October 3, 2023
2023-1638 Pakistan | Punjab modifies Sales Tax on Services Act 2012, changing descriptions, rates and more - On 12 September 2023, the Government of Punjab issued a Notification containing a number of measures modifying the sales tax rate or description for a range of services, "with immediate effect."
- Toll manufacturing services, including industrial and commercial packaging services and similar outsourcing of industrial or commercial processes, have been omitted from the Punjab Sales Tax Act.
- The requirement to collect reverse charge sales tax has been extended to a range of financial institutions.
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Amendments to descriptions and sales tax rates on certain services The Government of Punjab recently modified the Second Schedule of the Punjab Sales Tax on Services Act 2012 (the PSTS Act) by issuing SRO No. SO (TAX) 1-2/97(Pt.XIV) dated 12 September 2023 (the Notification) under section 5 of the PSTS Act. The Government of Punjab has the authority to modify the description of taxable services or alter the tax rate for services under the PSTS Act via an official Gazette notification (per Section 5(1) of the PSTS Act). This notification shall be effective from the date specified in the notification, which must not be prior to the date on which the notification is published in the official Gazette (per Section 5(2) of the PSTS Act). The Notification dated 12 September 2023 states that the amendments will be applicable "with immediate effect" and was published in the Official Gazette on 13 September 2023. Based on Section 5(2) of the PSTS Act, the Notification should take effect from the date of its publication, which is 13 September 2023. - Amendments to the sales tax rate
The Notification lists the tax rate for the following taxable services: Serial No. in the Second Schedule | Description | Tax rate pre-notification | Tax rate post-notification | 13 | Franchise services including intellectual property rights services and licensing services | (a) 5% without input-tax adjustment for services relating to educational institutions (b) 16% for others | (a) 0% without input-tax adjustment for services relating to educational institutions for information technology (b) 5% without input-tax adjustment for services relating to educational institutions other than educational institutions for information technology (c) 16% for others | 24 | Services provided by other consultants (by whatever name called or treated, whether as consultant or otherwise) including human resource and personnel development services, exhibition or convention services including provision of space, equipment, accessories and other allied services, event management services (whole range and variety of their services regardless of separate or individual classification thereof), valuation services, evaluation services (including competency and eligibility testing services), certification, verification and equivalence services, market research services, marketing or sales services (including marketing agencies and on line marketing or sales services), surveyors services, training or coaching services (other than general education services) and credit rating services. | 16% | (a) 0% without input-tax adjustment for training services related to information technology (b) 16% for others | 69 | Ride-hailing services Explanation: This entry includes and shall be deemed to have always included cab aggregators. | 4% without input tax adjustment | 5% without input tax adjustment |
- Amendments to description and rate of sales tax
The Notification has amended the description and rate of the following taxable service: Serial No. in Second Schedule | Pre-notification | Post-notification | Description | Tax rate | Description | Tax rate | 22 | Information technology-enabled or information technology-based services, including software development, software customization, software maintenance, system support, system assembly, system integration, system designing and architecture, system analysis, system development, system operation, system maintenance, system up-gradation and modification, data warehousing or management, data entry operations, data migration or transfer, system security or protection, web designing, web development, web hosting, network designing, services relating to enterprise resource or management planning (including marketing of products), development and sale of smart phone applications or games, graphics designing, medical transcription, remote monitoring, telemedicine, insurance claim processing, online retrieval and database access or retrieval service Explanation: This entry includes and shall be deemed to have always included real estate aggregators. | 5% without input tax adjustment | Information technology-enabled or information technology-based services including software development, software customization, software maintenance, system support, system assembly, system integration, system designing and architecture, system analysis, system development, system operation, system maintenance, system up-gradation and modification, data warehousing or management, data entry operations, data migration or transfer, system security or protection, web designing, web development, web hosting, network designing, services relating to enterprise resource or management planning (including marketing of products), development and sale of smart phone applications or games, graphics designing, medical transcription, remote monitoring, telemedicine, insurance claim processing, online retrieval and database access or retrieval service Explanation: This entry includes and shall be deemed to have always included real estate aggregators and streaming/over-the-top (OTT) services. | (a) 0% without input-tax adjustment for services provided by software or information technology-based system development persons (b) 5% without input-tax adjustment for others |
The amendment to the description of the taxable service in serial no. 22 will subject streaming/OTT services to Punjab sales tax at 5%, without input-tax adjustment. - Omission of taxable service from Second Schedule
The Notification has omitted the following category of taxable service: Serial No. in Second Schedule | Description | Tax rate | 37 | Services provided for manufacturing or processing on toll or job basis (against processing on conversion charges), including industrial and commercial packaging services and similar outsourcing of industrial or commercial processes | 5% without input tax adjustment |
The federation and provinces had been disputing the sales tax levy on manufacturing on a toll or job basis (as enumerated above). Omission of manufacturing services from the list of taxable categories of PSTS Act seems to indicate that this dispute has been resolved from 13 September 2023 onward. Banks/financial institutions designated as collecting agents The Act requires service recipients to pay Punjab Sales Tax (PST) at applicable rates while receiving services from nonresidents in Punjab (commonly referred as "reverse charge mechanism"). The Punjab Revenue Authority (PRA) specified (see notification No. PRA.32-24/2022/561 dated 05 July 2023) the State Bank of Pakistan (SBP) as "Collecting Agent" for information technology (IT) and Advertisement services (Entry Nos. 12 and 22 of the Second Schedule). The notification dated 05 July 2023 required the SBP to collect PST, using any means of transfer, from those remitting payments to nonresident persons providing IT or Advertisement activities in Punjab through websites. Subsequently, the PRA extended the scope of this authority by substituting expression "State Bank of Pakistan" with "State Bank of Pakistan/banking companies/financial institutions/non-banking financial institutions" (see Notification No. PRA.32-24/2022/354 dated 19 September 2023). In this respect, we have observed that PRA has issued "intimation letters" to banking companies requiring them to comply with the aforementioned notifications. However, these notifications are still not available on PRA website. The PRA has not yet prescribed any special procedure for collection, deposit and declaration of PST collected by State Bank of Pakistan/banking companies/financial institutions/non-banking financial institutions. Further, the service recipients are not absolved from depositing PST under reverse charge mechanisms while receiving IT-related or Advertisement service from nonresident persons. Note that this Tax Alert is general in nature and is not a substitute for detailed research or the exercise of professional judgment. Accordingly, no decision on any issue should be taken without seeking specific professional advice and further consideration. ——————————————— For additional information with respect to this Alert, please contact the following: EY Ford Rhodes, Karachi EY Ford Rhodes, Lahore & Islamabad Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor |
