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ISLAMABAD: The Pakistan Business Council (PBC) has approached Finance Minister Shaukat Tarin for clarity apropos, which portion of the sales tax on sale of goods by member companies through their distributors need to be deposited with Federal Board of Revenue (FBR) and which with the Sindh Revenue Board (SRB).

The PBC has written a letter to the finance minister on Tuesday in the light of a judgement of the Sindh High Court (SHC).

The PBC has informed Tarin that this letter is to invite attention towards a judgement pronounced by the SHC, Karachi on September 6, 2021, whereby, the SHC has held that the distribution arrangement, whereby, distributors buy goods from the manufacturers from onward supply down the supply chain against the payment of sales tax under the Sales Tax Act 1990, in fact, depict the rendering of taxable services under the Sindh Sales Tax on Services Act 2011, if such manufacturers retain certain quality or other controls over the supply chain down the line.

On the basis of the SHC decision, the SRB has now started issuing notices to member companies seeking details of their distributors.

Presently, PBC member companies and their registered distributors are paying sales tax on sale of taxable goods under the Federal Sales Tax Law. The decision of the SHC has now created a situation for the member companies and their distributors as to which portion of the sale tax due needs to be deposited with which tax authority -FBR or SRB?

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The current uncertainty regarding sharing of sales tax is impacting the ease of doing business and the PBC is thus writing the request that the FBR and the SRB mutually decide which portion of the distributors margins is due to which tax authority? the PBC added.

An expert on corporate affairs explained that the Sindh High Court (SHC) has classified distribution of goods as rendering of a "service" and deemed it subject to the Sindh sales tax on services. Hitherto, distribution i.e. purchase and sale of goods was liable to federal sales tax on goods. Business is now in a quandary of who to pay this sales tax to. The PBC has written to the Sindh chief ministerand the federal minister for finance to guide it. In the meantime, the SRB has started issuing notices to businesses. This is an example of fragmentation of authority best resolved through better coordination between the federation and provinces. As other provinces may follow Sindh's example, it needs to be taken up in the Council of Common Interests (CCI).

The FBR opined that the said judgement of the SHC carries considerable implications for the demarcation of sales tax on services and goods between the FBR and the provincial revenue authorities.

On the other hand, the SRB stated that the said judgement does not carry any implications for any demarcation of sales tax on services and goods between the FBR and the provincial revenue authorities. The economic activity of retail, wholesale, and distribution (including the distribution of gas, electricity etc) are essentially "services" both in terms of the national income indicator (GDP component) of Pakistan and also in terms of the exclusion specified in entry number 49 of the Fourth Schedule to the Constitution.

According to the letter of the FBR to the chairman SRB, the FBR, refer to the judgement pronounced by the SHC, Karachi on September 6, 2021 wherein, the SHC has held that the distribution arrangement, whereby distributors buy taxable goods from the manufacturers for onward supply down the supply chain against the payment of sales tax under the Sales Tax Act 1990, in fact, depict the rendering of taxable services which fall under the tariff heading 9845.0000) under the head of "supply chain management/distribution (including delivery services under tariff heading 9845.0000) under the Sindh Sales Tax on Services Act 2011 (SSTSA).

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The said judgement of the SHC carries considerable implications for the demarcation of sales tax on services and goods between the FBR and the provincial revenue authorities.

The SRB is, therefore, requested to share its official position with respect to the said judgment, the FBR added.

Responding to the FBR's letter, the SRB has informed the FBR that refer to the said FBR's UO dated September 29, 2021, the copy of the SHC judgement dated September 6, 2021 was not found enclosed with the said FBR's UO note. However, SHC judgement dated September 6, 2021 in SSTRA No. 6 of 2019, along with the SSTRA Nos. 09 to 24, 114, 768, 811 to 815 of 2019, may be read, understood and construed as it is worded.

The said judgement does not carry any implications as stated in the FBR's UO note under reference, for any demarcation of sales tax on services and goods between the FBR and the provincial revenue authorities. The levy is covered by tariff headings 9845.0000 of the First and Second Schedules of the Sindh Sales Tax on Services Act 2011, which is analogous to the series number 57 of the Second Schedule to the Punjab Sales Tax on Services Act 2012, serial number 5 of the Second Schedule of the KP Finance Act 2013, tariff heading 9845.0000 of the First and Second Schedules to the Balochistan Sales Tax on Services Act 2015 and also series number 53 of the Schedule to the Islamabad Capital Territory (Tax on Services) Ordinance 2001.

Copyright Business Recorder, 2021

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