GST on IT services: FBR urged to remove ‘legal’ anomaly in Finance Act

ISLAMABAD: The Federal Board of Revenue (FBR) should remove the ‘legal’ anomaly in the Finance Act 2022 whether the IT-based or IT-enabled services offered by any persons other than software consultant or development is chargeable to sales tax.

According to a leading sales tax expert, Arshad Shehzad, communication to the FBR, by virtue of Finance Act 2022 entry no. 11 table-II of the ICT law has been substituted and replaced as “Services provided by software or IT-based system development consultant” and chargeable to a reduced rate of sales tax at the rate of five percent.

It is further observed that no amendment was made in entry no. 11 of table-1 which also pertains to the same service chargeable to sales tax at the standard rate and thus, it implies that both reduced and standard rate of sales tax are made applicable to this service.

It is however interesting to note that the standard rate of sales tax at the rate of 16 per cent is replaced with the rate of 15 percent without referring the entry no. 11 of the table-I in the relevant amended clause, which means the service mentioned in entry 11 table-1 alone is yet chargeable to sales tax at the rate 16 percent, which of course does not make sense.

FBR expands scope of definition of IT, IT-enabled services

“We understand the board has either skipped to omit entry # 11 from table-1 or skipped to add entry 11 while reducing the standard rate of sales tax from 16 per cent to 15 per cent,” the tax expert stated.

Arshad Shehzad also observed that the explanation shared by the board on the recent amendments vide its circular no. 9 dated 21st July 2022 also suggests that software or IT-based system development consultant service is chargeable to sales tax at a reduced rate without mentioning the application of standard rate of sales tax on the same service which strengthen the understanding that board has skipped omitting entry no. 11 from table-1 from the ICT Law.

Moreover, the board while extending the explanation to this service specifically emphasized that this reduced rate service is only applicable to the extent of software or IT-based consultant and not to any other services. This may also raise the question, whether, the IT-based or IT-enabled services offered by any persons other than software consultant or development is chargeable to sales tax or not. “We, therefore, understand a serious legal anomaly arises from the above-amended position in the ICT Law which needs to be taken up and clarified by the board,” Shehzad added.

Copyright Business Recorder, 2022