Harmonization of sales tax: NTC to address issues raised by agencies

ISLAMABAD: The National Tax Council would address the issues raised by the federal and provincial agencies on the harmonisation of sales tax, distinguish the taxing powers of the Federal Board of Revenue (FBR) and that of the provinces, and agreement on a common definition of goods/services and common rules in place of supply and data sharing.

Sources told Business Recorder that a key aspect in harmonising Pakistan's sales tax was the need to distinguish the taxing powers of the federal government vis-à-vis that of the provinces, and further between the provinces themselves.

Under the Constitution, the sales tax base is divided between the supply of goods (taxable by the federal government) and supply of services (taxable by the provinces), and hence, it is very important to define as unambiguously as possible the definition of what constitutes, a good, and what constitutes, a service.

Moreover, in the case of supply of services, as provinces have the right to tax the supply of services occurring within their province, when services are provided across different provinces, clear "Place of Supply Rules" are needed to give the taxing power to the relevant province.

Sources said that the harmonisation also required data sharing, clearing house to allow cross-agency tax credits, common return and rules.

Further, harmonisation requires the smooth functioning of the National Tax Council, which has been setup to aid in such efforts.

According to sources, the ultimate goal is to address the questions raised by the federal and provincial agencies, and agree on a common definition of goods/services and common rules in place of supply, data sharing and to give guidance to members of the National Tax Council on specific issues.

Principles to arrive at a common definition: In order to address questions on harmonisation, the federation/provinces may use the following principles and laws: (i) existing laws in force in Pakistan; (ii) international treatment; (iii) Pakistan case law; (iv) ease of implementation for business as well as tax agency, and (v) flexible to government to raise revenue.

The following specific issues may be deliberated by the executive committee, and give recommendations for the National Tax Council:

The issue of definition of "goods" versus "services" is critical.

The definition of "goods" as provided in Article (260) (1) of the Constitution-"goods" includes all materials, commodities and articles.

Section 2(12 of the Sales Tax Act 1990)-(12) "goods" include every kind of movable property other than actionable claims, money, stocks, shares, and securities.

For any specific question whether a supply is a good or a service, the FBR proposes that the Pakistan Customs Tariff should form the basis of the definition for "goods" with the remaining being classified as "services".

Sindh proposes that the customs tariff should form the basis of the definition of "goods" with the remaining being classified as "services".

Balochistan proposes that the Islamabad Capital Territory Ordinance, 2001, should form the basis of the definition of the "service".

As there is a clarity on the broad definition of a "good" under the Constitution as well as Sales Tax Act, 1990, it is proposed that more clarifications on specific cases may be provided in the form of a notification issued by the National Tax Council under the authority of the NFC Coordination Committee, which represents the federal as well as the provincial governments.

In the case of specific cases for services, GST harmonisation would move away from specific definition of a taxable service (positive list) to a broad definition of a service, the sources added.

Copyright Business Recorder, 2020