Workshop on Sales Tax Laws on Services
Part 1
Provincial Withholding Sales Tax on
Services (SST & PST)
Asif S. Kasbati, FCA, FCMA & LLB
Head of Group Taxation & Legal Affairs
Gatron Group of Companies
Ex-Director Tax Services
A. F. Ferguson & Co.
PTBA & KTBA - March 21, 2014
At Marriott Hotel, Karachi
1
INDEX
Provincial Withholding
Sales Tax in Sindh &
Punjab
Exemption and
Reduced rates in SST &
PST
Federal Withholding
Sales Tax
3
CONCEPT in SST and PST
Withholding Sales Tax is envisaged
on acquiring taxable services falling
under the Second Schedule
Other services are not subject to
WHT
4
Withholding Agents
1. Federal and Provincial government, local and district
governments;
2. Autonomous bodies;
3. Public sector organizations, public corporation, state
owned enterprises and regulatory bodies;
4. Organizations funded wholly or partly out of budget grants
of Federal and Provincial Government;
5. Taxpayers falling in the jurisdiction of Large Taxpayers
Unit of Inland Revenue registered for sales tax, federal
excise duty and income tax; and
6. Recipients of advertisement services registered with
Federal Board of Revenue for goods or with Sindh Board
of Revenue for services.
5
Withholding Sales Tax – SST & PST
Service Recipient (withholding
agents)
Person registered in LTU and
Govt Organization.
Service Provider
Nature of
Services
Rate of
WHT
under
SST
Rate of
Reference
WHT
to SSTR &
under PST PSTR
Unregistered
person
Any taxable
services
100% of
Sales Tax
100% of
Sales Tax
3(3) / 5
Person receiving advertisement
services (Registered whether in
LTU / RTO for goods or SRB /
PRA)
Person providing
advertisement
services.
Advertisement
services
100% of
Sales Tax
100% of
Sales Tax
3(4) / 6
Govt. Organization
Registered service
provider
Any taxable
services except
advertisement
1/5th of
Sales tax
100% of
Sales Tax
3(2) / 4
Person registered in LTU
Registered person
in RTO
Any taxable
service except
advertisement
1% of
value of
supply
Amount of 3(4A) / 7(1)
ST
mentioned
on Invoice
6
MECHANISM (cont..) – SSTR 3(3) & 3(4) / PSTR 5 & 6
Persons registered in LTU and Govt. Organizations
acquiring any taxable services from unregistered person
AND Persons receiving advertisement services:
Illustration
(Taxable services from unregistered person)
Value of taxable services including sales tax
Sales tax to be withheld @16%
(Rs 1,000 X 16% ÷ 116%)
Balance amount payable to unregistered
service provider (Rs1000 less Rs 138)
Rupees
1,000
(138)
862
7
MECHANISM – SSTR 3(2) / PSTR 4
Govt. Organizations, on receipt of any taxable services (except
advertisement services) from registered service provider:
Illustration
SST
PST
Value of taxable services excluding sales tax
1,000
1,000
Sales tax chargeable @ 16%
Sales tax to be deducted by the withholding
agents (160÷5)
Sales tax payable by the withholding agent
(160-32)
160
160
32
160
128
-
1,128
1,000
Balance amount payable to the service
provider
8
MECHANISM (cont..) – SSTR 3(4A) / PSTR 7(1)
Person registered in LTU, on receipt of any taxable
services (except advertisement services) from registered
service providers:
Illustration
Value of taxable services excluding sales
tax
Sales tax chargeable @16%
Sales tax to be withheld
Balance amount payable to the service
provider
SST PST
1,000 1,000
160
160
1,160 1,160
(10) (160)
1.150 1,000
9
CERTIFICATE
A certificate of tax deduction under
SST / PST is also required to be
furnished to the service provider as
per Rule 3(9) / 10 on Form SSTW06 / PST - format of certificate is
not yet prescribed
10
Increase in list of Taxable Services
Continuous tax burden on us
11
PENALTY AND DEFAULT SURCHARGE
Penalty- Varying penalties as provided under
Section 43/48 of the SST/PST at serial nos. 2, 3 or
12. The exposure ranges from Rs. 5,000 to Rs.
10,000 and 3 to 5% of the amount of the tax
involved.
Default Surcharge- SST S.44&PST S.49
(a)
(b)
General : @ Inter-Bank Rate plus 3% per
annum of the amount of tax due; and
If default is on account of Tax Fraud: @ 2%
per month, of the amount of tax evaded, till
such time the entire liability including the
amount of default surcharge is paid.
12
Exemptions - SST
Exemptions under Notification no. SRB-3-4/7/2013 dated June 18,
2013 subject to conditions therein
Tariff Heading
9801.2000 & 9801.5000
Respective headings under 98.02
9809.0000
Respective headings under 98.13
Services
Restaurants and caterers having
turnover not exceeding 3.6M
Subject to conditions
Advertisement through grant-inaid
Services by NADRA for utility
bills collection
Banks and NBFC for Hajj and
Umrah , cheque book and others
14
Exemptions - SST
Tariff Heading
Services
9801.3000
Services rendered by
marriage halls
9802.4000
advertisement in newspaper
and periodicals
9810.0000
hair cutting salons and
beauty parlors
9813.1400/9813.1500/9813.1600
Insurance
15
Exemptions - SST
Tariff Heading
Services
9801.4000 & 9801.6000
Services provided by clubs to
its members and charges
received as security deposit
9809.0000
Contractual execution of work
98.12
Telecommunication and
internet service charges
9820.1000
Auto workshop and authorized
service stations
9824.0000
Specified construction services
16
Exemptions - PST
Exemptions under the Second Schedule of PST - subject to
conditions therein
Tariff Heading
Services
9802.1000 & 9802.2000
Advertisement sponsored by an
agency of the FG/PG / financed
out of funds by Government
under grant-in-aid / conveying
public service message
Internet services and charges for
98.12, 9857.0000 and 9858.0000
international leased lines
Marine, life, health and crop
98.13
insurance
9824.0000 and 9814.2000
Specified construction services
17
Exemptions - PST
Tariff Heading
Services
Actual purchase value or
9807.0000
documented cost of land
Contractual execution of work or
9809.0000
Furnishing supplies
Value of currency in respect of
9813.9000 and 9819.2000
services provided by foreign
exchange dealer
9810.0000, 9848.0000, 9847.0000,
Services provided by beauty
9821.4000 and 9821.5000
parlors
Amount received by way of fee
9838.0000
under any law by port operating
and allied services
Hajj and Umrah services
9805.5100
provided by tour operators 18
Exemptions - PST
As per notification No. PRA/Caterers.21/2012
dated November 25, 2013, Exemptions from
levy of Sales Tax has been granted to services
provided by standalone caterers to the extent
of 11% from the rate of tax subject to the
conditions mentioned therein.
19
Reduced Rate - SST
List of reduced rate services as per Notification no. SRB-3-4/8/213 dated July 1, 2013 subject to conditions therein
Tariff Heading
Services
Rate
9805.3000
Freight forwarding agents Rs. 500 per
bill of lading
9807.0000 & 9814.3000
Property developers or
Rs. 100 / Rs.
promoters
50 per
square yard /
square foot
9810.0000, 9821.4000 and
Beauty Parlors etc.
10%
9821.5000
9815.2000
Legal practitioners and
4%
consultants
20
Reduced Rate - SST
Tariff Heading
Services
Rate
9815.3000
Accountant and
auditors
4%
9815.9000
Tax consultants
4%
9818.1000
Security agency
10%
9824.0000
Construction
services
4%
21
Contractual execution of work or furnishing
supplies - 9809.0000
KTBA understands that the above
classification is considered too wide, vague
and unwarranted as it virtually covers
every facet of business. On the basis of this
entry, entire 2nd
Schedule becomes
redundant.
As such, the entry be deleted from the
Second Schedule.
22
Contractual execution of work or furnishing
supplies - 9809.0000
1. Exemption
If both the following conditions are met:
(a) total value of such work or supplies does not
exceed Rs. 50M in a financial year and
(b) the value of service component of such
contractual execution of work or furnishing
supplies also does not exceed Rs. 10M
23
SST issues & KTBA views – 9809.0000
(Letter dated November 27, 2013)
(a) Services forming part of a composite contract is
taxable only if the same fall under the “taxable services”
listed in the Second Schedule and embedded in contract
for execution of work or furnishing supplies
(b) Value to each contract with Contractee (and not all
contracts of a Contractor) is to be considered for the
levy of SST; otherwise it will result in withholding tax
issues, as the Contractee may not be aware of the value
of other contracts of the Contractor
24
SST issues & KTBA views – 9809.0000
(Letter dated November 27, 2013)
(c) Value to each contract entered into by the
Contractor is to be considered separately
(d) Exemption threshold is applicable on the
basis of work performed in any financial year
25
SST issues & KTBA views
(Letter dated November 27, 2013)
Reduced rate on Construction contracts - 9824.0000
KTBA is of the view that services provided by a
contractor engaged in a single contract for the
construction of building including other works i.e.
civil, electrical and mechanical works will fall under
the heading 9824.0000 (construction services).
Such contractor may opt for charging sales tax at the
reduced rate of 4% under notification No. 3-4/8/2013
dated July 1, 2013 for the whole of contract.
26
DRAFT NOTIFICATION
Notifications are generally being issued
without first issuing the Draft for the same,
for comments by the Stakeholders.
It is recommended that prior to issuing
Notifications, the Draft Notifications be
issued for comments by the Stakeholders
and final notification be issued after atleast
15 days.
27
DRAFT LAW
“I wish that the law making body shall
frame the laws after deliberations which is
an additional duty cast upon the law making
body in terms of the Article 2-A of the
Constitution. The same is in accordance
with the
 Injunctions of Islam and
 Doctrine of Expectation of Consultations
…”
Hon’ble Justice Chaudhry Ijaz Ahmed
28
Workshop on Sales Tax Laws on Services
Part 3
Federal Sales Tax Withholding Rules 2007
FST - SRO 660 of 2007
Asif S. Kasbati, FCA, FCMA & LLB
Head of Group Taxation & Legal Affairs
Gatron Group of Companies
Ex-Director Tax Services
A. F. Ferguson & Co.
PTBA & KTBA - March 21, 2014
At Marriott Hotel, Karachi
29
Withholding Agents
1. Federal and Provincial Government
Departments
2. Autonomous bodies
3. Public sector organizations
4. Companies as defined in the Income Tax
Ordinance 2001, which are registered for FST,
FED or income tax
5. Recipients of service of advertisement, who are
registered for FST; and
6. Registered Exporters
30
Company as per Income Tax Ordinance
1. Company as
Ordinance
defined
in
the
Companies
2. Body corporate formed by or under any law in
force in Pakistan
3. Modaraba
4. Body incorporated by or under the law of a
country
outside
Pakistan
relating
to
incorporation of companies
5. Trust
6. Non Profit Organization
31
Company as per Income Tax Ordinance
7. Co-operative Society or Finance Society or any
Other Society established or constituted by or
under any law for the time being in force
8. Foreign Association, whether incorporated or not,
which the Board has, by general or special order,
declared to be a company for the purposes of this
Ordinance;
9. Provincial Government;
10.Local Government in Pakistan; or
11. Small Company as defined in the Income Tax
Ordinance 2001.
32
Advertisement Services, ST shown on the
invoice i.e. from Registered person
Description
Value of Advertisement services
excluding ST
Amount Rs.
1,000
ST chargeable @ 16%
160
Amount as per invoice
1,160
ST to be deducted by the WA
160
Balance amount payable to the Service provider by the
WA Rs 1,000
FED, BSTO, ICTO: 16%
33
Example : Registered service provider (service
other than advertisement, if applicable)
Description
Value of services excluding ST
Amount Rs.
1,000
ST chargeable @ 16%
160
Amount as per invoice
1,160
ST to be deducted by the WA
i.e. Rs. 160 ÷ 5 or Rs. 1,000 x 3.2%
32
Balance amount payable to the supplier by the WA Rs 1,128.
FED, BSTO, ICTO: 16%
34
Advertisement from Unregistered person
Nature of
Services
Withholding
Agent
Rate of
Withholding
Tax
Advertisement
Services (received
other than from
Sindh, Punjab,
KPK)
Recipient of
advertisement
services,
registered for
sales tax
Applicable rates
of sales tax
35
Advertisement Services ,ST not shown on the
invoice i.e. from Unregistered person
Description
Invoice value
ST @ 16 % to be deducted by the
WA
(1,000/116 x 16 )
Amount Rs.
1,000
138
Balance amount payable to the Service
provider by the WA Rs 862
FED, BSTO, ICTO: 16%
36
Receiver not registered for FST
If the recipient of advertisement
services is not registered under Sales
Tax Act 1990, it can be argued that
the recipient will not withhold tax.
For instance, certain governments,
autonomous bodies, etc. will pay off
the gross sum back to the channel /
agency.
37
Exemptions from ST WHT
1. Electrical energy;
2. Natural gas;
3. Petroleum products as supplies by
petroleum production and exploration
companies, oil refineries and oil
marketing companies;
4. Mild steel products;
38
Exemptions from ST WHT
5.
Products made from sheets of iron or nonsteel alloy, stainless steel or other alloy
steel;
6.
Paper, in rolls or sheets;
7.
Plastic products including pipes;
8.
Vegetable ghee and cooking oil; and
9.
Telecommunication.
Issue: Interpretation may be link to the
Tariff Heading.
39
Deposit of ST by Registered WHT Agents
1. Withholding tax agents registered under
ST or FED shall deposit withheld sales tax
on the 15th of the month following the
month in which tax deduction was made.
2. Declaration of withheld tax shall be made
in monthly tax return.
Issue: Tax withheld by the buyer is not
adjustable against own refundable.
40
Deposit of ST by Unregistered WHT
Agents
Withholding tax agents, not otherwise
liable to register under ST or FED, shall
deposit such withheld tax on return set
out in Annexure to SRO 660 and deposit
such tax on the 15th of the month
following the month in which tax
deduction was made.
41
Other Legal, Compliance & Business Issues
A. Adjustment of Tax Deduction and
Certificate
B. Conversion of Corporates to AOP /
Individuals
C. Multiple registrations of AOP / Individual
D. Input Tax Credit vs. Tax Withholding
E. ST on Advance
F. Refund of withheld tax
42
Other Legal, Compliance & Business Issues
G. Issues relating to Excisable services
H. No WHT as per Baluchistan and
Islamabad Service Ordinances
I. Amendment required in Section 8B of
FST
J. Petition against FST and Interim relief
K. Penalty for non-compliance
43
A1 Adjustment of Tax Deduction and Certificate
1. A registered supplier is entitled to claim
tax credit of withheld tax on the basis of
certificate of deduction issued by the
corresponding withholding agent.
2. No specific format of such certificate is
prescribed in the rules.
Issue: Prescribed certificate is not
notified.
44
A2 Monthly Certificate Suggested
1. Certification about tax withheld.
2. Certification to deposit withheld sales tax
for the month by 15th of the following
month.
3. Certification to provide copies of the
relevant pages of submitted version of the
e-Forms, if required by Seller
SST: Only Point 1 Covered
PST & FST : Format required
45
A3 Reason for certification format
1.Ensure timely deposit of
withheld
tax
2.Practical issue of following up for
cheque first and then following
up for certificate.
3.Avoid cash flow issue next month
as applicable in case SST format
which required to issue certificate
after deposit of tax.
46
B. Conversion of Corporates to AOP /
Individuals
• Corporate withholding agents might start
/ shift business in the name of AOP /
Individuals; thus, corporatization would
be hampered and adversely affected.
• Manufacturers / Importers might prefer
sales to unregistered sectors or to AOPs /
Individuals who not required to withhold
tax.
47
C. Multiple registrations of AOP /
Individual
• In many cases, businesses conducted by
Individuals
/
AOPs
have
multiple
registrations, e.g., importer-cum-wholesalercum-exporter, etc. However, such businesses
may not be practically engaged in Exports at
all.
• In such cases, such Individuals / AOPs may
either need to change their registration
particulars; otherwise they would be
considered as a withholding agent due to their
status as ‘Exporter’ too.
48
D. Input Tax Credit vs. Tax Withholding
1. The registered buyer is entitled to claim input
tax credit in the related tax period on accrual
basis.
2. WHT is to be deducted at the time of making
payment to the supplier. Delayed payment to
supplier does not affect the right to claim
withholding tax credit. However, system
restrictions do not allow such credit.
49
D. Input Tax Credit vs. Tax Withholding
3. In respect of withholding agent (other than
service provider) under SRB and registered
under FBR, withholding SST is required to be
deposited by 15th day of the month following the
period in which he claims input tax adjustment
in FBR Return or payment is made, whichever is
earlier.
50
E. Sales Tax on Advances and
Withholding Tax
1. Section 2(44) requires collection of sales tax at
earlier of the time the goods are delivered or
the time any payment is received
2. Sales Tax General Order (STGO) 1 of 2006
dated June 5, 2006:
(a)Chargeability, collection and deposit of
sales tax against advance payment on the
basis of “Advance Payment Receipt” which
is deemed to be a sales tax invoice
51
E. Sales Tax on Advances and
Withholding Tax
(b)Sales tax is to be withheld and deposited on
the basis of “Advance Payment Receipt”
(c)Issuance of Sales Tax Invoice under section
23 of the Sales Tax Act, 1990 at time of actual
delivery of goods
52
F. Refund of Withheld Tax
1. Section 10 of the Act deals with input tax
carried forward & export refunds
2. Section 66 of the Act deals with refund cases
where tax was paid in inadvertence, error or
misconception or input tax adjustments not
claimed within 6 months’ period
3. No specific provision exists in the statute to
claim refund of withheld tax !
53
G. Issues relating to Excisable services
FED items under Sales tax mode are covered
under SRO 550(I)/2006 dated June 5, 2006.
These are not subject to Withholding Sales
Tax due to ---1. Withholding tax regime is framed under
FST and not FED
2. There is no concept of Withholding ax
under FED law
54
H. No WHT as per Baluchistan and Islamabad
Service Ordinances
In KTBA views, Services subject to
Baluchistan and Islamabad Capital Territory
Ordinances are not subject to withholding
sales tax as __
 Withholding tax regime is under FST and
not under the Ordinances
 There is no concept of withholding sales tax
under these Ordinances
55
I. Amendment required in Section 8B of FST
• Registered persons are restricted to
adjust input tax in excess of 90% of
output tax i.e. 10% mandatory payment
• Whilst e-filing the return, Sales tax
suffered @ 20% or 10% on own supplies
is adjustable against the above, to which
we agree
• Section 8B is required to be amended to
be in line with E-filing system
56
J. Petitions against FST and Stay order
1. Be Be Jan Colours VS FBR – WP 11939/13 - LHC
stay order of May 2013 – Suspended to the extent
of petitioner
2. Adnan Powers & Others – D-3445/13 – SHC
order of August 2013 – No adverse action
57
FST WHT - Legal Grounds of Petition and Stay order
1. Beyond the powers of the Federal
Government (FG) as envisaged under
Section 3(6) of ST Act to tax only
supplies and goods
2. Ultra vires to the Constitution as it only
empowers the FG to levy sales tax on
goods
58
FST WHT - Legal Grounds of Petition and Stay order
3. Contradictory
to exemption under
Serial no. 3 of the Sixth Schedule
available to retailers and cottage
industry having turnover less than Rs
5M
4. Withholding Rules are in violation of
Article 18 (Fundamental Rights) of the
Constitution.
59
FST WHT - Legal Grounds of Petition and Stay order
5. Discriminatory
and in violation of
Article 25 (Fundamental Rights) of the
Constitution, being applicable to
selected registered persons;
6. Impracticable to advertise / notify that
the payment will be subjected to sales
tax withholding;
60
FST WHT - Legal Grounds of Petition and Stay order
7. Person deducting the tax is not allowed
to take credit of tax withheld on
payment to unregistered persons;
8. Collection
of sales tax more than
amount that
would be the actual
sales tax liability;
61
K. Penalties For Non Compliance
1. Non-compliance of the Withholding Tax may
result in invoking of section 8A - Joint and
several liability of registered persons in supply
chain where tax remained unpaid as well as
levying varying penalties as provided under
Section 33 of the Sales Tax Act, 1990.
2. Relevant Serials of section 33 are 5, 17 or 19. The
penalty exposure ranges from Rs. 5,000 or 3% of
the amount of tax involved to Rs. 10,000 or 5%
of the amount of the tax involved, whichever is
higher.
62
Penalties For Non Compliance
3. Penalty should not be levied till it is proved that
the supplier has also defaulted in his liability to
the state and a revenue dent was caused to the
exchequer.
63
“Taxes, after all, are dues that we pay
for the privileges of Membership in an
Organised Society.”
Franklin D. Roosevelt – 1936
_____________________
“In the world, nothing can be said to be
certain except Death and Tax.”
Benjamin Franklin - 1789
64
Q&A Session
66
EMAIL CONTACTS
Name
Email address
K.T.B.A
itbarkhi@cyber.net.pk
Mr Asif S Kasbati
asifskasbati@gatronova.com
Mr Adnan Mufti
adnan.mufti@shekhamufti.com
Mr Asif Haroon
asif.haroon@pk.pwc.com
Mr Haider Patel
Haider.A.Patel@pk.ey.com
Mr Zeeshan Merchant
zeeshan@mmmerchant.com
67
Thank You &
Allah bless you