ARTICLE (June 03 2010): The sales tax, practically a value-added tax (VAT), was extended to services in 2000. According to the Constitution, the Federal government can levy sales tax only on the goods. In case of services only, provincial governments are entitled to levy sales tax.
To overcome this problem sales tax was levied as federal excise duty (FED) in VAT mode, on items mentioned in the Federal List of the Constitution like telecommunication, travel by air and train (air-condition and 1st class sleeper) etc. The VAT mode means that all sales tax provisions, necessary to implement sales tax, were made applicable on the collection of the FED on such services for instance sales tax paid on purchases, like telephone exchanges, was allowed to be deducted against the FED collected on service provided by telecommunication companies.
In 2000, sales tax was imposed by provinces on certain services, ie, hotels/caterers, courier services, stevedores, customs agents, advertisement on television/radio, ship chandlers, beauty parlours, (now omitted) and laundries (now omitted) by the four provincial governments and Islamabad Capital Territory (ICD) through five ordinances.
The provinces and ICD empowered the FBR to collect sales tax on such services under the Sales Tax Act, 1990. With the introduction of draft Value Added Tax Act in the Parliament, the provinces have either to empower the Federal Board of Revenue to collect sales tax on their behalf, as per past practice, or collect the VAT on services themselves. Now we will discuss the options available with the provinces.
The first option is to allow the Federal government to continue collection of sales tax on services, however, the provinces are more concerned with the actual realisation/distribution of amount without any hassle. For this purpose, a mechanism can be devised whereby recovery/distribution of sales tax may be ensured. The provinces may make an arrangement where the service-provider may deposit monthly tax directly in the provincial head of account according to ratio prescribed by National Finance Commission or some other mutually agreed basis (consumption basis, though it is a bit complicated).
In case, the provinces establish their own machinery, they have to keep certain facts in view. Practically the new VAT law is not possible to be implemented by the Federal government if any province decides to collect the VAT on its own. Various disputes will arise, eg, sales tax paid in province "A" on purchase of machinery (input tax) will be adjusted (deducted) from tax collected (output tax) in province "B", therefore, net collection for province "B" will be diminished to the extent of tax paid on purchases in province "A". Similarly, there will be many complications in various areas like registration, refund, blacklisting, adjudications etc.
The other option is to levy simple sales tax on services, ie, without giving option for any deduction of sales tax paid on inputs. This scheme is under consideration of some provinces. A draft legislation is under consideration in Sindh. This will resolve problems relating to input tax adjustment and other allied hurdles of the VAT.
In such eventuality, the provinces will have to calculate the rate of sales tax on the basis of net amount of tax being collected. At present, the rate of sales tax is 16% in general (19.5% on telecommunication), but after deduction of tax paid on purchases net tax rate should be on lower side.
Since the tax will be on consumption in the province, the service provider companies have to be taken on board as to whether they can maintain separate accounts for each transaction taking place in each province and whether it can be done easily or will entail extra cost.
In case of travel by air, it will be difficult to determine where tax is to be paid for a ticket purchased in Karachi for journey from Lahore-Peshawar-Quetta-Lahore. Some provinces are thinking of establishing their own VAT service for collection of the sales tax. Before discussing pros and cons of such proposal we may look at the collection figures during 2008-09 on services:
================================================================ Federal Services Collection (2008-09) ================================================================ Telecommunication Rs 50119 million Inland travel by air/ Travel by air Rs 634 million Services provided by persons for business Rs 299 million Advertisement on Cable TV Rs 65 million Inland carriage of goods Rs 34 million Services rendered by Banks Rs 15 million Shipping agents Rs 11 million Services provided in respect of insurance Rs 9 million The tax collected from provincial services during 2008-09 is given as under: ---------------------------------------------------------------- Provincial Services Collection (2008-09) ---------------------------------------------------------------- Hotels/Restaurants Rs 2033 million Caterers-suppliers of food/drinks Rs 20 million Clubs Rs 18 million Marriage halls and lawns Rs 3 million Courier Services Rs 1131 million Stevedores Rs 830 million Customs agents Rs 478 million Advertisement on TV/Advertisement Rs 763 million Advertisement on Radio Rs 30 million Ship Chandlers Rs 2 million Beauty parlors/slimming clinics (now omitted Rs 0.2 million Laundry/dry cleaners (now omitted) Rs 0.05 million ================================================================
Presently, all services have been declared taxable except 6 categories (services related to funeral, religious institutions, non-profit charitable organisation, certain financial and education services and certain supplies of immovable property). For transparency and benefit of taxpayers, it will be more appropriate if a positive list of services is jotted down so that each taxpayer is aware of his responsibility.
The present proposal will give a leverage to the lower echelons of the tax machinery to misuse the "right" of interpretation of taxability of a certain service as the definition of "service" is too broad (anything that is not goods, immovable property or money). The rate of sales tax has also not been mentioned in the Provincial VAT Acts, which needs to be publicised for feedback and suggestions from the service providers.
The other major issue is that of enforcement and estimate of actual collection from the services and expenditure, which will be incurred on the tax collection. In the past, several experiments were conducted and duty was levied on several services, including the services of travel agents, property dealers, car dealers, doctors, advocates, chartered accountants, carriage of goods by road (truck addas), beauty parlours, laundries etc. However, tax on these services was abolished due to practical difficulties in collection. Before discussing the problems faced by the tax collecting machinery, we may glance through the tax collection figures on such services in the past:
================================================================================== All Pakistan basis Rs in million ================================================================================== Name of Service 94-95 95-96 96-97 97-98 98-99 99-00 Accountants - 0.076 0.032 Architects & Town Planner - 0.199 0.165 - - Beauty parlors - - 0.976 2.848 3.276 3.516 Doctors - - 0.097 Launderers & dry cleaners - - 3.896 5.139 4.701 4.558 Travel Agent - 7.274 31.763 Services of Supply/Dist. of Natural Gas - - 1,630.841 3,269.312 3,313.843 1,135.949 Licence Fee -Car Dealers 0.134 0.155 0.155 0.045 0.045 - Licence Fee-Fright forwarding Agents 0.015 0.665 0.215 0.030 0.010 - Licence Fee-Property Dealers 0.032 0.710 0.401 0.375 - 0.120 Licence Fee-Recruiting Agents 0.015 0.030 0.030 Bank Loans/Advances 1,851 2,312 2,538 223.750 32.134 4.940 ==================================================================================
In case of travel agent, car dealers the duty was not levied on actual transaction as these services had already suffered incidence of tax at original stage (car manufacturers and importers already pay sales tax at manufacturing and import stage). The second-hand car buyers do not keep original invoice so accountal of input tax was difficult. Similarly in case of travel agents, sales tax is paid and included in the price of the ticket. The car dealers and travel agents only get commission. After much discussion, normal rate of tax was withdrawn and 5% tax was levied on the amount of commission of travel agents and car dealers. The dealers resisted this levy also as they were of the view that the amount of commission is actually their income and they had already paid income tax. Charging of tax on the commission tantamount to impose tax on their income, which had already been taxed.
Subsequently, license fee of Rs 5000 to Rs 30,000 (varied for individual, partnership and companies) was levied on car dealers, property dealers. A long process of contravention cases, show cause notices, hearings and adjudication orders were undertaken.
Recovery proceedings were initiated by issuance of notices and finally attachment of immovable property was ordered, which normally comprised the office furniture or computer. The whole process took months and months for recovery of Rs 5000. In the end, the tax department could not even auction that small furniture or computer. Only that amount was recovered, which was paid voluntarily by some dealers.
The same fate was met by contractors and architects. Various Federal and provincial departments were requested to provide lists of contractors. Lists comprising thousands of contractors were provided to the sales tax department. Some big contractors deposited tax, but no recovery could be made from small and medium size contractors.
Most of them could not be located, as incomplete addresses were provided by the departments. Most of them replied that they did not carry out any work in that financial year. Hardly a few departments provided proper lists and work carried out by the contractors along with the payments made. Recovery could be made in a very small number of cases.
The lawyers got stay from the courts. The chartered accountants also approached the courts. The stay orders could not be vacated for a long period. The levy was abolished subsequently. The present sales tax potential of these sectors - chartered accountants, architects, doctors and advocates) can be gauged from the professional tax being collected by the provincial governments, which is nominal as compared to the actual potential from these sectors.
In case natural gas duty was levied on production of natural gas at well heads (considered as goods) and later on duty was also imposed on distribution of natural gas, which was regarded as service. This levy was also discontinued as levy on production of natural gas and again on distribution was considered as levying duty twice on the same product.
In 1995-96, excise duty was levied on loans 1% per annum and subsequently increased to 2%, which generated very handsome amount, but subsequently the levy was abolished as it increased the mark up rate. Presently, the handsome amount is being collected (expected revenue for current financial year is 4 billion rupees) from the banking services (other than loans).
The electricity is regarded as good and remains outside the ambit of service sector. In case of electricity since input tax exceeded output tax due to line losses and other factors, the government had to refund the difference to the KESC in the past. The wholesalers, distributors and retailers, though counted as services in the GDP, yet these are also categorised as goods for sales tax purposes.
The lesson of the history is that wherever efforts were made to collect sales tax from a large number of small taxpayers, the enforcement issues erupted and there was little success in most of the sectors. If the Federal government continues to collect sales tax on telecommunication, banking services, travel by air and insurance (potential from these four services is estimated at 70 billion rupees), actual collection from rest of services will be very meager and would not justify establishment of a separate service. (The writer is the Additional Collector of Customs, Karachi)
Source:http://www.brecorder.com/index.php?id=1064135&currPageNo=1&query=&search=&term=&supDate=
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