According to the provisions of Sindh Sales Tax on Services Act 2011, (hereinafter referred to as the Act), franchise services are chargeable to sales tax at the rate of 10%. These services include franchise fee, royalty and technical fee. A franchise means an authority given by a franchiser to a franchisee (under a contract) to produce, manufacture, sell or trade or to do any other business activity relating to goods or provide service or to undertake any process identified with the franchiser against a fee or consideration including royalty, technical fee, trademark, service mark, name, logo, brand name or any such symbol etc.
Sales tax is chargeable on the value of service, the value for the purpose of the levy of sales tax is the gross amount of franchise fee or royalty or technical fee remitted or paid to the franchiser under an agreement or the amount laid down in the franchise agreement.
Where franchisers are foreign or local beverages companies, and where there is no formal agreement between the franchiser or franchisee, the assessable value for the purpose of levy of sales tax is 10% of the value of concentrate supplied by the franchiser to the franchisee. However, in such cases where proper remittance or payment of fee or royalty is being made by the franchisee beverage company to the local or foreign franchiser under a proper agreement, the assessable value is the gross amount of fee or royalty remitted or paid to the franchiser or the amount laid down in the agreement.
For the food sector, in case of a proper franchise or royalty agreement, the assessable value for levy of sales is the gross amount of franchise fee or royalty remitted or paid to the franchiser or the amount laid down in the agreement. In case there is no formal agreement, the assessable value for levy of sales tax is 10% of the net sales of the franchisee.
Where the franchiser and franchisee are both locally-based the liability to deposit the franchise fee or royalty is upon the franchiser. The sales tax is payable on the 15th day of the month, following the payment month laid down in the franchise agreement. Where there is no date prescribed in the agreement or in case of no agreement, the tax is payable on the 15th day on quarterly basis. Any service provided in course of an economic activity within the province of Sindh or doing of a business activity relating to goods or services under a contract executed between the parties for a consideration is liable to tax.
In order to discharge their tax liability: The taxpayer is required to be registered with the Sindh Revenue Board. In case of the centralised accounting system in the Province of Sindh, the service provider is required to get a single registration, even if such a service is provided from more than one premises or office. For obtaining registration, an electronic request is to be made by filling the form SST-01.
Every registered person is required to file a tax return in the form SST-03 along with details required and in a specified manner. The taxpayer is authorised to claim adjustment or deductions, including refunds arising as a result of input tax paid on taxable services. The taxpayer may make monthly adjustment and the same is subject to reconciliation and audit.
Where adjustment claim exceeds 20% of the output, the claimant is required to file scanned attachments of the evidence on the basis of which the claim is being made. Where a tax return needs modification, the taxpayer is authorised to issue debit and credit notes to adjust the amount within a period of 90 days. The liability to charge the tax on service is on the service provider.
While determining the tax liability, the service provider is entitled to claim adjustment except where the utility bill is not in the name of the service provider. A taxpayer is required to issue serially numbered tax invoices. The taxpayer is also required to maintain prescribed records. These records will be subject to a yearly audit. The offences and penalties in respect of violations and offences committed have been specified within the framework of the Act.
Any service provided in course of an economic activity within the Province of Sindh including a business activity relating to goods or providing of service (under a contract executed between the franchiser and franchisee) for consideration is chargeable to sales tax. Having explained the existing legal framework for levy and collection of tax we now analyse a typical franchise agreement. This agreement may relate to an agency, distribution, sales support, development services and for licence and distribution work.
A) Agency and distribution We assume that an agency and the distribution agreement has been executed between Lipless International and Lipless Pakistan (Pvt) Ltd. This agreement consists of two parts, one relating to commission business and the other to distribution business. In both the cases Lipless Pakistan is entitled for payment of commission with a right to use trademarks of Lipless International. Though the payment for service rendered by Lipless Pakistan has been termed as commission and in case of commission business on the invoices issued by Lipless International directly to customers, the phrase used in the definition of franchise namely, "trade in or do any other business activity relating to goods for consideration on the payment of consideration" makes such transaction liable to sales tax. However, one can plead that merely acting as an agent or distributor will not bring the commission payment within the fold of chargeability to sales tax.
B) Sales support Now we take the case of sales support agreement entered into between Lipless International with Lipless Pakistan (Pvt) Ltd whereby Lipless Pakistan is to provide the field force to market and support the sale of products of Lipless International. And in addition to the reimbursement of the total cost of the expenses incurred by Lipless Pakistan, a mark-up (of minimum 5%) on the total sum incurred as cost by Lipless Pakistan is to be reimbursed by Lipless International to Lipless Pakistan. The definition of franchise provides that doing of business activity relating to the goods or to provide service against a consideration falls within the preview of the franchise and makes such a transaction liable to sales tax. However, it gives rise to question whether or not a financial agreement can be termed as franchise service.
C) Development of services There is another agreement between the parties providing that Lipless Pakistan will provide development services such as clinical development, health and economic studies by charging a mark-up of 8% in the form of fee on the cost incurred by Lipless Pakistan, and the same is to be reimbursed by Lipless International. A question will arise whether an agreement for business development can be termed as franchise within the framework of the definition of franchise? It can however be treated as a service provided by Lipless Pakistan. There is a likelihood that the tax authorities may treat it as franchise service resulting in a levy of sales tax.
D) Licence and distribution According to the licence and distribution agreement executed between Lipless Consumer Care and Lipless Pakistan (Pvt) Ltd, Lipless Pakistan has been granted the right to use trademark on local products manufactured by Lipless Pakistan on payment of license and royalty fee which comes within the definition of franchise and therefore liable to be charged to sales tax.
Having said that, it is submitted that in order to know whether or not tax is leviable, Lipless has to submit the copies of all the agreements to the specified authority who is empowered to direct Lipless to submit the agreement in order to ascertain the exact nature of franchise services for the purpose of levy of sales tax. At the same time contesting chargeability of sales tax is not easy on the payment made under an agency and distribution agreement or sales support agreement or development service agreement, on the ground that all the four agreements executed with Lipless Pakistan (Pvt) Ltd relating to their products are ancillary to the imported or locally manufactured goods, the tax on such services will be chargeable if the same are not exempt. The other issue would be the development work, ie, distribution of locally manufactured goods by using the trademark outside the province of Sindh. The tax will be payable on license fee being paid by Lipless Pakistan and the other remunerations received by Lipless Pakistan may not be chargeable to sales tax.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates)