Mismatching federal, provincial classification systems troubling taxpayers seeking refunds
KARACHI: The mismatch between federal and provincial classification systems is generating significant practical difficulties for taxpayers seeking refunds from the Federal Board of Revenue (FBR).
Speaking at an event organized by the Karachi Tax Bar Association at RTO Karachi, Adnan Mufti, Partner at Moore Shekha Mufti, highlighted the complications arising from the unilateral updating of taxpayer profiles following SRB’s adoption of the CPC system.
The main issues identified include changes in tax rates and tax jurisdiction after profile updates. Mufti explained that while the Federal Board of Revenue uses ISIC codes for profiling business activities and HS codes for product classification, SRB has shifted to the CPC framework.
“Uploading of CPC-embedded SRB invoices for refund by an FBR taxpayer may generate queries as FBR uses HS Code,” Mufti stated, pointing to a fundamental mismatch between federal and provincial systems.
The broader nomenclature under CPC may also lead provincial revenue authorities to treat taxpayers’ businesses differently. For instance, services previously classified as “Indenters” are now categorized as “Retail Trade Service” while “Auctioneers & Automobile Dealers” fall under “Wholesale Trade Services”.
Several examples of conflicting classifications were presented at the seminar. Tax consultants and human resource consultants, previously classified under HS code 9815.9000, are now grouped under CPC code 8311 as “Management Consulting and Management Services”. Similarly, accounts and auditors have shifted from HS 9815.3000 to CPC 822 for “Accounting, Auditing and Bookkeeping Services,” Mufti said.
Corporate law consultants have moved from HS 9833.0000 to CPC 821 for “Legal Services,” creating potential confusion in tax treatment and compliance.
The Central Product Classification Version 2.1, published by the United Nations’ Department of Economic and Social Affairs, provides an international standard for gathering economic data. It features a five-level structure of exhaustive and mutually exclusive categories covering all goods and services, he added.
Under Sindh’s new framework, effective July 2025, a negative list approach has been adopted, making all services provided in the province taxable except those specifically exempted. The Act has introduced a much wider definition of “service” to encompass any activity, facility, utility, or advantage, including the granting, assignment, or surrender of any right.
Importantly, definitions of services have been omitted from the Act, with SRB now empowered to prescribe classification codes via the official gazette. The board has final authority to resolve disputes regarding service classification.
While Sindh has fully implemented CPC through SRO No.SRB-3-4/28/2025 dated July 1, 2025, other provinces show varying levels of adoption. Khyber Pakhtunkhwa has an enabling provision for CPC or HS adoption under Section 3(4), while Balochistan has similar provisions under Section 2(36A) and Section 78B. However, Punjab and Islamabad have not yet adapted to the system.
Mufti further said that CPC adoption aligns Pakistan with international practice. The European Union uses CPA (Classification of Products by Activity) adapted from CPC for VAT purposes. Countries including the United States, Canada, Australia, and India have incorporated CPC principles into their tax frameworks, either directly or through adapted systems.
The classification system aims to support compliance with IMF, World Bank, and WTO reporting requirements, expand the tax base by identifying untaxed or under-taxed services, and assist the Pakistan Bureau of Statistics in estimating GDP by product and value added in service sectors.
He highlighted that distinguishing between goods and services under CPC remains challenging in certain cases, including photographs, meals served in restaurants, shoe repair services, and products where embedded information is the essential component.
When services are classifiable under multiple categories, CPC rules require classification based on the most specific description, the service giving essential character to composite services, or the last category in numerical order when other criteria don’t apply.
Copyright Business Recorder, 2026