11 July 2024 Pakistan adopts changes to Provincial sales tax laws
This Tax Alert outlines the numerous changes introduced in the Finance Acts, 2024 (the Act), approved by the Provincial Assemblies of Punjab, Sindh and Khyber Pakhtunkhwa in respect of the following laws:
The standard rate of Sindh sales tax (SST) is enhanced from 13% to 15%. In line with the increase in standard rate, the upper limit of the input tax adjustment is also enhanced from 13% to 15% for other than telecommunication services. Telecommunication services providers would be allowed to claim input tax up to 18%. Three new services are brought into the tax net, which includes educational services, medical practitioners, and hospitals/clinics services. Based on monetary threshold, exemption has been provided for education and medical services, whereas services beyond exemption threshold shall be subject to tax at reduced rate. Amendments have been made to certain definitions and tariff descriptions to broaden the scope of taxable services and mainly include intra-city transportation of goods, marketing activity, dealers of other motor vehicles. The exclusion of employment from economic activity is restricted to employees directly working for employers. As a result, salaries paid for manpower supplied to other persons are made taxable and the whole amount of consideration would attract SST. Reimbursement of expenditures incurred by a services provider for rendering taxable services shall form part of the consideration for the purpose of levy of SST. The Sindh Revenue Board (SRB) has notified the deemed value of distribution services as 8% of distributor's gross margin. Applicable SST rate on distributor's services is 15%; however, a beneficial reduced rate of 5% is provided for pharmaceutical product. The time limitation for assessment proceedings is reduced from eight years to five years and record retention requirement also reduced to six years. However, this would be applicable for tax periods from July 2025 onward. The threshold for an automatic stay is reduced from 25% to 10% of tax due where appeal is pending before Commissioner appeals. The power of the Commissioner Appeals SRB for granting stay is extended from 120 days to 180 days. Suspension of taxpayer status would be effective from date of suspension order, rather than its reflection on the online portal. The standard rate of SST had been 13% since 2016. The Act has enhanced the rate to 15% for rationalizing tax rates with other provinces. The input tax adjustment has been restricted up to corresponding standard rate of taxable services (i.e., 13%). In line with the increase in standard rate, the upper limit of input tax adjustment is also enhanced from 13% to 15% for all services other than telecommunication services. Telecommunication services are taxable at higher rate of 19.5%; presently, the upper limit for adjustment of input tax for telecommunication sector was 17%. The Act now allows telecommunication service providers to claim input tax on goods and services up to 18%, which is the highest standard rate among all jurisdictions. Service providers are not allowed to claim any input tax if services are taxable at less than the standard rate (i.e., 13%). Similarly, service consumers are also not allowed to claim input tax paid on procurement of goods and services if the purchases are taxable at less than the standard SST rate. Due to enhancement of standard rate of sales tax, corresponding reference to the standard rate is also updated in relevant provisions from 13% to 15%. SRB made compulsory registration for certain distributors on the premise that the distributors are providing services to their principal (e.g., manufacturers or importers) under the tariff heading of supply chain management or distribution (including delivery) services. The higher courts have confirmed this SRB position. SRB has now issued a special ruling to treat value of distribution services as 8% of distributor's gross margin. SRB also explained that gross margin shall include various discounts, rebates, commissions or any other incentives as received by distributor. The applicable SST rate on distributor's services is 15%; however, SRB has provided beneficial reduced rate of 5% for distribution of drugs registered under Drugs Act, 1976. The Act includes the following new services in the Second Schedule to the SST Act. Consequently, the following services are subject to SST with effect from 1 July 2024: The Act introduces an extensive definition of education services, which covers all types of educational institutions including pre-primary, primary, secondary schools, colleges, universities and vocational, professional, instructional, technical institutes, teaching hospitals, or such other degree, diploma, or certificate awarding institutions (excluding special education for special children and education under adult literacy program). SRB has exempted education services by institutions where annual fees does not exceed Rs. 500,000 per student. If services of an educational institute exceeds this threshold, the reduced rate of 3% shall be applied. Services provided by hospitals or institutions as defined in the Pakistan Medical and Dental Council Act, 2022, include medical, surgical, psychiatric, obstetric, dental or ophthalmological and similar treatment and care services. An exemption has been provided to services of hospitals and clinics, except where daily room/bed charges exceed Rs.25,000 for indoor and day-care patients and same shall be subject to SST at reduced rate of 3%. Services of registered medical practitioners and the registered dental practitioners are as defined in the Pakistan Medical and Dental Council Act, 2022 where consultancy fee exceeds Rs.3,000 per visit then SST would be 3% otherwise services of medical practitioners and consultant shall be exempted. However, benefits shall not be extended to cosmetic and plastic surgery therefore, such services shall be taxable at a standard rate of 15%. In this respect, SRB has enacted a special procedure rule, which stipulates that services of medical practitioners and consultants shall be taxable if provided from a hospital, clinic or any other place. If a practitioner or consultant provides services from hospital or clinic, the obligation to pay the applicable SST on services would fall on the hospital or clinic. The Act has also amended following definitions or tariff headings to broaden the scope of taxable services: Inter-city transportation of goods by road, conduit or pipeline is presently taxable. The Act has removed expression of "inter-city" transportation. As a result, services that transport goods within city limits are also taxable. The SRB has made respective amendments to all relevant rules and notifications, including the Sindh Sales Tax Special Procedure (Transportation or carriage of Petroleum Oils through Oil Tankers) Rules, 2018. The scope of Business Support Services is extended to include marketing services. There is no specific definition of marketing under the SST Act. Service of surveyors relating to insurance, marketing and other specified surveys are presently taxable. The Act has enlarged the scope of taxable service of surveyors by inserting any kind of specialized or special-purpose survey, geological or geophysical survey, surface or sub-surface survey, survey for exploration of minerals. Previously, tax has only applied to persons providing truck aggregating services as an aggregator/operator/intermediary or an online marketplace to a business enterprises. The Act has extended the scope of truck aggregating services to all persons, whether business enterprises or not. Currently, services of car or automobile dealers are taxable. The Act has also included services of dealership providing other motor vehicles. Presently, only the renting of a car and other passenger motor vehicle is taxable. The Act has enhanced scope of automobile rental services by removing the word "passenger" from the definition, effectively levying tax on rentals of all type of motor vehicles, including commercial vehicles. Services provided by hotels, guest houses and marriage halls, etc. are currently taxable. The Act has extended levy of SST on services provided by farmhouses. Consequently, the services provided by restaurants, caterers, marriage halls and lawns located within the premises of any farmhouse will also be subject to SST. Currently, services of a person providing indoor sports or games center are taxable. The Act has enhanced the scope by including all persons providing a facility for games and sports, whether indoor or outdoor. SRB has withdrawn the spread-charge exemption for foreign-exchange dealers and money exchangers for currency trading. A reduced rate of 3% has been provided on the services of foreign-exchange dealers and money exchangers. Additionally, SRB has now enhanced deemed service value of foreign exchange dealer and money exchanger from 20 to 25 paisa to every hundred rupees equivalent being exchanged. Rural cable TV operators that have specific category licenses from PEMRA and standalone cable TV operators were exempted from SST. Now, SRB has withdrawn these exemptions and imposed a reduced rate of 10% on rural cable TV operators and 2% on standalone cable TV operators. To promote digital payment, SRB has provided reduced rate of 8% on restaurant services where payments are received digitally. However, SRB may, upon request of restaurant, allow the standard 15% rate to be charged. Standalone recruiting agents for overseas employment in countries outside Pakistan were subject to reduced rate of 5% until 30 June 2024. SRB has now extended this beneficial reduced rate for an additional two years. An employee's provision of services to an employer is specifically excluded from the definition of economic activity. There had been disagreement over whether this exclusion also applied to manpower supplied to another person for performing activities for someone other than the employer. Taxpayers contended that salary reimbursement for outsourced employees does not attract sales tax. The Honorable Supreme Court of Pakistan has decided the matter in favor of taxpayers. The Act has restricted the exclusion of employment activities if there is a direct relationship with the employer. Any services an employee provides to anyone other than employer will be treated as an economic activity of the employer. Value of taxable services is defined as consideration in money received by a service provider from service recipient. The courts have held that the reimbursement of expenses incurred on behalf of a service recipient, during the provision of such services, would not constitute consideration. The Act has provided that the term "consideration" means the gross amount charged by the service provider, including any amount of reimbursable expenditure or cost incurred by the service provider for provision of taxable activities. The time limitation for assessment proceedings is reduced from 8 years to 5 years and record retention requirement has also been reduced from 10 years to 6 years. Further, a show-cause notice is required to be issued within the stipulated time after the end of a relevant tax period. The Act has streamlined the above provisions with federal tax laws and requires issuing a show-cause notice within a stipulated time from the end of financial year to which the tax periods relate. Currently, the Commissioner (Appeals) SRB is impowered to grant a stay from recovery of any sales tax due up to 120 days. The Act has enhanced this period from 120 days to 180 days. Previously, where a tax demand had been challenged before Commissioner (Appeals) and the taxpayer had paid 25% of tax due, no recovery may be made against taxpayer until the disposal of appeal by the Commissioner (Appeals). The Act has reduced the payment threshold from 25% to 10% of the tax. A registered person is required to maintain certain records as specified under SST Act. The Act enhanced the scope of these maintained records by including records of taxable or exempt services provided by a registered person in other provinces or areas to the extent his tax liability would be reconcilable in Sindh. For certain services, SRB has required registered person to integrate their point of sales (POS). SRB has now also enhanced power of the officer to check the specified documents to validate the digital transaction. The Act has empowered SRB to enter into an arrangement or agreement with the Federal and Provincial Sales tax Authorities on a reciprocal or multilateral basis for sharing electronic data of computerized sales tax returns with certain restrictions and conditions as may be prescribed.
Penalties for denying or refusing to monitor or track by electronic means or other means is omitted from and merged with the newly introduced penalty. The penalty for persons who gain access or attempt to gain access to computerized systems without lawful authority is Rs. 25k or 100% of the amount equal to the loss caused to sales tax revenue. The Act has imposed higher of above two penalties against the person committing the offense.
Previously, a registered person seeking deregistration was required to file a paper application to the Board or any officer authorized by the Board in this behalf. However, recently, an online deregistration process/application was also introduced on SRB portal. The Act has now streamlined the process by requiring a registered person seeking deregistration to submit an application electronically to the Board. Previously, the suspension of a registered person took effect only when the person's name was removed from the list of registered persons published on the Board's website. The name of a registered person, along with registration status (active/non-active/suspended), can be searched on SRB portal by entering an NTN of a registered person. The Act has removed this mandatory requirement for the suspension to take effect. It appears that the Act has made suspension effective from the date of order of suspension, irrespective of the current status of a taxpayer as appearing on SRB portal. The definitions of "additional collector," "collection agent," "inspector," and "regulations" have been added in the KP Act. A concept of collection agent has been introduced to mean someone who may act as collection agent in a particular transaction. The powers of Management Committee have been enhanced to apply to those who, without prejudice to other provisions of the KP Act, may declare the extent of admissibility of input tax or sales tax refund arising with respect to other laws subject to certain conditions, limitations, restriction, fixation or refixation that is allowable as input tax in such other law. The adjustment input tax shall not be available in respect of tax chargeable on a specific rate, fixed rate or other rates not based on value or on goods that are subject to tax at the rate less than 18% or on services subject to Sales Tax less than standard rate of 15%. The adjustment of Sales Tax on goods shall not be available if the adjustment is barred under the provisions of the Sales Tax Act, 1990. The Sales Tax levied and paid on the services under the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 shall not be available for an adjustment as input tax. The scope of assessment of tax has been enhanced to apply to persons who (a) have not filed a return or have not timely filed a return; (b) made an untimely tax payment; (c) had not filed the information/explanation required under the relevant provisions of the KP Act; (d) failed to issue tax invoices; or (e) failed to monitor or track provision or receipt of service or services by electronic or other means in terms of Section 64 of the KP Act. The Management Committee, without the approval of the Government, may require any person who is engaged in rendering solely an exempt service or services to obtain registration and file a return in such form and manner as may be specified in the notification. Penalties have also been specified for registered persons who fail to comply with the e-invoicing system and those who failed to produce information/records/documents on receipt of a notice issued by an officer of the Authority, not below the rank of Assistant Collector. The rate of default surcharge has been enhanced from 12% to 24% generally, and from 24% to 36% in the case of fraud. The Officer of the Authority, not below the rank of Assistant Collector, may now access the business premises, registered office or any other place, where any stocks, business records or documents are kept or maintained by the persons exercising such power with the prior approval of Collector or Management Committee. To recover unpaid tax, a registered person's bank account may now be attached if it is evident from the records and materials, including the computer system taken into custody by the authorized officer from the business premises of the registered person, that the registered person charged or collected the tax from a customer or service recipient but has not remitted or has short paid the tax to the government. The attachment of the bank account shall be exercised with prior approval of the Collector or Management Committee. A concept of whistleblowers is introduced to mean those who, subject to certain conditions, may be rewarded for reporting concealment or evasion of tax, tax fraud, corruption of misconduct by officers or officials of the Authority by providing the credible information leading to detection of evasion of tax. Services of private healthcare centers, facility-provided services for intra-provincial and inter-provincial travel or transportation and management services have been added in the Schedule of taxable services. (m-i) "Collection Agent" means the State Bank of Pakistan or any other scheduled bank or entity licensed or authorized by the State Bank of Pakistan to transfer money abroad for the specified services. The Act has also enhanced the ambit of "tax fraud" and now "failing to declare and pay the tax so charged and collected under the Act" shall also be treated as tax fraud in terms of Section 2(aai) of the KP Act. The Act has inserted new Section 14A, whereby the Policy Board in addition to the collection agent as defined in the KP Act, may declare any other person or class of persons not necessarily the service provider or recipient, as collection agent in a particular transaction. The special procedure to be prescribed may provide for registration, bookkeeping, invoicing or billing requirements, returns and other related matters for collection agents in respect of any service or class of services. The newly inserted section also provides that if the collection agent fails to deposit the amount so collected, he shall be personally liable to pay the amount of tax assessed or determined to the government in the manner so prescribed. Section 16(2) of the KP Act empowers the Management Committee to allow adjustments, including refunds in respect of tax paid under any other law subject to certain conditions and restrictions as it may specify or otherwise. The Act has enhanced the mandate of the Management Committee, which now declares the extent of admissibility of input tax or sales tax refund arises with respect to other laws subject to certain conditions, limitations, restriction, fixation or refixation provided that such adjustment or input tax is allowable in such other law. Historically the substituted subsection was not independent to the other sections of the KP Act. Section 17 of the KP Act provides certain scenarios or taxes for which adjustments are specifically barred in the KP Act. Before amendment, clause (k) of Section 17(1) restricted the adjustment of services taxable at the reduced rate against output tax payable on the services provided by the service provider at immediate next stage of supply chain. The Act extends the scope of this restriction, making it applicable to input tax chargeable on specific rate, fixed rate or such other rates not based on value or on goods that are subject to tax at the rate lesser than 18% or on services subject to Sales Tax lesser than standard rate of 15%. The Act has inserted new clause "(o)," whereby adjustment of input tax on goods shall be inadmissible if the adjustment of such input tax is barred under the provisions of the Sales Tax Act, 1990. The Act has also inserted new clause "(p)," whereby adjustment of Sales Tax levied and paid on the services under the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 shall now be inadmissible. The Act has inserted a new subsection "(1A)," whereby the scope of assessment of tax has been enhanced to the persons who had (a) not filed a return or filed a late return; (b) made a late payment; (c) not filed the information/explanation required under the relevant provisions of the KP Act; (d) failed to issue tax invoices; or (e) failed to monitor or track of provision or receipt of service or services by electronic or other means in terms of Section 64 of the KP Act. After insertion of the above subsection, the Officer of the Authority may pass an Order to impose penalty and default surcharge under the provisions of the KP Act against anyone who committed any such offence. Section 29 of the KP Act deals with matters related to registration. Prior to the amendment in subsection (4), the Policy Board, with the approval of the Government, could require any person engaged in rendering solely exempt services to register and file a return in such form and manner as may be specified in the notification. The Act has now delegated this power to the Management Committee, which may assume such power and shall not be required to obtain approval of the Government.
Serial No. 09 of the Table to the Section 53 imposes penalty of Rs. 50k or 10% of the amount of tax sought to be recovered, whichever is higher, if a person violates any embargo placed on providing services in connection with recovery of tax; this penalty may be increased to imprisonment or the amount equal to the amount sought to be recovered or both. The Act has now extended the scope of the offense and prescribed that penalties shall also apply if a person violates the restrictions imposed for sealing of business premises in connection with the recovery of tax. The Act has doubled the rate of the default surcharge from 12% to 24% and increased the rate from 24% to 36% in case of tax fraud. Section 60(1) of the KP Act provides power to the Officer of the Authority, not below the rank of Assistant Collector, to have free access to the business premises, registered office or any other place, where any stocks, business records or documents are kept or maintained by the persons specified therein. The Act has now imposed a condition that Officer of the Authority, not below the rank of Assistant Collector, may exercise such power with the prior approval of Collector or Management Committee. Section 65 of the KP Act empowers the Management Committee and Collector to revise any Order or decision of the Officer of the Authority by its or his own motion or an application made in writing by a registered person for such revision. The Act has added a second proviso, whereby any order or decision of the Officer of the Authority if revised by the Collector shall be communicated to the Management Committee within seven days of passing such order. Section 75 of the KP Act provides that if a registered person pays the amount of tax less than the tax due as indicated in his return, the short-paid amount of tax along with default surcharge shall be recovered from such person by attaching his bank accounts without providing a show-cause notice and without prejudice to any other action specified in the relevant section of KP Act in respect of recovery of arrears of tax. The Act has substituted the section and now the scope of such nonpayment of tax shall also cover the scenario if it is evident from the records and materials — including but not limited to the computer system taken into custody by the authorized officer from the business premises of the registered person — that the tax has been charged or collected from customer or service recipient but not paid or short paid by such registered person. The Act also imposes a condition that attachment of bank account for the purpose of this section shall only be exercised with prior approval of the Collector or Management Committee. The Act has inserted a new section allowing the Management Committee, with the approval of Finance Department, to sanction rewards to the whistleblowers in case of reporting concealment or evasion of tax, tax fraud, corruption of misconduct by officers of officials of the Authority by providing the credible information leading to detection of evasion of tax. The newly inserted section has also given mandate to the Policy Board to prescribe the manner for the payment of reward and extent of reward for the whistleblowers. The claim of whistle blowers is also subject to certain terms and conditions and in case of non-fulfilment of such terms and conditions the claim shall be rejected. Section 93 of the KP Act provides repeals and saving provisions of the Khyber Pakhtunkhwa Finance Act, 2013 relating to KPST on services. However, while providing the saving definition clause of the KPK Finance Act has not referred. Now, the Act has repealed and provided saving to definition provisions of the KPK Finance Act. Section 2(aaa) provides that service means anything which is not goods and includes facilities, amenities utilities or advantages by whatever name called and are liable to Sales Tax on services as specified in the First Schedule. Section 3(4) of the KP Act also provides that the services mentioned in the First Schedule are not exhaustive and all services mentioned in the Second Schedule shall be taxable services, regardless, whether or not they are mentioned in the First Schedule.
Section 3(1) defines taxable services which are listed in the Second Schedule. Section 9(1), provides that the tax shall be charged, levied and collected and paid on the value of taxable services at the rate specified in the Second Schedule. A proviso to the above section provides that a 15% tax shall be deemed and treated as standard or general rate of tax for all purpose of KP Act. The Act has reduced the rate of Sales Tax from 15% to 13% with the facility of input tax adjustment on the services listed at Sr. No. 1 of the Second Schedule provided or rendered by "hotels, motels, guest houses, resorts, accommodation-and/or — food service providing farm-houses, motorway-or-highway side accommodation — and/or — food provisioning/food servicing or food supply facilities, restaurants (including food service supply chains), ice cream parlors, marriage or wedding halls, marques, lawns, clubs and caters, suppliers of prepared eatables and drinkables, pandals and shamianas, clubs including such clubs as, though run on mutuality basis, are operated in commercial mode, manner or style, messes, hotels and similar entities, enterprises or undertakings including all such services, facilities, utilities, entertainments, comforts, enjoyments or amusements etc., as are allied, auxiliary or ancillary thereto." The Act has also amended following clauses of "Exemptions and Reduced Tax Rates" in case ofservices listed at Sr. No. 1 of the Second Schedule.
The Act has added another clause in the "Exemptions and Reduced Tax Rates"in case of services listed atSr. No. 1 of the Second Schedule.
The customs agents shall now pay tax at the fixed rate of Rs. 3,000/- per goods declaration which was earlier 8% without any input tax adjustment. The rate of Sales Tax on advertisement on or through print media of all types and forms is enhanced from 1% to 2%. The rate of Sales Tax on the services listed at Sr. 13 of the Schedule including "services provided by persons engaged in contractual execution or performance of works or furnishing supplies," "fumigation services," "maintenance or cleaning services," "janitorial services" etc. is enhanced from 5% to 15%. The practitioners, professionals, consultants or advisers of legal profession or field shall now pay fixed Sales Tax of Rs. 500 at the time of filing of each case, appeal or petition and attach proof of such payment with the Power of Attorney. The rate of Sales Tax on the services listed at Sr. 20 of the Schedule including "Cinematographic production, photographic services, recording services and telecasting or broadcasting services etc. is enhanced from 1% to 2%. The rate of Sales Tax on Exhibition, convention or carnival services and allied services etc. is reduced to 5% from 8%. The health insurance services including Sehat Card Plus Programme were exempt from levy of Sales Tax. The Act has withdrawn such exemption and now services of "health insurance services and services in respect of Government sponsored Sehat Card Plus Programme, shall be subject to Sales Tax at the rate of 10% without any input tax adjustment. The rate of Sales Tax on cold storage services including other form of warehousing of agriculture produce is enhanced from 1% to 2%. The rate of Sales Tax on the services provided or rendered by under writers including sponsorship services is enhanced from 1% to 2%. The rate of Sales Tax on the services provided or rendered by Auctioneers is enhanced from 1% to 2%. The rate of Sales Tax on the services provided or rendered by quality assurance, quality control, quality inspection including pre-inspection, quality verification or certification including verification or certification of quality or standards under ISO regime is enhanced from 1% to 2%. The rate of Sales Tax on the services of ride hailing or ride hail like Uber, Careem, Bikers and Lyft etc. is enhanced from 2% to 5%. The rate of Sales Tax on the services relating to or in respect of the installation, erection, commissioning or other permanent structure-affixed/linked/tied placement (whether full or in part) of any industrial, mechanical or electrical plant, machinery or equipment (excluding installation of domestic equipment etc. for residential use) is enhanced from 1% to 2%. The Act empowers PRA to appoint an officer in the prescribed manner and by notification in the official gazette. Now the Act proposes to enhance the PRA powers by eliminating the condition of notification in the official gazette retrospectively from the promulgation of the Act. The purpose of this retrospective amendment is to settle the litigation pending before courts due to the appointment of non-gazetted officers by the PRA. Amendments to provincial tax laws will require significant compliance updates for both national and multinational taxpayers, impacting their financial strategies and local tax obligations. Such changes call for a meticulous review and adaptation of accounting practices, legal structures, and long-term planning to ensure alignment with the revised tax landscape
Document ID: 2024-1353 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
