.49D. 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. 50

E. Sales Tax on Advances and Withholding Tax 51Section 2(44) requires collection of sales tax at earlier of the time the goods are delivered or the time any payment is received2.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 Tax 52(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 goodsF. Refund of Withheld TaxSection 10 of the Act deals with input tax carried forward & export refundsSection 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 periodNo specific provision exists in the statute to claim refund of withheld tax !

53G. Issues relating to Excisable servicesFED 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 FEDThere is no concept of Withholding ax under FED law54H. No WHT as per Baluchistan and Islamabad Service OrdinancesIn 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

55I. Amendment required in Section 8B of FSTRegistered persons are restricted to adjust input tax in excess of 90% of output tax i.e. 10% mandatory paymentWhilst e-filing the return, Sales tax suffered @ 20% or 10% on own supplies is adjustable against the above, to which we agreeSection 8B is required to be amended to be in line with E-filing system

56Petitions against FST and Stay orderBe 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 57FST WHT - Legal Grounds of Petition and Stay orderBeyond 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

58FST WHT - Legal Grounds of Petition and Stay orderContradictory 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.

59FST WHT - Legal Grounds of Petition and Stay orderDiscriminatory 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;

60FST WHT - Legal Grounds of Petition and Stay orderPerson 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;

61Penalties 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.

62Penalties 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.

6364Taxes, 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

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Q&A SessionEMAIL CONTACTSNameEmail addressK.T.B.A itbarkhi@cyber.net.pkMr Asif S Kasbatiasifskasbati@gatronova.comMr Adnan Muftiadnan.mufti@shekhamufti.comMr Asif Haroonasif.haroon@pk.pwc.comMr Haider Patel Haider.A.Patel@pk.ey.comMr Zeeshan Merchantzeeshan@mmmerchant.com67Thank You &Allah bless you