Sales tax withholding comparison and exceptions under federal and provincial sales tax laws

Sales tax withholding comparison and exceptions under federal and provincial sales tax laws.

Rules relating to sales tax withholding and exception therefrom under federal and provincial sales tax laws are summarized hereunder:

1. Supply of goods (in any territory) and rendering of services in Islamabad:

For supply of goods (in any territory) and rendering of services in Islamabad, sales tax is withheld;

• @ 20% of the sales tax charged in the invoice by a registered vendor; and
• @ 1% of the gross invoice amount from a vendor that is unregistered but liable to be registered.

However sales tax withholding will not apply to the supplies of the following goods and services if made by a registered person, namely:–

(i) Electrical energy;

(ii) Natural gas;

(iii) Petroleum products as supplied by petroleum production and exploration companies, oil refineries, oil marketing companies and dealers of motor spirit and high speed diesel;

(iv) Registered persons paying sales tax under Chapter XI of the Sales Tax Special Procedure Rules, 2007, except those paying sales tax on ad valorem basis at standard rate;

(viii) Vegetable ghee and cooking oil;

(ix) Telecommunication services ;

(x) Goods specified in the Third Schedule to the Sales Tax Act, 1990;

(xi) Supplies made by commercial importers who paid value addition tax on such goods at the time of import as prescribed under Chapter X of the Sales Tax Special Procedure Rules, 2007; and

(xii) Supplies made by active taxpayer as defined in STA 1990 to registered person except for advertisement services.

2. Services obtained in Punjab:

For services obtained in Punjab, sales tax is withheld

• @ 100% of sales tax charged in the invoice by a registered vendor; and
• @ 100% of applicable rate of sales tax, if services are obtained from unregistered vendor that is liable to be registered.

Sales tax withholding shall not apply to

• Telecommunication,
• Banking,
• Courier,
• Insurance, and
• Services, other that the advertisement services, provided by corporate sector persons registered with the authority.

3. Services obtained in KPK:

For services obtained in KPK, sales tax is withheld:

• @20% of sales tax charged in the invoice, if services are received from registered vendor who is also active for sales tax.
• @100% of sales tax charged in the invoice, if services are received from registered vendor who is inactive for sales tax.
• @ 100% of applicable rate of sales tax, if services are obtained from unregistered vendor that is liable to be registered.

4. Services obtained in Sindh:

For services obtained in Sindh, sales tax is withheld:

• @20% of sales tax charged in the invoice, if services are received from a registered vendor.
• @ 100% of applicable rate of sales tax, if services are obtained from registered vendor and the amount of sales tax is not indicated on the invoice.
• @ 100% of applicable rate of sales tax, if services are obtained from unregistered vendor that is liable to be registered.

Sales tax withholding shall not apply to:

• Telecommunication,
• Banking companies,
• Financial institutions, insurance companies (other than re-insurance).
• Port operator,
• Airport operator,
• Terminal operator,
• Airport ground services.

5. Services obtained in Balochistan:

• @20% of sales tax charged in the invoice, if services are received from a registered vendor.
• @ 100% of applicable rate of sales tax, if services are obtained from unregistered vendor that is liable to be registered.

Sales tax withholding shall not apply to:

• Telecommunication,
• Banking companies,
• Financial institutions, insurance companies (other than re-insurance).
• Port operator,
• Airport operator,
• Terminal operator,
• Airport ground services.

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FBR-PRA Joint Body to Settle Toll Manufacturing Sales Tax Issue

LAHORE: The Federal Board of Revenue (FBR) and the Punjab Revenue Authority (PRA) have finally agreed to constitute a joint committee for settling their longstanding dispute over who should collect sales tax from toll manufacturers who add value to product(s) for others.

Squeezed between the two tax administrators, many factory owners have filed cases against the provincial tax collector in the courts to avoid double taxation.

The dispute arises out of different interpretation or definition of toll manufacturing employed by the FBR and PRA to suit their interests. For example, the FBR considers toll manufacturing a ‘goods producing activity’ and collects sales tax (on goods) from the manufacturers under the federal Sales Tax Act, 1990 that deals with tax on sale, import, export, production, manufacturing and consumption of goods.

The PRA, on the other hand, classifies the same activity as a ‘service’ and has issued show-cause notices to scores of factory owners for not “withholding and paying 16 per cent provincial sales tax on toll manufacturing” in spite of a clarification by the FBR in January 2016 that it was not a service.

“We have received a letter from the FBR for naming our representatives on the proposed joint committee to discuss the issue (and determine who – the federal government or the province – actually has a legal claim on sales tax collection on toll manufacturing),” PRA Chairman Javed Ahmed told Dawn.

Manufacturers say the PRA has long been trying to extend its jurisdiction on areas such as toll manufacturing that are being treated by the FBR as its territory for charging federal sales tax from the industry.

“The authority has in the last two years issued show-cause notices to a large number of manufacturers across the province, raising tax demands to the tune of several hundred millions of rupees against each firm. This is despite the fact we are engaged in supply of goods and not services, and regularly paying sales tax on toll manufacturing to the FBR,” former Pakistan Hosiery Manufacturers Association (PHMA) chairman and leading knitwear exporter, MI Khurram, told Dawn.

Like the FBR, the manufacturers also insist that toll manufacturing is not a service as they are adding value to goods to be sold in the domestic or foreign markets, and thus the provincial sales tax law does not apply on them.

“The PRA demand to the extent of withholding (sales tax) on toll manufacturing is an encroachment on the power of federal legislature. When we are paying tax to the federal government how can the province also charge it from us? Besides, the constitution says the federal statuettes override provincial law to the extent of repugnancy or inconsistency,” he explained.

The dispute between the FBR and the PRA on toll manufacturing isn’t the only issue adding to the cost of doing business for manufacturers, especially exporters, in Punjab. The PRA is also claiming from them tax on the ‘foreign commission’ exporters pay outside the country and services like insurance they buy from a company based outside Punjab.

“When we buy a service from out of Punjab, say from a firm registered in Karachi with the Sindh Board of Revenue (SBR), the service provider charges us 13 per cent sales tax on service. But then enters the PRA demanding we pay it 16pc sales tax because we are located within its jurisdiction,” Mr Khurram said. “Consequently, the manufacturers-cum-exporters are forced to hire lawyers to file cases to avoid double taxation, which adds heavily to our costs.”

The PRA chief admits the existence of the problem, but says Punjab had taken an initiative with the help of other provinces to address this issue as early as possible.

Published in Dawn, March 23rd, 2019

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Difference between Sales Tax and VAT (Value Added Tax)

So, many people have questions regarding the difference between Sales Tax and VAT.

This is due to the fact that in countries where Sales Tax is applicable people are generally unaware of V A T whereas in the countries where VAT is applicable people are unaware of Sales Tax.

In simple words, Sales Tax is basically applicable on the goods and services on the retail price that is the end price whereas VAT on the other hand is applicable on all the stages of production of those goods that is manufacturing stage, distribution stage, wholesale stage, retail stage etc.

Unlike VAT, Sales Tax is imposed on the total value of goods and services purchased.

The Sales Tax is collected one time by the retailer whereas the Value Added Tax is collected by all the sellers at various stages of production.

Although, the burden of tax in both Sales Tax and VAT falls upon the end consumer, however, the payment of these taxes is made by all the purchasers in VAT as compared to single end consumer in the case of Sales Tax.

The rate of Sales Tax is generally high as compared to the rate of VAT due to the fact that the Sales Tax is applicable one time generally where as the VAT is applicable on various stages of value addition.

Both the taxes are indirect of nature. Also, the treatment of adjusting Input and Output taxes is also similar in both Sales Tax and VAT.

It is generally believed that the model of VAT as compared to Sales Tax is more effective as it brings all the stages of value addition under tax net where as in Sales Tax certain stages remain unaccounted for.

In general the rate of Sales Tax in various countries remains between 17% to 25% where as the rate of VAT fluctuates between 5% to 12%.

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