Punjab Sales Tax on Services Act-2012: An overview
The Punjab Assembly passed the Punjab Sales Tax on Services Act-2012 (PSTSA) on 21st June 2012, which will come into force on from July, 2012. By virtue of this enactment, Punjab Sales Tax Ordinance, 2000 would stand repealed. The Punjab Assembly has also passed Punjab Revenue Authority Act, 2012 to administer and enforce Sales Tax on Services rendered or acquired in Punjab.
Copyright Business Recorder, 2012
PSTSA is an exhaustive tax law, which does not confine to 'sales tax on services rendered in Punjab'. It also seeks to tax services received or consumed in the Province. It brings certain excisable services such as banking, shipping into sales tax net. It brings under the tax net certain other services such as services rendered by clubs/hotels/caterers and advertisements on TV/radio, courier, telecommunication, insurance and stockbrokers etc. In line with Sindh Sales Tax on Services Act 2011, the PSTSA also seeks to 'reverse tax charge' to be deducted and paid by withholding tax agents.
The PSTSA contains 13 Chapters with 87 Sections in all. Todate, the rules and format of tax returns and other statutory declarations to be filed by the taxpayers have not been notified. One is given to understand that the rules are under final stages and would be issued in due course.
The following services have been specified in 2nd Schedule of PSTSA to be taxable services, attracting sales tax @ 16% of value of the service. Besides specifying list of taxable services, the legislature has authorized Government of Punjab to declare any other service 'liable to sales tax'. This is despite the fact that such an open authority is a deviation from the philosophy of fiscal laws whereby leviability of tax or exemption therefrom is the prerogative of legislature, not of a Government or of Tax Authorities:
A 'taxable service' is defined to be a service listed in the 2nd Schedule of PSTSA, which is provided by a registered person from his office or place of business in Punjab in the course of an economic activity, including in the commencement or termination of the activity. The law stipulates that a taxable service provided by a non resident person shall also be treated as a taxable service if it is provided to a resident person by a non-resident person. In this way, the PSTSA has prescribed that recipient of taxable services from elsewhere may also be required to pay sales tax in Punjab - a scheme which was initially coined by Federal Excise Act, 2005 a few years back and incorporated as such in Sindh Sales Tax on Services Act, 2011.
The PSTSA carries detailed framework covering definitions, scope of tax, invoicing, adjustment of tax paid on acquisition of services against the output tax liability, payment / collection of tax, registration, book keeping, audit, tax returns, offences/penalties, appeals and general administration. However, we understand such areas would be crystallised or elaborated through subordinate legislations being drafted at the moment.
PSTSA empowers the PRA established under the Punjab Revenue Authority Act 2012 to be the administrative and enforcement body with respect to sales tax on services in the Province of Punjab. The PRA is to be headed by a chairman and assisted by commissioners, deputy/assistant commissioners and other officers of the Authority.
The law empowers the PRA to fix minimum annual turnover threshold for registration under PSTSA. Besides, PRA is also empowered to declare any area of Punjab exempt from sales tax. However, as indicated in preceding paragraphs, the recipient of service may also be held liable to registration.
Provisions relating 'value of taxable services' and 'open market price' have been replicated in the Punjab Law from the Sindh Sales Tax Law. These are quite stringent which may hinder usual business activities of service providers. The law prescribes value of a taxable service to be the gross money consideration which the service provider receives from the recipient of service. However, in case the service is provided at a price lower than the price at which the person provides the service to other persons, the value of the service will be taken at open market price for such a service ie price such service would fetch in an open market transaction freely entered into between independent buyers and sellers. PSTSA suggests application of subjective adjustments in computing the open market price in case such price is not easily determined.
According to the Sindh Sales Tax on Services Act, 2011, a taxable services is a service listed in the Second Schedule of the Act, which is provided: (a) by a registered person from his registered office or place of business in Sindh and (b) in the course of an economic activity, including in the commencement or termination of the activity. This is in relation with services provided by registered persons, regardless of the fact whether those services are provided to persons resident or non-resident in Sindh.
According to the Sindh law, a service that is not provided by a registered person shall be treated as a taxable service if the service is listed in the Second Schedule to the Act: (a) is provided to a resident person and (b) by a non-resident person in the course of an economic activity, including in the commencement or termination of the activity. This provision deals with services provided by persons non-resident in Sindh to resident persons.
Where service provider renders one or more taxable services from one or more premises or a registered person, having a centralised billing systems or centralised accounting system in the Province, such service from more than one premises or offices, would require one registration, so provides the Sindh Sales Tax on Services Rules. Where a registered person is providing more than one taxable service, he may make a single application listing all the taxable services provided by him. Certificate of Registration in the prescribed form of SRB would indicate details of all taxable services provided by that person.
Sindh Sales Tax on Services has to be withheld in the manner prescribed under the Sindh Sales Tax Special Procedure (Withholding) Rules, 2011 read with SRB's Circular No 2/2011.Persons not registered under the Sindh law, but registered with FBR, may claim input tax credit against the tax invoices of the Sindh registered service rendering persons. The Sindh law calls for registration by providers of services. Registration is mandatory for providing taxable services, not for receiving services. Withholding Agents not registered under the Sindh law as service providers are required to deposit the tax withheld with the Sindh Government's coffers.
The Sindh Sales Tax on Services Rules provides for transfer of registration of a registered person from the jurisdiction of one commissioner to another commissionerate. It, however, does not cater transfer of registration of a registered person from one province to another. Probably one wanting such a transfer shall have to de-register by application to the Sindh Board and seek fresh registration in the other province.
Significant aspects of the law are the likelihood of cross border/inter-province problems when goods and services originated from one Province are delivered or rendered in another Province.
PSTSA places strong reliance upon collection of sales tax by way of 'withholding tax'. Accordingly, the role of withholding tax agents is likely to be both crucial and cumbersome.
For certain service providers operating across Pakistan, accounting, IT and operating systems would need to be revamped and modified eg in cases where a particular service is taxable only in Sindh and not in Punjab. Besides, there could be contentious industry and tax issues vis-a-vis compliance and enforcement.