Air travel, inland carriage services: FBR will keep collecting FED in VAT mode

The Federal Board of Revenue will continue to collect Federal Excise Duty in Value Added Tax (VAT) mode on two services ie travel by air and inland carriage of goods by air as these services are no longer part of Second Schedule (Taxable Services) of the 'Sindh Sales Tax on Services Act, 2011'.
Sources told Business Recorder on Friday that the FBR has deleted the excisable services mentioned in the Table-II of First Schedule to the Federal Excise Act, 2005 except travel by air and inland carriage of goods by air. The FBR has abolished the FED on services given in the Table-II of First Schedule to the Federal Excise Act, 2005 to remove confusion or ambiguity as now only provincial sales tax would be applicable on these services.
In case the FBR retains federal excise duty on these services, it would result into double taxation. Moreover, travel by air and inland carriage of goods by air falls within the jurisdiction of federal government. The FBR has sent the notification to the Law and Justice Division for vetting and would shortly issue it with the effective date from July 1, 2011. Resultantly, these services of the Table-II of First Schedule to the Federal Excise Act, 2005 would be subjected to provincial sales tax.
The FBR has abolished federal excise duty on advertisement on CCTV, advertisements on cable TV network, advertisements in newspapers and periodicals (excluding classified advertisements) of hoarding boards, poles signs and sign boards, shipping agents, telecommunication services, telephone services, fixed line voice telephone services, wireless telephone, cellular telephone, wireless local loop telephone, video telephone, payphone card, pre-paid calling cards voice mail service, messaging service, short message service (SMS), multimedia message service(MMS), bandwidth services [used for voice and video telecommunication vices], fiber-optic based, co-axial cable based, microwave based, satellite based, telegraph, telex, tele-fax, store and forward fax services, audio text services, tele-text services, trunk radio services, paging services, voice paging services, radio paging services, vehicle tracking services, burglar alarm services, services provided or rendered in respect of insurance to a policy holder by an insurer, including a re-insurer [in case where direct insurance services has been provided.] goods insurance, fire insurance, theft insurance, marine insurance, other insurance, services provided by banking companies or non-banking financial companies, services provided by property developers or promoters for development of purchased or leased land for conversion into residential or commercial plots, construction of residential of residential or commercial units, services provided or rendered by stock brokers, services provided or rendered by port and terminal operators in relation to imports excluding stevedoring services.
The official said that the FBR has not specifically compiled any list of services to be collected by the federal tax authorities or Sindh government as the FBR will collect sales tax on services as per Record Note already agreed among the provinces and the federation. Sindh government would authorise the FBR to collect sales tax on services mentioned in the GROUP-III of the Record Note. Sindh government would empower the FBR to collect sales tax on services that constitute a significant proportion of inputs into other supplies or involve transactions across provinces.
After authorisation, the FBR will be able to collect sales tax on financial services, including banking, insurance, stock market operations, etc, advertising services, construction services and franchising services. The FBR will also collect sales tax on other services that constitute a significant proportion as inputs into other supplies and involve transactions across provinces. All such services falling within the said category would also be collected by the FBR.
When asked whether the FBR has finalised list of services to be collected by the federal tax authorities, sources said that Sindh government would authorise the FBR for collection of sales tax on services of the GROUP-III of the Record Note. Through the Sindh Sales Tax on Services Act, 2011', the province can collect sales tax on services as per relevant schedule of the Act unless or until authorise the FBR to collect the same on the behalf of provincial governments.
Sources said that the proceeds of sales tax on telecommunication services shall be credited directly by telecom companies to the provinces on the basis of revenue generated on the basis of origin of call. The telecom services would operate within the system of the FBR but the telecom companies would directly credit the amount to provinces after input/output adjustment taking into account the origin of call. The telecom companies will continue to file their return with the FBR along with province-wise break-up of services originated from various provinces. The further modalities will be worked out by the FBR with the telecom companies in this regard.
Sources added that the province would collect sales tax on standalone services specified in the Group-I of the Record Note agreed between federation and provinces. The standalone services included such services that neither involve transactions across the provinces nor constitute a significant proportion as inputs into other supplies.
These services shall be deemed to be of a 'standalone' nature and neither input/output adjustment nor refunds will be provided for services in this group. As such every service provider even if is providing standalone services, will consume electricity, gas and telephone as part of their inputs.
It is therefore going to be a challenge for the provincial governments collecting tax on standalone services and allowing input adjustments of the tax paid on the electricity, gas and telephone without which the service providers will have to bear a lot of burden.
A statement of the FBR said that the services rendered by registered persons who were previously subject to Federal Excise Duty (being collected in Sales Tax mode) have now been subject to sales tax by the provinces through their legislation with effect from July 1, 2011.
The FBR through a notification has withdrawn Federal Excise Duty on such services (Table-II of First Schedule to the Federal Excise Act, 2005) with effect from the same date ie July 1, 2011 in order to avoid double taxation. However, the registered persons providing such services will continue to charge Tax/Duty and file Sales Tax Returns as before with certain amendments being worked out in Federal Board of Revenue and the registered persons shall face no difficulty for switching from Federal Excise Duty to the Sales Tax on Services receivable by the provinces, the FBR added.
When contacted, sources in Sindh government said that the Sindh government has given basic approval of the authorisation of certain services including financial institutions and non-banking financial intuitions, insurance, stock market operations, advertising services, construction services and franchising services. In this regard, the notification would be shortly issued by the Sindh government to authorise the FBR to collect sales tax on the said services. However, services provided by shipping agents and services provided or rendered by port and terminal operators in relation to imports except terminal fee would be collected by the province.
However, there is a serious confusion in the press release issued by the FBR regarding filing of returns by the registered persons. The FBR press release said, "However, the registered persons providing such services will continue to charge Tax/Duty and file Sales Tax Returns as before with certain amendments being worked out in Federal Board of Revenue and the registered persons shall face no difficulty for switching from Federal Excise Duty to the Sales Tax on Services receivable by the provinces", it added.
Sources said that how the FBR can use the word 'Duty' when the Federal Excise Duty has already been abolished on the excisable services through amendment in the Table-II of First Schedule to the Federal Excise Act, 2005. There is no question of collection of duty on services which now falls within the domain of provinces.
Secondly, why service providers should continue to file their sales tax returns with the FBR when the excise duty has been abolished and services falls within the jurisdiction of the provinces. How the service providers like terminal operators subjected to provincial sales tax would continue to file their sales tax returns with the FBR. The FBR must clarify that the word 'Duty' could not be used and sales tax returns of the service providers should be filed with the province, official from Sindh added.
A leading tax expert said that unless or until proper modalities and notifications from the both the sides have not been publicised the confusion would prevail. In order to remove ambiguity both the federal government and provincial governments should issue clear notifications in this regard. In the absence of notifications, it would not be clear about the applicability of the sales tax on services.