KARACHI: Businesses operating across Pakistan are facing growing tax compliance challenges as tax jurisdictions overlap with provinces for identical transactions, creating regulatory hurdles and leading to significantly increased operational costs and administrative burdens.
In a letter sent to the Federal Finance Minister Muhammad Aurangzeb, the Pakistan Tax Bar Association (PTBA) has highlighted issues related to the sales tax on services.
The PTBA informed that enterprises with nationwide operations are being forced to navigate through extensive appellate processes across different jurisdictions to resolve disputes, dramatically inflating their cost of doing business.
The absence of a harmonized definition of “service” across provincial statutes creates interpretational ambiguities, particularly affecting digital services, software licensing, works contracts, and activities in port and airport areas, the letter said.
The Sindh Revenue Board (SRB), for instance, has excluded certain services under federal jurisdiction from its tax net, while other provinces maintain different interpretations, leading to conflicting claims and potential litigation.
The lack of a comprehensive framework for determining the place of provision of services has emerged as another significant concern. Currently, only limited sectors, including insurance, advertising, franchising, transportation, and electricity transmission, have defined rules, leaving most services vulnerable to inconsistent interpretations that have resulted in situations where multiple provinces simultaneously claim taxing rights over the same transaction, especially in digital or inter-provincial supplies, the letter said.
Service providers are facing additional complexity through fragmented withholding tax regimes, encountering multiple rates, varying thresholds, and inconsistent categories of withholding agents depending on provincial jurisdiction, creating difficulties for businesses operating across multiple provinces, where compliance requirements can vary dramatically.
The letter further said that the issue has extended to audit procedures, with taxpayers facing duplicate examinations by multiple provincial authorities for identical tax periods, resulting in administrative inefficiencies and what the PTBA described as taxpayer harassment. The practice not only duplicates effort but also creates inconsistent interpretations of tax obligations across different jurisdictions, the letter added.
Provincial digitalization initiatives have also introduced complications, with some provinces offering reduced tax rates for credit card transactions at restaurants while denying input tax credits on these reduced-rate sales, PTBA said, and added that this policy inconsistency has created trust deficits within the business community, as enterprises support digitalization efforts but face penalization through restricted credit mechanisms.
Moreover, it said that the absence of unified approaches has led to instances where both provincial and federal authorities simultaneously assert taxing rights over the same transaction, creating unnecessary tax burdens through double taxation.
Registration thresholds vary significantly across provinces, with only Sindh providing turnover-based exemptions for small service providers. Other provinces lack such provisions, imposing compliance obligations on micro and small enterprises regardless of their revenue scale, putting undue burden on smaller businesses while creating uneven competitive conditions across provincial boundaries, the letter said.
PTBA has proposed several solutions, including the development of model place-of-provision rules applicable to all services, the establishment of unified withholding frameworks, and the creation of joint audit mechanisms for multi-jurisdictional service providers.
Copyright Business Recorder, 2025
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