Sales Tax on Services under Provincial Ordinance & Federal Excise Duty: PTBA Summer Camp-2009 Overview

1. PAKISTAN TAX BAR ASSOCIATION Paper presented on SALES TAX ON SERVICES UNDER PROVINCIAL ORDINANCE, 2000 & FEDERAL EXCISE DUTY LEVIED AS SALES TAX PTBA Summer Camp-2009 Organized by PTBA Academy of Taxation At Pearl Continental Hotel, Bhurban By Adnan Mufti, FCA Partner, Shekha & Mufti, Chartered Accountants

2. Overview Sales Tax on Services under Provincial Ordinances, 2000 Federal Excise Duty levied as Sale Tax

3. SALES TAX ON SERVICES UNDER PROVINCIAL ORDINANCES, 2000 OVERALL REGIME • Rate of Sales Tax @ 16% on value of taxable services • Applies to Hotels, Clubs, Caterers, Advertisements on TV / Radio Customs Agents, Ship Chandlers, Stevedores, Courier Services • No registration threshold for service providers. All taxable service providers liable for registration and payment of sales tax without any monetary threshold • Differentiate between restaurants and hotels providing room services in addition to restaurants • Time of service is the time when the service is completed or payment is received, whichever is earlier. This is contrary to the provisions of section 2(44) of Sales Tax Act 1990

4. Overall Regime… • In case of credit facility offered to customers, invoicing may be made at the end of month • Specific special procedures for advertisers, customs agent, ship chandlers and stevedores

5. Service Providers – Advertisements • Applies to broadcasting of advertisements other than exempt advertisements • Value of service is gross amount received • How to claim input tax by registered clients – Routed invoice prescribed under Annexure ‘B’ of SPR • Payments be made through banking channel verifiable readily Exempt Advertisement Services on Radio & TV • if sponsored by a Government Agency for health education • Advertisement financed out of funds provided under grant in aid Agreements • Public service message on TV by WWFN or UNICEF

6. Service providers – Customs agent & ship chandlers • Value of supply for customs agent excludes certain charges which are reimbursable – No minimum values of services effective 01 July 2007 • Sales tax registration and license number of customs agent are required to be mentioned on GD / duty drawback / refund claim • Value of supply for ship chandler also defined and exclusive of certain charges paid on behalf of the clients

7. Service providers – Customs agent & ship chandlers Reimbursable Expenses not liable to Sales Tax for Customs Agents & Chip Chandlers • transportation charges, • Demurrage, • Wharfage • Customs-duties, excise duty, sales tax, provincial duties or taxes • Toll taxes • Municipal charges • Port charges • Handling charges • Packing charges • Labour payment • Other reimbursable expenses

8. Service provider - Stevedores • Who are stevedores? • Container terminal operators • Commercial tank terminal operator • Bulk terminal operator • Other service providers engaged in discharge and loading of cargo from / to vessels • Sales tax levied upon the charges, billed to customers • Invoice is compulsory

9. Service provider - Clubs Charges accrued by clubs exempt from levy of sales tax • Membership fees • Refundable deposit or security

10. FEDERAL EXCISE DUTY IN VAT MODE

11. The Law of Federal Excise Duty • Federal Excise Duty is levied and collected on the goods / services specified under the First Schedule to the Federal Excise Act 2005 • FED is charged on manufacturing, import and rendering of services • FED one stage levy and is not collected like sales tax on each stage when • the goods are sold or the services are rendered

12. Application for The Provisions of The Sales Tax Act 1990 Upon Federal Excise Duty VAT Mode • FED paid on following goods are adjustable on sales tax / VAT mode : Goods liable to FED in sales tax mode • 2nd Schedule of FED Act 2005 • Edible oil excluding expodized soyabean oil • Vegetable ghee and cooking oil Services liable to FED in sales tax mode • (SRO 550(i)/2006 dated 05 June 2006) as amended SRO 478(I)/2009, dated 13 June 2009 • Advertisement • Domestic Air Travel • Carriage of goods by air • Shipping agents • Telecommunication services

13. Application for The Provisions of The Sales Tax Act 1990 Upon Federal Excise Duty Services liable to FED in sales tax mode • Services provided or rendered by banking companies and non-banking financial companies • Services provided by insurance companies • Services provided or rendered by stockbrokers • Services provided or rendered by port and terminal operators

14. Application for The Provisions of The Sales Tax Act 1990 Upon Federal Excise Duty Types of Advertisement in VAT mode • Advertisement on radio and TV • Advertisement on closed circuit TV • Advertisement in newspapers and periodicals • Advertisement in cable TV network Types of insurance in VAT mode • Goods insurance • Fire insurance • Theft insurance • Marine insurance • Other insurance

15. Application for The Provisions of The Sales Tax Act 1990 Upon Federal Excise Duty Types of insurance exempt from levy of FED • Marine insurance for export • Life insurance • Health insurance • Crop insurance Services of banking &non-banking financial companies in VAT mode • All funded & non-funded services Services of banking & non-banking financial companies exempt from levy of FED • Haj & umrah • Cheque book • Insurance

16. Application for The Provisions of The Sales Tax Act 1990 Upon Federal Excise Duty Services of banking & non-banking financial companies exempt from levy of FED • Musharika & Mudaraba services • Utility bill collection • Mark-up interest on advances

17. Duty on Excisable Services Insurance Insurance services are subject to levy of FED @ 16% of gross premium charges. Services rendered by re-insurer where direct service provided also attract FED FED for a month to be deposited in national treasury on 15th day of the following month with FED return to be filed on 18th of such month If contract or any part is cancelled, the company is not liable for duty for that part Statutory records like invoices, registers pertaining to services should be maintained by insurance company Annual audited accounts to be submitted to the Collector of Federal Excise within 15 days of the receipt of such accounts

18. Services provided by Banking Companies & Non Banking Financial Companies All services [funded and non-funded] rendered by banking company and non-banking financial company subject to levy of FED @16% in VAT mode of the gross amount of charges received by such institutions Definition of Non-funded Services ! Includes all non-interest based services provided or rendered by the banking companies or non-banking financial institutions against a consideration in the form of a fee or commission or charges FED for a month to be deposited in national treasury on 15th day of the following month with FED return to be filed on 18th of such month

19. Services provided by Banking Companies & Non Banking Financial Companies Exemption from issuance of invoice Quarterly statement to be filed by 15th of the month following the end of every quarter No FED invoice to be issued by banking and non-banking financial institutions A reconciliation statement in the prescribed format to be submitted by the 15th day of month following the end of every quarter at the Collectorate by such institutions

20. Head office of the company is required to maintain records of the services rendered under the rules and the collection of duty in such manner as will enable the distinct ascertainment of FED on each of the services, so rendered Annual audited accounts should be sent to the Collector within 15th day its publications Any short payment of duty, reflected as result of such audit report, is payable Non Fund Services provided by Banking Companies, Financial Institutions and Non Banking Faineance Companies

21. Issues related to non-funded services ? With effect from 01 July 2007, all non-funded services are subject to FED. However, material growth in FED collection not observed by FBR Certain non-funded services such as issuance of credit cards, ATM cards, debit cards are being provided to customers free of charges. No FED on such free services is paid Certain non-funded services such as account stoppage charges, charges received on one link, etc. are not being offered for FED

22. Application for The Provisions of The Sales Tax Act 1990 Upon Federal Excise Duty Adjustment mechanics! • The registered person producing dutiable goods or rendering such services can deduct input tax from the excise duty due from him on such goods or services, • Input tax paid on raw material adjustable against excise duty payable on cooking oil • Input tax paid on packing goods adjustable against excise duty payable by airline / telecommunication services • The registered person is allowed to deduct the amount of excise duty on such goods or services as are acquired by him during a tax period from the output tax due from him, • Excise duty paid on cooking oil adjustable against output tax of scrap • Excise duty paid on domestic air travel / insurance services/ banking services / port and terminal operators adjustable against output tax payable on consumer goods like detergents, tea, biscuits, sugar

23. Application for The Provisions of The Sales Tax Act 1990 Upon Federal Excise Duty Adjustment mechanics! • The registered person supplying dutiable goods or providing dutiable services is entitled to deduct FED on such goods or services as are acquired by him from the amount of duty of excise due from him on such manufactured goods or services provided • Excise duty paid on manufacturing of ghee & cooking oil and sold to confectionary manufacturer is adjustable against FED thereon • Excise duty paid on advertisement relayed on CCTV or Cable TV is adjustable against FED payable on domestic air travel

24. THANK YOU