OVERSEAS INVESTORS CHAMBER OF COMMERCE AND INDUSTRY TAXATION PROPOSALS 2019 - 2020 SINDH PROVINCIAL TAXES AND LEVIES - OICCI

 
OICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES

                 OVERSEAS INVESTORS
               CHAMBER OF COMMERCE
                      AND INDUSTRY

            TAXATION PROPOSALS
                2019 – 2020

         SINDH PROVINCIAL TAXES AND LEVIES

                       March, 2019

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                                 TABLE OF CONTENTS

                                                             Page Nos

Introduction                                                         03

Multiple Taxes and Increased Cost of Doing Business                  04

      All Collections Under One Ministry/Body                       04

      Tax Broadening Measures                                       04

      Sales Tax on Services                                         06

      Procedural and Structural Proposals                           18

      Other Levies                                                  20

   Levies

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INTRODUCTION

The Overseas Investors Chamber of Commerce and Industry (OICCI), represents the largest bloc
of foreign investors in Pakistan. It is the largest Business Chamber in the country based on
contribution to the national and provincial exchequers, as well as to the GDP, as over one third of
the total revenue collections in the country by the Federal and Provincial revenue authorities,
come from OICCI members. OICCI members also have a large footprint on CSR activities as,
besides the monetary contributions, employees spend over 800,000 man hours in community
welfare work, which last year benefited over 40 million persons belonging to the
underprivileged communities across the country.
A few facts, which are part of the OICCI profile, are being mentioned below for an appropriate
appreciation of the role played by the Chamber in the country’s economy, including social
inclusion activities:
   Representing 190 Foreign Investors
    Shareholders from 35 countries / Representation in 14 business sectors
    56 listed on Karachi Stock Exchange / 50 associates of 2017 Global Fortune 500
      companies
   Major contributor to the Economy of Pakistan
    Approximately one-third of government taxes/levies collected from OICCI members
    OICCI members invested USD 2.2 billion, in new capital expenditure, in 2016.
    Members provide employment to around one million people
    CSR activities of members benefit over 40 million underprivileged sections of society.
   Tax Environment
      OICCI members are fully tax compliant and share the concerns of the government on the
       very low tax to GDP ratio, which is primarily due to the fact that a significant portion of
       the economy continues to remain outside the tax net.
      Members appreciate and support all initiatives of the government to document the
       economy, penalize non-filers with higher withholding tax rates, and harmonize the
       property valuation besides the actions taken recently for potential access to multiple
       sources of tax evaded assets held locally or overseas. However many more measures and
       strict enforcement measures need to be incorporated in the relevant laws to ensure a
       more compliant tax culture in Pakistan, where there are rewards for the compliant tax
       payer and enforceable penalties for tax evaders.

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MULTIPLE TAXES AND INCREASED COST OF DOING BUSINESS
OICCI members appreciate the fact that the 13% Sindh sales tax on services is the lowest sales
tax rate amongst all the Revenue Boards of the country. However members continue to express
concern that the cost of doing business in Sindh is higher than the other provinces, on account of
certain levies, for example SDMI, which are not applicable in other provinces.
Taxes levied in Sindh should be harmonized with taxes in other provinces of the country, to
ensure competitiveness to investors in Sindh. Secondly, the taxes should be levied rationally, e.g.
marking fee and stamp duty are charged in Sindh without any concrete rationale and without
considering its negative impact on business. The consolidation of taxes will also make
compliance easy for taxpayer.

ALL REVENUE COLLECTIONS UNDER ONE MINISTRY/BODY
1.   Integration of all Revenue Collections
     Currently revenue collections of the Province of Sindh fall under the following
     Ministries/Bodies;
        Sindh Revenue Board (SRB)
        Ministry of Excise and Taxation and
        Sindh Board of Revenue (BoR)– responsible for taxes on all transactions related to
         immovable property, stamp duties and agriculture tax
     OICCI strongly recommends that all revenue collections should be merged under one
     Ministry/Body. The provincial government can devise an in house mechanism to share the
     revenue of the above three bodies through intra-government fund transfer.
     This would add considerably to the Ease of Doing Business (EODB), a matter which should
     be a priority for all policy makers in the country since Pakistan has fallen from 75 in 2010
     to 147 in 2018, in the World Bank – EODB survey.

TAX BROADENING MEASURES
2.   Agricultural Income Tax
     As per the constitution of Pakistan, right of taxing income lies with the federal government
     except income from agriculture which is taxable under the respective provincial laws.
     Agriculture related activities contribute approximately 20% of the overall national
     production. However, the collection of agricultural income tax is estimated to be even less
     than 1% of total collection of Federal and Provincial taxes.
     The above disparities in tax levies between different incomes segments need to be
     addressed. It is recommended that the Sindh government and revenue authorities take all
     possible measures to increase revenue collection from the agriculture sector. The original
     rationale of keeping agriculture out of tax net to facilitate small agriculturists is not
     applicable, due to non-implementation of land reforms, and the benefit of the tax
     exemption is being availed, as per common perception, by big landowners earning huge
     incomes and unscrupulous elements by transfer of income and wealth to businesses
     fronting as agriculture sector.
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   Some of the key issues related to agriculture income are identified as follows:
       Principle of Non-Discrimination: In principle, income from all sources, including
        agriculture, if exceeding the minimum threshold applicable for other sources of income
        should be taxed without any discrimination.
       Determination Basis: A transparent, easily understandable and applicable manner of
        determining such income should be designed.
       Flexible Income Based System: At present, the Agricultural Income Tax has effectively
        become a land tax, based on land holding, that leads to the perception that there is no
        tax on agricultural activities.
       Identification and Linkage with National Tax Number: There is no identification of
        even the small number of agricultural income taxpayer as they are not on the national
        tax number (NTN) system
Recommendation
       In light of the above, following proposals, given last year, are again given below:
       1. Income Based System: At present, the tax is payable on ‘land holding’ or ‘net
          income’ whichever is higher. However, the manner of determination of net
          income is complicated and therefore in almost 100% of the cases tax is received
          on land holding basis. This discourages the taxation on net income basis.
          Therefore taxability of income on land holding should be abolished and taxes
          collected on ‘net income basis’;
       2. Adjustable withholding tax: Advance tax should be introduced on sale of
          agricultural produce such as sugar cane, wheat, cotton and others. There are
          only around 10 to 15 agencies and enterprises which acquire such crops. The
          advance tax should be adjustable against income tax payable on net income
          basis. Rates of withholding and the threshold for the same should be aligned
          with other products – for example any payment exceeding Rs 25,000 should be
          subject to advance tax at the rate of 1 to 3 percent as the case may be. Federal
          taxation system may be used for such collection on behalf of the provincial
          government in the same manner as is being done in other cases by the
          provincial government.
       3. Link and Interface with the National Tax Number: All persons holding land
          should be required to obtain a National Tax Number (NTN), like the one
          maintained by FBR, and may be modified by adding one or two digits so as to
          identify that source of income is agriculture. [PRAL facilities may be used for
          such purposes in coordination with NADRA].
       4. Definition of Agricultural Activity: Definition of agricultural income should be
          amended to include all agricultural activities like non-corporate dairy farming
          and poultry etc.
       5. Rent for the Use of Agricultural Land: Under the specific provision, the rent for
          use of agricultural land, which is general practice especially for large
          landowners, is an agriculture income. There is effectively no mechanism to
          ensure completeness of recovery of taxes from such receipts. Such rent income
          should be subject to same rate of tax as is currently in vogue on property
          income under the FBR system.

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SALES TAX ON SERVICES
3.   Coordination Between Federal/Inter-Provincial Sales Tax Authorities
     All four Provinces and Federal Government have introduced distinct sales/service tax laws
     for their respective jurisdictions, with some of the clauses in clear conflict with each other
     resulting in foreign investors being pursued and harassed by the Federal and Provincial
     revenue collectors (FBR, PRA, SRB, KPRA and BRA) demanding tax on the same
     transactions creating undue hardship and double taxation claims for taxpayers. This
     situation is highly undesirable and creates complexities for investors.
     As an example, a service provider registered in Sindh providing taxable services to
     recipient in Punjab is liable to pay sales tax in Sindh whereas the withholding agent
     (recipient of service) is registered in Punjab and is liable to withhold sales tax and pay the
     same to Government of Punjab.
     Although, we have noted some improvements in the coordination between the revenue
     authorities, investors’ concerns continue, for e.g. the issue of levy of sales tax at
     'origination' and 'termination' of service in both the provincial legislations on services has
     still not been resolved.
     Section 60A and 60B of the Income Tax Ordinance, 2001 has not been amended to allow
     contribution to Provinces in respect of WWF and WPPF.
Recommendation
      In line with International and Regional practices a uniform service tax law may be
      drafted and agreed upon by the tax authorities of the Provinces and Federal
      Government, for implementation in their respective jurisdiction. Furthermore, a
      uniform tax return may also be introduced for the taxpayers.
      The above points can be addressed by taking the following four steps which will
      lead to effective management and expansion of the tax base:
         I.   A policy board comprising of the Chairmen of the Federal and Provincial
              revenue authorities (FBR, PRA, KPRA, BRA and SRB) should be formed to
              ensure synchronization of the policies, standard tax rates, basis of
              apportionment of revenues and removal of all anomalies/ conflicts between
              the laws of the different revenue boards (for example issues of jurisdiction,
              sales tax on toll manufacturing, clarity on jurisdiction and deductibility of
              WPPF/WWF expenses paid to the provinces).
        II.   Revenue authorities should decide the basis of levy of indirect tax, which can
              be ORIGINATION or TERMINATION, to establish jurisdiction of taxation of
              services;
       III.   To promote transparency and uniform interpretation, a ‘Standard schedule’
              should be introduced covering all services along with standard Tariff
              Headings and Standard definitions. The standard schedule should be
              adopted by all provinces and Islamabad Capital Territory while levying sales
              tax on services in their respective jurisdictions
       IV.    One return may be filed with identification of provincial head of account and
              direct deposit of share of tax of each province.

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        V.      SRB should take up with FBR for appropriate amendment in IT Ordinance,
                2001 to ensure that payments made to the provincial tax authorities on
                account of WWF and WPPF are allowed as tax deductible expense.
Rationale or Benefit
             Duplicate taxation is causing hardships to taxpayers and has given rise to unnecessary
             litigations and is one of the deterrents in attracting FDI in Pakistan.

4.   Reduction In Sales Tax Rate
     The expectations of the investors that the Sindh Revenue Board will continue the reduction
     of Sales Tax rate on services to 13%, as done in fiscal year 2016-17 will be repeated in
     2017-18, remained unrealized. Although, investors appreciate that the Sales Tax rate in
     Sindh province at 13% is the lowest in the country, it remains higher than comparative
     regional tax rates, as per the rates given in the graph below:

                                         Regional Sales Tax Rates
     15%                                                                      12%           13%
                                                  10%           11%
     10%              7%            7%
      5%
      0%
                Thailand     Singapore      Indonesia     Sri Lanka    Philippines      Sindh
                                                                                       Revenue
                                                                                        Board

Recommendation
      To keep in-line with the regional developing countries, reduction in sales tax on
      services should be made by 1% in the 2019-20 Sindh Finance Act and should be
      continued in the next coming budget and gradually reduced to 10% over the next
      three years for registered entities, whilst the current rate should be maintained for
      unregistered entities. This reduced rate will encourage the registration of the
      unregistered taxpayers to avail the benefits of input adjustment.
      Secondly, the option to opt for the basic rate or normal regime should be given to
      all the service provider who fall under the reduced/fixed rate regime.
Rationale or Benefit
      This option will reduce the cost of doing business for recipient of services as lower tax is
      not available for input tax adjustment.

5.   Sales tax on reduced rates not allowed to be claimed
     Currently, there is restriction on claiming of sales tax on those services which have reduced
     rates under “Sindh Sales Tax on Services Act, 2011”. Furthermore, SRB has also increased
     number of services on which reduced sales tax rate is applicable, increasing the number
     and amount of sales tax which is not claimable.

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Recommendation
     Amendments to be made in provincial laws to allow claim of input sales tax,
     regardless of the fact that the rate specified is full rate or reduced rate, as claiming
     input sales tax is basic feature of VAT mode of taxation.
Rationale or Benefit
     This is in contradiction of VAT principles on the basis of which Sales tax laws were
     introduced in Pakistan.
     Due to increase in list of services of reduced rates, cost of doing business has increased
     significantly as these payments, against nearly 25 services, are not claimable.
6.   Reverse Charge
     [Section 3(2) of & Rule 22 of SSTSA]: All Provincial Statues provide that service provided
     by non-resident service provider is liable to tax under reverse charge mechanism i.e. in the
     hand of service recipient. A non-resident has been defined to mean a person who is not
     registered with the relevant provincial statute.
     Such a tax framework tantamount to double taxation, in case where service provider is
     located in other province of Pakistan as the service provider becomes liable to tax in his
     respective Province; while the recipient of service becomes liable to tax in the Province of
     his residence.
     Moreover, Provincial Statues do not allow registered services recipient to claim sales tax
     paid on reverse charge as input tax against their own name.
     Sale tax @ 3% is charged on export of call center services (9835.0000) and standard rate is
     charged on both export sales of Software or IT based system development consultants
     (9815.6000) under reverse charge provisions.

     No separate category for IT based & ITES is available in SRB whereas both in PRA & FBR
     recognize IT based & ITES as distinct from other categories

Recommendation
       Reverse charge should be restricted to such cases where service provider is
       located outside Pakistan. Further, tax paid under reverse charge mechanism
       should be allowed as input tax.
          All exports for which foreign remittance is received through banking channel in
          business bank account should be exempt.
          IT-based and ITES should be recognized with separate tariff code and lower rate
          should be offered on local services as well.

Rationale or Benefit
         To avoid double taxation, allow input tax and reduce cost of doing business.
          All export of services are exempt under PRA, whereas export of IT Services & IT
          Enabled Services are exempt under FBR. As a result call centre and software
          development businesses are moving towards Punjab and ICT where rates are lower.
          All exports and at the very least exports of IT and IT enabled services should be
          exempt in SRB to make it consistent [SRB Notification 3-4/11/2017 (Software Services exempt
          only) & Notification No. SRB-3-4/7/2013 dated 18.6.2013].

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          Pakistan has huge potential in IT & ITES sector with respect to exports and
          development of local businesses since the cost of providing such services is usually
          low. Putting such services in same category as other services where there is
          consumption of input tax is not favorable [FBR SRO 781(I)/2018, June 21, 2018 5% ICT, IT
          companies moving to Islamabad].

7.   Reduction In Sales Tax On Telecommunication Services
     The high growth rates of cellular Industry in Pakistan have slowed down due to various
     reasons which include higher taxation. Pakistan cellular industry is one of the highest taxed
     in the region. This relative decline in growth has resulted in decrease in revenue from
     cellular industry.
Recommendation
          Currently, sales tax rate on telecommunication services is 19.5%. It is proposed
          that this should be brought at par with other services - sales tax on telecom
          services be equivalent to general Sales Tax rate on services, in order to
          harmonize all sales tax on services rates. This will increase the tax collections
          by helping telecom operators tap lower income population of Pakistan.

8.   Exemption of Withholding Agents from deducting Sales Tax from payments to
     Registered persons and Reduction of rate for unregistered persons
     Withholding of sales tax from registered sales tax persons with SRB, does not provide any
     benefit and only creates hardships for genuine taxpayers of reconciliations and delay in
     adjustments. Similar to Federal Sales Tax law, exemption be given if payment being made
     to sales tax registered person against withholding sales tax.
     Withholding tax rules are applicable on active taxpayers also.
Recommendation
      Withholding should be exempted from deduction of Sales Tax at applicable rate
      against the payments to the Sales tax registered persons with SRB, in line with
      Federal Laws.
      The rate of withholding sales tax against the invoices of unregistered persons
      should be reduced to 1% in line with the FBR’s Withholding Sales Tax regime as
      applicable under SRO.660 (I)/2007.
      Withholding tax rules should not applicable on active taxpayers.
Rationale or Benefit
      The withholding agents are unnecessarily burdened with deduction of sales tax which is
      not claimable as input tax and is thus resulting in increasing their cost of doing business.
      Similar matters have already been decided by the courts in case of sales tax withholding
      rules of FBR and PRA. The ultimate objective of the taxpayer is that indirect tax should
      not increase its cost of doing business. Moreover these enforcement measures have
      negative bearing on the regulated sector only.
      The purpose of withholding tax deduction is to ensure that non-active & non-registered
      taxpayers can be detected. Compliance burden of businesses can be reduced for
      businesses by exemption deduction at source for active taxpayers. PRA allows similar

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        provision [Sindh Sale Tax Special Procedures (Withholding Tax) Rules, 2014 read with notification SRB-
        3-4/14/2014].

9. Withholding Tax
        Under the Sindh Sales Tax Rules, all payments made for services received from unregistered
        persons, the service receiving company attracts withholding tax @13%. Under the current
        economic scenario, where the cost of doing business is very high, such requirement is draining
        out liquidity of businesses.
Recommendation
        The requirement for withholding sales tax on services provided by unregistered persons should
        be removed or brought in line with the provisions of Sales Tax Act 1990 whereby only 1% tax
        needs be withheld on purchases from unregistered person.

10. Admissibility of Input Sales Tax on Services
      As per section 18 Sindh Sales Tax on Services Act, 2011 read with rule 22A of the Sindh
      Sales Tax on Services Rules, 2011, the input tax may not be claimed by a registered person
      on the goods in respect of which sales tax has not been deposited in the Government
      treasury by the respective supplier. It is an unreasonable expectation by tax authorities
      from the buyer to ensure the deposit of the sales tax into Government Treasury by the
      seller, as the buyer does not have any enforcement power over the seller.
Recommendation
        Section 18 should be suitably amended to exclude the taxpayers falling under
        Large Tax Payers Unit who are already subject to greater scrutiny and tax audits.
Rationale or Benefit
        This will remove the undue pressure on legitimate taxpayers, as it is not the
        responsibility, neither the jurisdiction of the service recipient to ensure that the supplier
        has deposited output tax. Furthermore, legitimate taxpayers will not face harassment
        from tax authorities.

11. Admissibility of Input Sales Tax on Goods
      The input sales tax adjustment has been restricted to 13% as per section clause (k) of
      section 15A of the Sindh Sales Tax on Services Act, 2011.
Recommendation
               The Act should be amended and claim of input tax should be allowed at the
               actual amount of sales tax paid by the registered buyers in order to save them
               from any extra cost burden.
Rationale or Benefit
               This will remove the undue pressure on cost of legitimate taxpayers, as it is the basic
               right of the tax payer to claim sales tax on such goods as input tax. Further removing
               such kind of restriction will save both authorities and tax payer from unnecessary
               litigation.

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12. Claim of Input Tax – [Section 22]
      The input tax can only be claimed if the same is paid rather than following the accrual
      method of accounting. Further, the input tax has to be claimed within next four months
      from the relevant tax period. This restriction will give rise to filing of refund which
      resultantly brings administrative hassle to taxpayer and tax collector.
Recommendation
               It is recommended that claim/adjustment period of input tax should be
               increased to six months and adjustment should be allowed on payable basis
               rather than paid basis i.e. in line with the mechanism adopted by FBR.

13. Joint and Several Liability of Registered Persons in Supply Chain where Tax is
    Unpaid
      [Section 18 of SSTSA]: The Provincial Statutes stipulate that where a registered person,
      receiving a taxable service from another registered person, is in the knowledge of or has
      reasonable grounds to suspect that some or all of the tax payable in respect of that taxable
      service or any previous or subsequent taxable service provided would go unpaid, such
      person as well as the person providing the taxable service shall be jointly and severally
      liable for payment of such unpaid amount of tax.
Recommendation
        The provision should be aligned with Section 8A of STA. Accordingly, the burden to
        prove that the service provider and service recipient acted in connivance, should
        rests upon the tax authorities.
Rationale or Benefit
        To bring harmony among federal and provincial sales tax laws.

14. Use of technical knowhow/ information for manufacturing be eliminated from the
    definition of “Franchise services”
      [SSTSA 2(46)]: The definition of “Franchise Services” is very broad and generic that covers
      technology transfers being made through use of technical knowhow/ information for
      manufacturing in Pakistan, which generates employment, saves foreign cash outflows for
      imports and contributes to society.
Recommendation
               Use of product knowledge, technical know-how/ information for manufacturing
               should not be included in the definition of “Franchise Services”.
Rationale or Benefit
               Taxpayers suffering from increase in cost of doing business even on account of
               technology transfers will get some relief and provide an incentive to foreign investors.

15. Zero Rating for Pharmaceutical Inputs
      All pharmaceutical products are exempt from Sales Tax. Consequently any sales tax paid by
      pharmaceutical industry on goods or services purchased, can neither be passed on to the
      consumer nor can be claimed as input, and has to be absorbed by the manufacturers in
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      their costs. It is resulting in increasing the cost of doing business, amidst already spiraling
      inflation, and frozen prices of finished products.
      This is also against the philosophy of sales tax which is supposed to be borne by the
      consumer.
Recommendation
               Services received by pharmaceutical industry should be zero rated.
Rationale or Benefit
               Since pharmaceuticals prices are controlled, sales tax paid on inputs can neither be
               added to the selling price nor separately charged.

16. Zero Rating for Exports
      As per the Fifth Schedule to the Sales Tax Act 1990, exports made by a registered person
      are zero-rated. Presently, there is no concept of zero-rating in Provincial Sales Tax Acts.
      Resultantly, the companies providing services to foreign companies and bringing foreign
      exchange in Pakistan need to pay sales tax from their own account.
Recommendation
               A separate schedule should be inserted in Provincial Sales Taxes Act for zero
               rating. All services provided to foreign companies outside Pakistan which
               result in inflow of foreign exchange and export of all taxable services should be
               exempt from Sind Sales Tax.
Rationale or Benefit
         This will result in harmonization of tax laws in Pakistan and would ensure convenient
         compliance with tax laws through uniform systems across the country and would also
         contribute towards the economic development of the Country.

17. Common Sales Tax Return Filing Portal
    Requirement specification for FBR, SRB, KPK, BRA & PRA should be same for filing of
    monthly sales tax return rather than submitting same return at different portals, one portal
    accessible to all tax authorities should be there.
Recommendation
               This would save operational cost of taxpayer as well better visibility for Federal
               and provincial tax authorities.

18. Provincial Sales Tax on ‘toll manufacturing’
      Sindh and Punjab provincial governments are treating toll manufacturing activity as a
      ‘service’ and have levied sales tax. Notwithstanding the fact that toll manufacturing is not a
      ‘service’ and therefore outside the constitutional scope of Provinces to charge PST, such a
      levy has directly increased cost of doing business, especially for pharmaceuticals which are
      exempt from Federal Sales Tax. It may be noted that toll manufacturing activity, since
      inception of sales tax regime, has always been treated as ‘a manufacturing activity’. Since
      pharmaceutical and some other supplies are exempt from sales tax under the FST Act, no
      Federal Sales Tax was leviable under the FST Act. The position is further aggravated owing

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      to the fact that prices of pharmaceutical products are regulated by Drug Regulatory
      Authority of Pakistan; therefore effect of such levy has to be borne by pharmaceutical
      company itself.
Recommendation
       “Toll manufacturing” should be deleted from the list of services.
Rationale or Benefit
         It will bring practice in line with the norm.

19. Permanent Exemption of Life and Health Insurance from Provincial Sales tax
      Life insurance / health policy is not a service, rather it is an underwriter’s promise to pay
      to the policy holder in the future, a specified sum of money, either on occurrence of an
      identified event or on maturity of the policy.
      Each year, the life/health insurance companies have been approaching the Sindh Revenue
      Board (SRB) for an exemption, which is granted annually. The current exemption for life
      insurance, is valid till June 30, 2018. However, after the lapse of exemption for Corporate Health
      Insurance, on June 30, 2016, the same has not yet been renewed, and only Individual
      Health Insurance has been exempted, till June 30, 2018. . The life and health insurance
      industry is based largely in the province of Sindh, where, the medical sector itself is exempt
      from SST. Accordingly, subjecting the corporate health insurance to SST is making it
      uncompetitive, in Sindh, by adding on to the cost of health insurance. Discussions are still
      ongoing with the Chairman SRB, and the Chairperson, Sindh Board of Investment, for
      exemption on the same.
Recommendation
       SST on Services Act, 2011:
               It is recommended that both, life insurance and health insurance, which do not
               fall within the scope of definition of service, should be permanently included in
               the list of exempt of exempted services by incorporating the same under the
               under table of exempt services specified in SRB’s notification no. SRB 3-
               4/7/2013 dated June 18, 2013, as per the following:
                      S. No.      Tariff Heading         Description
                      1           9813.15                Life Insurance
                                                         Health insurance, rendered to both,
                      2           9813.16
                                                         individuals and corporates.

               It may be mentioned that in Sindh these are taxable services.
Rationale or Benefit
               A life insurance/ health policy is not a service, rather it is an underwriter’s promise to
               pay to the policy holder in the future, a specified sum of money, either on occurrence
               of an identified event or on maturity of the policy.
               The assertion that insurance is not a service, has also been legally tested in the USA in
               the Fairbanks v. Superior Court, 46 Cal.4th 56 (March 20, 2009), wherein the
               California Supreme Court ruled that life insurance policies are not “services” and
               described “Insurance” as “a contract of indemnity under which, in exchange for the

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               payment of premiums, the insurer promises to pay a sum of money to the designated
               beneficiary upon the death of the named insured.
               The Khyber Pakhtunkhwa Revenue Authority has exempted life insurance from the
               purview of taxable services. There needs to be rationalization and uniformity of
               provincial taxation to enable ease of business throughout the country.
               Furthermore, Sindh having taxed this as services. Such tax is highly discriminatory as
               entire health sector itself remains exempt and is not taxed. This creates a deterrence
               for insurance business, as a person obtaining insurance would be paying additional
               13% as well as cost of insurance, compared to directly obtaining health services,
               where he does not have to pay this tax. This is clearly discriminatory and in violation
               of Article 25 of the Constitution of Pakistan.

20. Sec 2(87) of the Sindh Sales Tax on Services Act 2011
    The definition of “Sponsorship” includes
      “….naming an event after the sponsor, displaying the sponsor’s logo, trade name, brand name
      or product name, giving the sponsor exclusive or priority booking rights, sponsoring prizes or
      trophies for competition or game or sports; but does not include financial or other support in
      the form of donations and gifts, given by a donor, subject to the condition that the service
      provider is under no obligation to provide anything in return to such donor..."
      However, it does not exclude the activities carried out under the ambit of CSR.
      For example, the Guidelines for Continuing Medical Education (CME) issued by the
      Pakistan Medical & Dental Council (PM&DC) also prohibit promotional activities during
      such CME events.
Recommendation
               The definition of sponsorship should exclude CSR activities since these are
               performed for non-commercial objectives.
Rationale or Benefit
               This change will increases the capacity to invest in human and community
               development activities.

21. Definition of Other Services – [2nd Schedule of SSTS (Taxable services]
    Definition of other services (2nd Schedule Taxable services 9813: 4990 SSTS) “Other
    services not specified elsewhere”
Recommendation
       The heading “other services not specified elsewhere” should be deleted from
       the schedule.
Rationale or Benefit
         It is a generalized term without any definition and gives unlimited power to tax any
         services.

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22. Value of Taxable Services
      [(Section 5 (iii)) of SSTS), (Section 7 (4) of PSTS) and Section 23 (III) KPKSTS]
      If a person provides a services for no consideration or at a discount, in such case the value
      of the service shall be the open market price for the similar services. It means that Sales tax
      will be applicable, on even if the services are free of charge.
Recommendation
       These Sections should be deleted. There should be no sales tax on free services.
       In other cases, sales tax should be directly related to consideration for services.
Rationale or Benefit
         Banks can allow discounted services depending on the category of the account
         holders.

23. Normal sales tax rate be applied for services provided by authorized car dealers
    under tariff heading 9806.4000
      Sales tax on services by authorized car dealers under tariff heading 9806.4000, is at
      reduced rates and input sales tax is barred, while no such position is available under any of
      the other Provincial sales tax laws.
      Further, no option is available to the service provider to pay sales tax at the normal rate @
      13%, instead of reduced rate, as provided for other services under notification No. SRB 3-
      4/5/2015 dated Jul 01, 2015, e.g. Construction services, Transportation services, Concrete
      services etc.
Recommendation
       Normal sales tax rate be applied for services provided by authorized car dealers
       under tariff heading 9806.4000.
       Alternatively, Option be provided to “authorized car dealers of vehicle
       manufacturers” to pay sales tax at normal rate under tariff heading 9806.4000,
       as provided to other services.
Rationale or Benefit
         Application of standard rate will eliminate the discrimination arising on services
         provided by Dealers in Sindh against other provinces and cost of doing business will
         reduce for service providers and recipients.

24. Tax Exemptions for Social Cause
      Under STA, sales tax exemption is available on certain goods / areas which directly concern
      the common man or which are basic commodities and service for every livelihood.
      Accordingly, agricultural produce, medicines and medical equipment, food, machinery
      supplied to certain social organization, goods supplied to hospitals run by the Federal or
      Provincial Governments, etc. are exempt from sales tax.
Recommendation
       In line with Federal Government’s policy to exempt social areas from Federal
       sales tax, the chamber recommends that services provided in / to such sectors
       should also be exempted.
Rationale
               To remove inequality in provincial sales tax laws.
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25. Provincial Sales Tax on Manpower
      Due to a recent amendment in provincial sales tax laws, sales tax is now levied on salary
      reimbursement in addition to service charges. Since the sales tax is added to the cost of the
      product instead of being passed onto the consumer, it adversely affects the business.
Recommendation
       We propose that the sales tax should only be charged on service charges, as the
       salary reimbursement is effectively not a service obtained.
Rationale
               This proposal will help the businesses to reduce their cost of doing business.

26. Sindh Sales Tax on Services Act, 2011 - Second Schedule respective tariff heading
      The act defines a threshold of Rs. 4 Million (annual turnover of the service provider) below
      which the following services that are otherwise taxable remain exempt from sales tax:
              Restaurants, Caterers, Contractual execution of work or furnishing of supplies,
               Contractor of building, construction services, Auto workshops, workshops for electric
               or electronic equipment or appliances including computer hardware, dry cleaners or
               launderers, car or automobile service stations.
      However, the act does not define a procedure that a recipient of such services may adopt to
      verify the status of an unregistered person providing such services that is whether the
      services are exempt due to the applicable threshold limit
Recommendation
       The act needs to be amended to define a procedure that a recipient of such
       services may adopt to verify the status of an unregistered person providing
       such services that is whether the services are exempt due to the applicable
       threshold limit.
Rationale
               The proposed change will help ensure compliance of withholding rules.

27. Exemption of Capital Value Tax for Islamic Banking Institutions
      The Federal [Provincial]* Government may, by notification in the official Gazette, exempt
      any person or class of persons or assets or class of assets from the Capital Value Tax. [Sub-
      section (10) of section 7 (10)]
      * After Eighteenth Constitutional Amendment, CVT has become provincial subject
      (reference is made to Circular No. 3 of 2012 issued under Finance Act, 2012).
Recommendation
       Under sub-section (10) of section 7 of the Finance Act, 1989, the Provincial
       Government may issue a suitable notification to be published in official gazette
       with following provision.
               “The sale or purchase of immovable property by the banks or financial
               institutions under any Islamic mode of financing approved by the State Bank of
               Pakistan or the Securities and Exchange Commission of Pakistan shall be
               exempt from the levy of Capital Value Tax.”

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Rationale
               The registration of sale of property is subject to stamp duties, registration fees, capital
               value tax and town taxes which approximately comes to 6% of the sale value, which
               has a significant impact on cost of doing business.

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PROCEDURAL AND STRUCTURAL PROPOSALS
28. Active Taxpayer List
      Under the income tax regime, the FBR provides list of ATL in excel form. This provides ease
      to the WHT agent to verify the status of tax payer. Such documents also became a
      reference/ supporting documents in case any dispute arises with the FBR / suppliers on
      the status of the tax payer. Currently no such facility is available for SST registered person
      which should be provided on SRB portal.
Recommendation
       Active Taxpayers List (ATL) be provided in excel going forward.

29. Launching of STRIVe in SRB portal

      Recommendation
          As successfully launched by FBR and PRA, SRB should also adopt and launch
          STRIVe in SRB portal. STRIVe will benefit both registered persons and tax
          authority.
      Rational or Benefit
           For registered person STRIVe will enable them to claim genuine sales tax invoices and
           for SRB it will help them in their real-time audit and monitoring of sales tax claimed
           made by registered persons.

30. Withholding of sales tax on services
      Elimination of SST withholding for all registered persons
      The withholding agents are unnecessarily burdened with deduction of sales tax which is
      not claimable as input tax and is thus resulting in increasing their cost of doing business.
      Recommendation
          It is suggested that withholding of Sindh Sales Tax should be restricted to
          Unregistered Persons or persons who are not active taxpayer in sales tax.
      Rational or Benefit
           The ultimate objective of the taxpayer is that indirect tax should not increase its cost
           of doing business. Moreover, these enforcement measures have negative bearing on
           the regulated sector only.

31. Assessment Of Tax - Section 23(5)
      Any assessment order can be amended by the tax officer on the basis of any subsequent
      information, etc. Such powers are arbitrary and unjust and may open the doors for
      harassment and corruption.
      Recommendation
          The taxpayer should first be confronted with a show-cause notice with
          substantial reasons / evidence(s) that warrant reopening or amending the
          assessment order. Further, the powers to amend any assessment order should
          only vest with the Commissioner or the Board.
      Rationale
           In order to introduce transparency in the system and provide justice to the taxpayer.
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32. Retention of Records - Section 27(1)
      The taxpayer is liable to retain books / records for a period of 10 years from the date of
      relevant tax period. Further, show cause notice may be served to any taxpayer within a
      period of 8 years from the date of relevant tax period.
      Recommendation
          The time period for retention of records and assessment of tax should be
          rationalized to a maximum of 5 years, which was in place prior to Sindh Finance
          Act 2016.
      Rationale
           To save taxpayers from practical difficulties, unnecessary hardship and to keep the
           exchequer more vigilant for taking timely action. Further, the proposed timeframe of
           5 years should be in line with other tax laws of the STA and ITO.

33. Obligation To Produce Documents And Provide Information - Section 52(1)
      The tax officer is empowered to solicit any information or record from any person without
      specifying any reason and without specifying the reference of any case being investigated
      by him.
      Recommendation
          Scope of Section 52(1) should be restricted to specific parties and transactions
          already identified by SRB instead of a mere exploratory enquiry.
      Rationale
           To provide equity, fair play and to avoid harassment and corruption by tax officials.

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OTHER LEVIES

                                           STAMP DUTY

34. The definition of the term 'instrument'
      The definition of the term 'instrument' as contained within the Stamp Act 1889,
      applicable for the province of Sindh, was amended in 2006 to broaden its scope.
      Subsequently through an amendment in the Sindh Finance Act of 2009, the term
      Purchase Order (PO) was included to the stamp schedule for purposes of levy of the
      stamp duty on POs generated at the rate of 0.25% of the amount of the PO. The
      progressive nature of the tax is increasing the cost of doing business and further raises
      the issue of double taxation, in the presence of income and sales tax as direct and
      indirect taxes respectively. The levy is currently enforced only in Sindh and therefore
      causes serious hardships for corporate sector registered or carrying out business in
      Sindh Province as against other provinces.
Recommendation
        It is recommended that the Stamp Duty on Purchase Order @ 0.25% should be
        eliminated as it is a tax on ‘instrument' and not on a transaction. If it is not a
        transaction tax on purchases then there can’t be a dual charge under the
        constitution on same nature of transaction.
               Furthermore, Stamp Duty is payable on enforceable instruments. PO in
               commercial sense is a document only acknowledging the transaction that will
               be undertaken and does not fall within the ambit of Stamp Act.

35. Exemption to Banking Companies on transactions under Islamic mode of financing
      [Section 9A of the Stamp Act 1899]: Power of Provincial Government to exempt certain
      instruments– The Provincial Government may by [notification in] the official Gazette,
      generally exempt from payment of the whole or any part of the duties on any instrument
      executed by or in favor of a banking company in the normal course of its banking business.
      Explanation– For the purpose of this Section, “Banking Company” shall have the same
      meaning as in the Banking Tribunals Ordinance, 1984
      [Sub-section 2 of section 14 of Stamp Act 1899]: (2) ‘Instrument’ includes every document
      by which any right or liability is, or purports to be, created, transferred, limited, extended,
      extinguished or recorded.
      New legislation to be drafted in the light of below comments:
      “The registration of sale or purchase of immovable property by banks or financial institutions
      under any Islamic mode of financing arrangement approved by State Bank of Pakistan or
      Securities and Exchange Commission of Pakistan shall be exempt from the levy of registration
      fee, stamp duty, district, municipal or town taxes or any other related taxes.”
      Explanation: In case of sale or purchase of immovable properties by banks or financial
      institutions for the purpose of extending finance under Islamic modes to their clients, the
      registration fee, stamp duties, district, municipal or town taxes, etc. shall be levied once and
      not twice. Whereas in case of sale and lease back contracts, no stamp duty etc. shall be
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      levied both at the time of purchase of immovable property by the bank or Special Purpose
      Vehicle created for the purpose and sale back at maturity of the financing contract.
      Special Purpose Vehicle means a Special Purpose Vehicle as defined in the Asset Backed
      Securitization Rules, 1999.
      Exemption of duties under Stamp Act 1899
      In order to ensure tax neutrality for Islamic Banking Institutions as well as fulfilling the
      registration requirements with regard to sale/purchase of immovable property under the
      Registration Act, 1908, the provincial governments may be requested to exempt the
      registration of sale/purchase of immovable properties for the purpose of extending
      financing facilities under Islamic modes of financing by IBIs. Section 9A of Stamp Act 1899
      empowers the provincial governments to do the needful, as proposed.
Recommendation
               We strongly believe that such exemptions should also be provided on Islamic
               financing transaction involving transfer of immovable property in Pakistan so
               that it may act as the necessary stimuli for facilitation of Islamic banking in the
               country and the Islamic financial institutions can have a level playing field.
               Accordingly, provincial government may be requested to issue the proposed
               SRO/notification in their official gazettes.
Rational or Benefit
               In order to facilitate Islamic financing transaction involving transfer of immovable
               property, developed countries such as Malaysia and United Kingdom have specifically
               allowed exemption to Islamic financing transaction from such levies. Whereas, in
               Pakistan the sale/purchase of immovable property by IBIs is subject to stamp duties,
               registration fees, capital value tax and town taxes which approximately come to 6% of
               the sale value. These taxes consequently render transactions involving transfer of
               immovable properties for Islamic financing purposes unviable. This issue was even
               faced in issuing GOP Sukuks.

36. Sindh Development & Maintenance Infrastructure Fee/ Cess
      Sindh Finance Act, 1994 (as amended from time to time) levied Cess/ Fee for the
      maintenance and development of infrastructure on all imports.
Recommendation
               It is proposed that Sindh Development & Maintenance Infrastructure Cess be
               withdrawn in its entirety.
Rationale or Benefit
               We understand that this levy is adversely affecting in terms of increasing the cost of
               doing business in Sindh.
               Elimination of the same will reduce unnecessary burden on importers through Sindh
               Province.

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