EXECUTIVE SUMMARY: General, Economic Overview: There is no major change in the proposed composition of revenue and expenditure projected by the respective provinces as compared to earlier years.
-- Internal revenue generation has improved however, the same is largely concentrated on sales tax on services.
-- Substantial part of expenditure is to be spent on salaries and other fixed costs of the governments.
Sales Tax on Services
Since 2011 and 2012, Provincial Governments of Sindh and Punjab respectively have started collecting sales tax on services. Previously, such rights were assigned by these provinces to the Federal Government. Province of KPK followed the same in 2013.
General rate of Federal sales tax is 17 per cent after an increase in rate by 1 per cent in Finance Act, 2013. Upto June 30, 2013, the rate of tax on goods and services, except certain services and goods was 16 per cent. The Federal Government has retained the rate of 17 per cent in the proposed Federal Finance Bill 2014. Punjab has retained the rate of 16 per cent. However, Sindh has across the board, except generally for telecommunication services, reduced the rate to 15 per cent. The matter of disparity in rates is to be considered on national level.
Sales tax on services is taxed, wherever applicable, by the respective provinces and the sale of goods is taxed by the Federal Government. In principle, a value added tax system is in place in Pakistan therefore, sales tax on goods and services either at Federal or Provincial levels is admissible as input tax whilst discharging the respective output tax liability, unless specifically made inadmissible. Certain issues, which arose in the past on this matter, are gradually being resolved by respective amendments in the statutes by the concerned authorities. Further clarity and administrative actions on this matter are desired.
Over the years, more and more service sectors are being brought within the ambit of tax. The concept of harmonisation of tax regime within the provinces and the Federation has been accepted and reiterated in the object clause of the Bill proposed in the Punjab Assembly. Same object is expected to be followed by Federal and Sindh Governments.
The matter relating to right of taxation as to origination or consumption or destination of services has arisen in certain cases. Statutory clarification on the matter as expected do not find place in the respective Finance Bills.
Agriculture Income Tax
Desired emphasis in improving the process of collection of Agriculture Income Tax, which falls within the purview of Provinces, does not appear as a part of respective Finance Bills.
Capital Gain Tax on disposal of Immovable Property
Punjab introduced income based Capital Gain Tax on disposal of immovable properties in 2013. Sindh is yet to introduce such income based taxation.
Tax / Duty on Telecommunication
In the Federal Finance Bill, rate of duty on telecommunication services by the Federal Government is proposed to be reduced from 19.5 to 18.5 per cent. These services are taxable by the Provinces under their respective statutes, as the case may be. This reduction in rate of tax does not appear as a part of the proposed bills. In practical terms on account of nature of services and entities involved, dissimilar rates cannot exist in this case. It is expected that a correction in rate to 18.5 per cent will be made by the respective provinces.
Punjab Sales Tax on Services
New services which have now been included in taxable services are specialised workshops, indenting/brokerage, call centre, laundry and dry cleaning, cable TV, TV/radio program production and print media advertisements (reduced rate of 5 per cent).
Sindh Sales Tax on Services
General rate
General rate of tax has been reduced from 16 to 15 per cent across the board except certain identified services.
Sales tax on Education and Health Services
In addition to inclusion of many other services, by way of an important change, 'education' and 'health' sectors have been brought within the ambit of taxable services. This is a major proposal. In the proposed bill, all educational institutions and medical practitioners and related services will be subject to tax at the rate of 15 per cent of the value of services. A threshold is being prescribed for the amount of the bill (education or health) which will not be subject to tax on services. Necessary circular and clarification are expected for the charge of tax on such sectors.
New Services
New services in addition to 'education' and 'health' sectors which are proposed to be taxed mainly include:
Classified advertisements
Share transfer agents
-- Services provided or rendered in the matter of purchase or sale or hire of immovable property
-- Services provided or rendered by property dealers
-- Services provided or rendered by laundries and dry cleaners
-- Technical, scientific and engineering consultants
-- Cable TV operators
-- Services provided or rendered by registrar to an issue
-- Services provided or rendered by programme producers and production houses
-- Services provided or rendered by corporate law consultants
-- Contractual Services
(Punjab & Sindh)
Contracts executed can be taxed under the Provincial Sales Tax on Services Acts only to the extent of taxable services included in the value of contract. Present entry in the law needs clarity on this matter. The expected explanation / clarification does not find place in the Bill.
PUNJAB FINANCE BILL 2014
PUNJAB SALES TAX ON SERVICES
Scope of Taxable Services Extended
-- Extension of kinds of services in the existing entries of the Second Schedule:
Race clubs
-- Cargo services by road passenger transportation business and transportation through pipe line and conduit services
Cafes, food (including ice-cream) parlours, coffee houses, coffee shops, degas, food huts, eateries, resorts and similar cooked, prepared or ready-to-eat food service outlets etc.
-- Intellectual property rights services
-- Investment management services
Technical inspection and certification services, quality control (standards' certification), technical analysis and testing, erection, commissioning and installation services.
Other consultants including but not limited to human resource and personnel development services, exhibition or convention services, event management services, valuation services (including competency and eligibility testing services), market research services and credit rating services.
-- Travel agents including all their allied services or facilities.
-- Labour and manpower supplies.
Services provided by depository agents including services provided through manual or electronic book-entry system used to record and maintain securities and to register the transfer of shares, securities and derivatives.
Services by Realtors
Services provided by fashion designers whether relating to textile, leather, jewellery or other product regimes including allied services such as cutting, stitching, printing, manufacturing, fabrication, assembly, embellishment, adornments, display (including marketing, packing and delivery etc.)
Services by automobile dealers
-- Industrial and commercial packaging services and similar outsourcing of industrial or commercial processes
-- All the above services are subject to sales tax at 16%.
New Entries introduced
Services provided by specialised workshops or undertakings (auto - workshops; workshops for industrial machinery, construction and earth moving machinery or other special purpose machinery etc; workshops for electric or electronic equipment or appliances etc including computer hardware; car washing or similar service stations and other workshops)
Services provided for specified purposes including fumigation services, maintenance and repair (including building and equipment maintenance and repair including after sale services) or cleaning services, janitorial services, dredging or desilting services and other similar services etc.
-- Brokerage (other than stock) and indenting services including commission agents, underwriters and auctioneers
Call centers
Services provided by laboratories other than services related to technological or diagnostic services for patients
Services provided in specified fields such as healthcare, gym, physical fitness, indoor sports, games and body or sauna massage etc.
-- Services provided by laundries and dry cleaners
-- Services provided by cable TV operators
-- Services provided by TV or radio program producers or production houses
-- Advertisements (including classified ads) in newspapers, magazines, journals and periodicals
-- All new services are subject to tax at 16%, except for Call Centres and Advertisement Services which are taxable at 19.5% and 5% respectively.
Association of Persons
There appears to be the correction of an apparent omission in the present drafting of law, as a result of which 'association of persons' is not presently required to charge sales tax on taxable services provided by them.
-- Services in relation to disposition of Goods
In the present law, while defining the term 'service', it has been clarified that a service remain and continue to be treated as service regardless of the fact that rendering thereof involves any 'use', 'supply' or 'consumption' of goods.
Through this amendment, 'disposition of goods' has been added along with the word 'supply'.
Tax Fraud
At present, any act done knowingly, dishonestly or fraudulently and without having any lawful excuse with the intention of 'understatement', 'underpayment', or 'suppression' of tax liability constitutes a 'tax fraud'. However, the present law does not expressly treat 'non-payment' of sales tax as an act of 'tax fraud'.
The expression 'non-payment' is, therefore, being proposed to be added to the relevant provision. This amendment needs to be examined in legal sense. Non-payment unless coupled with 'mens rea' cannot be considered as a 'fraud'.
Value of Taxable Service
Value of taxable service is, presently, taken equivalent to the consideration in money that a service provider receives from the recipient of the service. This also includes all duties and taxes (other than sales tax).
The Bill now proposes to amend the basis for levy from mere 'consideration' to 'gross consideration'.
Registration
An 'explanation' is proposed to be inserted in provisions relating to 'registration' in order to clarify that no person shall be absolved of any tax liability accrued under the Act owing to mere non-registration with the Authority.
Time Limitation Extended For Recovery of Taxes
As per the existing provisions, department can initiate recovery proceedings in respect of non- payment or short payment of tax within three years.
The period is proposed to be enhanced up to five years.
Recovery of Sales Tax Arrears
In connection with recovery of any tax demands, penalties under the Act or the rules made there under, the tax authorities are being empowered with the same powers as are available to a Civil Court under the Code of Civil Procedures, 1908 for recovery of an amount due under a decree.
Offences and Penalties
The Bill proposes following amendments in penal provisions:
Penalty regarding failure to make an application for registration is enhanced from Rs 10,000 to Rs 50,000, or 5% of the tax involved (whichever is higher).
Recipient of services is also made liable to pay penalty of Rs 25,000 or 100% of tax payable in case of non-payment of due tax, being an act of obstruction in the performance of duties by tax authorities. [This amendment seems inappropriate in the contextual background].
Financial Services
Owing to dispute with regard to the scope of financial services, entry relating to financial services is proposed to be substituted in order to bring clarity:
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Existing Proposed
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Services provided by Services provided by
Banking Companies or banking companies,
Non-Banking Financial cooperative financing
Institutions including societies, modarbas,
but not limited to all musharikas, ijarahs,
non-interest based leasing companies,
services provided non-banking financial
against consideration institutions and other
in form of a fee or persons, businesses or
commission or charge. Enterprises providing
or dealing in any such
services.
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Construction Services
Construction projects (industrial and commercial) of the value not exceeding Rs 50 million are currently not taxable. It is, however, not clear whether the said threshold is time- specific or project-specific.
Now, it is proposed to clarify that the threshold of Rs 50 million is to be considered on annual basis.
LUXURY TAX
A one-time tax was levied on urban residential properties above 2 kanals last year. Fixed tax was imposed on the basis of size of properties. This year, the rates are proposed to be revised on the basis of location and size of the residential houses.
The tax is payable either on lump sum basis on or before September 30, 2014, or in four equal quarterly instalments with first instalment payable on or before September 30, 2014. In case of lump sum payment, a rebate of 10% is permissible.
Luxury tax previously paid under section 10 of Punjab Finance Act 2013 would, however, be adjustable towards the new tax liability.
Following properties are allowed exemption from the luxury tax:
Residential house constructed prior to January 1, 2001.
Existing residential house inherited prior to July 1, 2014.
Residential house owned by a widow by way of inheritance and used for her permanent residence. If the widow owns more than one residential house then the exemption is available only in respect of one residential house.
STAMP DUTY
Stamp duty on transfer of immovable property is proposed to be enhanced from 2 per cent to 3 per cent of the value of property.
Registration fee in respect of immovable property is proposed to be reduced from one per cent to Rs 500 / Rs 1,000.
The government intends to revise the valuation list of properties as required under the Punjab Urban Immovable Property Act, 1958. The revised list will be enforced from July 7, 2014 for the purpose of assessing and collecting property tax.
SINDH FINANCE BILL 2014
Reduction in General Sales Tax Rates
There is a proposal in the Sindh Finance Bill, 2014 to reduce the existing general rate of 16 to 15 per cent for all the services other than the telecommunication services which will continue to be chargeable to tax at the rate of 19.5 per cent.
Proposed addition in Taxable Services
Certain new definitions are proposed to be inserted in the Act.
The following services are proposed to be taxed as per the Finance Bill, as the same are to be included in the Second Schedule to the Act, being the description of taxable services:
-- Classified advertisements
-- Tour operators
-- Recruitment agents
-- Share transfer agents
-- Services provided or rendered in the matter of purchase or sale or hire of immovable property
-- Services provided or rendered by Property dealers
-- Services provided or rendered by Car or automobile dealers
-- Services provided or rendered by laundries and dry cleaners
-- Interior decorators
-- Medical and dental practitioners and consultants
-- Technical, scientific and engineering consultants
-- Services provided or rendered by pathological laboratories
-- Services provided or rendered by medical diagnostic laboratories including clinical and radiological laboratories, X-Rays, ultra-sound, CT scan, MR Imaging, etc.
-- Rent a car and automobile rental service
-- Cable TV operators
-- Technical testing and analysis service
-- Services provided or rendered by registrar to an issue
-- Workshops for electric or electronic equipments or appliances, etc, including computer hardware
-- Car or automobile washing or similar service stations
-- Fumigation services
-- Maintenance or cleaning services
-- Janitorial services
-- Services provided or rendered by programme producers and production houses
-- Services provided or rendered by corporate law consultants
-- Services provided or rendered by fashion designers
-- Services provided or rendered by call centres
-- Services provided or rendered by persons engaged in inter-city transportation or carriage of goods by road or through pipeline or conduit
-- Education services
-- Services provided or rendered by hospitals and clinics
-- Enhancement in the power of the Board
The Board can now exercise following powers without the approval of Sindh Government:
a) Determining conditions under which a particular service or class of services will be considered to be provided by a person from his registered office or place of business in Sindh.
b) Specifying the services or class of services in respect of which the liability to pay tax shall be on the person providing the taxable service / person receiving the taxable service / any other person.
c) Allowing registered person to claim adjustments, deductions and refunds in respect of sales tax paid on or in respect of taxable services or class of taxable services provided by that person.
d) Providing exemptions to registered persons or class of registered persons from payment of penalty and default surcharge imposed under the Act.
e) Making rules for carrying out the purposes of this Act.
Economic Activity
It is proposed to bring more clarity in the definition of "Economic Activity" by including all activities undertaken by the person for the provision of services to another person whether on a continuous/ regular basis or otherwise.
Time, manner and mode of payment
Presently, the Act prescribes that the sales tax is to be paid by the person at the time of filing of return for the relevant tax period. However, the relevant rule requires that payment of sales tax to be made by 15th day of the month next following the tax period to which it relates, and the sales tax return is to be filed within 3 days of due date for the payment of sales tax.
The Act has now been brought in line with relevant rule, whereby sales tax shall be paid by a person by 15th day of the month next following the tax period to which it relates.
Records
Presently, a registered person is required to maintain and keep records of taxable services provided by him or by his agent in English or Urdu languages only. Now it is proposed that the record can also be maintained in Sindhi language.
It is proposed that the registered person whose accounts are subject to audit under any law including the Companies Ordinance, 1984 is required to submit a printed copy of the annual audited accounts to the Assistant Commissioner - SRB within 60 days from the date of audit report of the auditors. Presently, the law requires submission of annual audited accounts with SRB without specifying the time limit.
The issue of 'certification' by auditor of payment of sales tax by registered person needs to be resolved. In this regard, generally accepted auditing principles do not include 'certification' of information like complete discharge of tax liability of any person.
Appeals
The prescribed fee for filing an appeal with the Commissioner (Appeals) - SRB is proposed to be enhanced as under:
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Appellant Current Proposed
prescribed prescribed
fee fee
( Rs) (Rs)
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Company 1,000 2,000
Person other than company 200 1,000
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Decision in Appeal
Presently, the law provides that if the Commissioner (Appeals) -SRB has not passed an order within the prescribed time limit then the undecided appeal is deemed to have been allowed to the appellant.
The bill proposes to transfer the undecided appeals to the Appellate Tribunal for its decision, along with report by Commissioner (Appeals) - SRB giving reason for such transfer and duly intimating the appellant or his representative and Chairman of the Board.
Appellate Tribunal
At present, the Appellate Tribunal under the Act is not in existence. Nevertheless, following amendments are proposed:
Presently, the Appellate Tribunal consists of judicial and accountant members. It is proposed that the Accountant Members be replaced by Technical Members.
The Bill proposes to allow filing of appeal against revision order passed by the Commissioner SRB (under section 55) or by the Board (under section 56) before the Appellate Tribunal. Currently, the revision orders are not appealable.
It is expected that Appellate Tribunal will shortly come into existence.
CAPITAL VALUE TAX ON IMMOVABLE PROPERTY
Section 4 of the Sindh Finance Act, 2010, introduced capital value tax on the capital value of an immovable property payable by every person who acquires by purchase, gift, exchange, power of attorney (other than revocable and time-bound), an immovable property or a right to use thereof for more than twenty years, or renewal of the lease or any premium paid thereon.
The immovable properties for the purposes of Capital Value Tax (CVT) are classified into two categories:
a) Residential immovable property (recorded and unrecorded property value).
b) Commercial and Industrial immovable property situated in Sindh.
At present, immovable property, where the value thereof is recorded, is subject to CVT as prescribed percentage of recorded value; whereas CVT on immovable property, where the value is not recorded, is charged on the basis of prescribed fixed rates per square feet / yard.
Through the Sindh Finance Bill, 2014, it is proposed that the CVT on immovable property, where value is recorded, should be charged at the higher of:
a) recorded value of the property; or
b) value according to the Valuation Table.
In this perspective, Valuation Table means, "the Valuation Table notified under section 27-A of the Stamp Act, 1899 (Act No.II of 1899)."
REAL ESTATE INVESTMENT TRUST
It is proposed to levy CVT at the rate of 1 per cent of the market value on transfers of properties to the Real Estate Investment Trust.
Moreover, Registration Fee for all properties to be transferred in favour of Real Estate Investment Trust is proposed to be charged at the rate of 0.5% of the market value of the property; at present the transfer of immovable property in Sindh is liable to registration fee at the rate of 1% of the property value.
In this regard 'market value' has been defined to mean, "...the fair value of the property to be determined by the authority notified by the Board of Revenue Sindh in consultation with Finance Department; provided that such market value shall not be below the value specified in Valuation Table".
STAMP DUTY
The Stamp Act, 1899, is a federal legislation, however the rates of stamp duty are fixed by the Provincial Governments.
Sindh Finance Bill, 2014, has put forth a proposal to increase the rates of stamp duty on certain documents.
Sindh Finance Bill, 2014, in addition to the proposal of increasing the rates of stamp duty, has proposed a considerable change in the classes of documents that, if the proposal is accepted, will fall within the ambit of dutiable instruments.
Allotment Order or Transfer of Allotment Order
Allotment Order or Transfer of Allotment Order issued by a developer, builder, co-operative society, housing society or housing authority, or any other body or organisation providing before lease, at present, are only dutiable in respect of open plots.
It is proposed to introduce a new category in Schedule I, Article 4, for Allotment Order or Transfer of Allotment Order issued by aforesaid persons / entities in respect of built-up properties liable to be stamp duty as follows:
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Description Rate
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(i) Residential house Ten rupees per Sq. ft.
(ii) Residential flat Five rupees per Sq. ft.
(iii) Commercial Offices/Premises Fifteen rupees per Sq. ft.
(iv) Industrial units/factories Fifteen rupees per Sq. ft.
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Moreover, an increase has been suggested regarding the rates at which stamp duty is being charged on Allotment Order or Transfer of Allotment Order in respect of open plots as follows:
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Description Current Proposed
rate rate
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(i) Residential Plots:
(a) upto399 Sq. yds. Rs.10 per Rs.15per
Sq. yd. Sq. yd.
Rs.20 per Rs.30 per
(b) 400 Sq. yds or above Sq. yd. Sq. yd.
(ii) Residential plots Rs. 30 Rs.40 per
(termed as Commercial open per Sq. yd. Sq. yd.
plots in the existing Schedule)
(iii) Industrial plots Rs.5 per Rs.20 per
Sq. yd. Sq. yd.
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Contract (Schedule I, Article 15)
Amendment has been proposed to extend the scope of documents that fall within the description of 'contract' from contracts relating to 'engineering consultancy' to 'any other services' as well chargeable to stamp duty at the rate of thirty paisa for every 100 rupees or part thereof of the amount of contract.
Instrument of Gift (Schedule I, Article 20)
It has been proposed through the Sindh Finance Bill, 2014, that gift instruments of (not being settlement or will or transfer) executed between spouses, father, mother, son, daughter, grandparents, grand children brother and sister, should be subjected to stamp duty at the rate of one fifth of the duty leviable on Conveyance [(No.16-A(iii) - which at present is 2 per cent of the value in accordance with the valuation table]; whereas such instrument, if executed between persons other than the above, is proposed to be subject to stamp duty at the rate as applicable on Conveyance [(No.16-A(iii)].
At present, an affidavit/declaration in writing confirming an oral gift is chargeable at the rate of one tenth of the duty leviable on Conveyance (No.16-A(iii), if made in favour of a legal heir, and at the rate of 3 per cent if made in favour of any person other than a legal heir, of the value of property determined in accordance with the valuation table
Lease (Schedule I, Article 21)
In Schedule I, Article 21 (i) Open plots are suggested to be included in the categories of properties subjected to stamp duty for which lease instrument is to be drawn out. Moreover, it also proposes to substitute the existing slab rates of stamp duties with a flat rate of 1 per cent as per valuation table.
It is also suggested in Schedule I, Article 21 (ii) that surrender of a lease, sub-lease and pre lease of open property in urban areas is also charged to stamp duty in addition to built-up properties.
A reduction in the rate of stamp duty has also been proposed regarding instruments of surrender of lease as follows:
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Current rate Proposed rate
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3 per cent of such 2 per cent of such
value determined in value determined in
accordance with the accordance with the
valuation table. Valuation table
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Settlement (Schedule I, Article 30)
It is proposed that any Settlement instrument (including a deed of dower), other than where the settlement is made for charitable or religious purpose, should be liable to either 2 per cent of the value in accordance the valuation table under sections 27-A and 27 B or 5 per cent of the value of moveable property settled.
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