Provincial revenue authorities’ approach to sales tax on services comes under criticism

LAHORE: Provincial revenue authorities are considering salaries as part of service to charge sales tax on services despite the fact that they can levy sales tax only on the value of services, said sources.

They said the provincial tax authorities, in some parts of the country, are charging sales tax on services against the gross amount charged by the service provider, inclusive of salaries paid to the labour and manpower.

Accordingly, the firms involved in the business of labour and manpower supply services and security agency services are facing problems in dealing with the provincial tax departments.

According to the sources, sales tax on services could only be levied on the value of taxable services but it could not include reimbursable expenses such as salaries. These expenses are not a part of the service itself, they maintained, and could not be factored in the value of taxable service under the law.

They added that salaries are borne by the service recipients and do not form part of the consideration paid for the service.

They said sometimes salaries are paid by the service provider after being invoiced to the service recipient and sometimes directly paid by the service recipients, therefore, they should be treated separately and part of the service. Salaries should be considered as an expense of the service recipient while sales tax on services is applied to the taxable services and does not include the service recipient’s expenses.

The revenue authorities, on the other hand, are of the view that the value of taxable service is the gross amount charged by the service provider which includes the salaries. They said salaries paid by the service provider to the security and manpower should be included since it is a part of the invoiced amount which shows the gross amount charged by the service provider for the service. They said they claim the tax similar to UK’s VAT, which is applied to the turnover rather than profit, making it appropriate to include expenses in the taxable amount.

Additionally, they asserted that sales tax is a consumption-based tax and is assessed based on what the service recipient pays to the service provider and since salaries are paid by the service provider, it should be included in the gross amount charged and failure to do so would make the amendments to the law redundant. However, the appellate forums agree with the stance of service providers, and not the department, said the sources.

Copyright Business Recorder, 2023