OVERSEAS INVESTORS CHAMBER OF COMMERCE AND INDUSTRY TAXATION PROPOSALS 2019 - 2020 SINDH PROVINCIAL TAXES AND LEVIES - OICCI
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
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
1|PageOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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
2|PageOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.
3|PageOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.
4|PageOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.
5|PageOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.
6|PageOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.
7|PageOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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].
8|PageOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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
9|PageOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.
10 | P a g eOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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
11 | P a g eOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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
12 | P a g eOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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
13 | P a g eOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.
14 | P a g eOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.
15 | P a g eOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.”
16 | P a g eOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.
17 | P a g eOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.
18 | P a g eOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.
19 | P a g eOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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
20 | P a g eOICCI TAXATION PROPOSALS (2019-20) – SINDH PROVINCIAL LEVIES
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.
21 | P a g eYou can also read
