Taxation Proposals for Punjab Provincial Budget 2021-2022 - OICCI TAXATION PROPOSALS (2021-2022) - PUNJAB PROVINCIAL LEVIES - OICCI TAXATION ...
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OICCI TAXATION PROPOSALS (2021-2022) – PUNJAB PROVINCIAL LEVIES
Taxation
Proposals for
Punjab
Provincial
Budget
2021–2022
OICCI TAXATION PROPOSALS (2020 – 2021) – PUNJAB PROVINCIAL LEVIES
1|PageOICCI TAXATION PROPOSALS (2021-2022) – PUNJAB PROVINCIAL LEVIES
TABLE OF CONTENTS
Page Nos
Introduction 03
Highlights of the OICCI Taxation Proposals 04
Increased cost of doing business 07
All Revenue collection under one ministry/ body 07
Tax broadening measures 07
Sale tax on services 09
Procedural and structural proposals 17
Other levies 17
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INTRODUCTION
The Overseas Investors Chamber of Commerce and Industry (OICCI) is the largest
Business Chamber in the country based on contribution to the national and provincial
exchequers, as well as to the GDP, and represents the largest bloc of foreign investors
in Pakistan. OICCI members believe in the business potential and opportunities in
Pakistan and have in the past seven years invested over $ 13 Billion in Pakistan, which
is at par with the total net FDI inflow into the country during the same period.
A few facts, which are part of the OICCI profile, are being mentioned below for an
appropriate appreciation of the role played by the Chamber in the country’s economy,
including social inclusion activities:
Representing 201 Foreign Investors
▪ Shareholders from 35 countries operating in 14 business sectors
▪ 56 listed on PSE and 50 associates of 2019 Global Fortune 500 companies
Major contributor to the Economy of Pakistan
▪ Approximately one-third of government taxes/levies collected from OICCI
members
▪ Leaders in transfer of technology and best management practices
▪ Direct and indirect employment to around one million people
▪ CSR activities of members benefit over 5.8 million persons in underprivileged
sections of society.
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Highlights of the OICCI Taxation Proposals for Sindh
A. EASE OF DOING BUSINESS
1. Integration of all Revenue Collections
• Total revenue collection should be merged under one Ministry/Body. The provincial
government can devise an in-house mechanism to allocate the share of the revenue of
the three bodies through intra-government fund transfers.
o An important measure for Ease of Doing Business (EODB).
(Details of page No. 6)
2. Coordination Between Federal/Inter-Provincial Sales Tax Authorities
• A policy board to be formed to ensure synchronization of the policies, standard tax
rates, basis of apportionment of revenues and removal of all anomalies/ conflicts
between the laws of the different revenue boards.
o Basis of levy of indirect tax, which can be ORIGINATION or TERMINATION, to
establish jurisdiction of taxation of services
o ‘Standard schedule’ to promote transparency and uniform interpretation
o One return may be filed with identification of provincial head of account and
direct deposit of share of tax of each province. (This has also been recommended
to FBR and SRB)
• PRA to resolve with FBR for appropriate amendment in IT Ordinance, 2001
o WWF/WPPF payments made to the provincial tax authorities currently not
allowed as tax deductible expense.
o Proper mechanism for adjustment of input tax on franchise service payable in
reverse charge mode
(Details of page No. 9)
3. Single Federal/Provincial Return and Consolidation of all taxes and levies
• All provincial taxes should be consolidated into one, including the labor levies e.g.
EOBI/PESSI/WPPF/WWF.
• Integration of tax data should be ensured at all levels through one return including
Federal and Provincial,
(Details of page No. 10)
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B. TAX BROADENING MEASURES
4. Agricultural Income Tax
• Income Based System: taxability of income on land holding should be abolished and
taxes collected on ‘net income basis’.
• Adjustable withholding tax: Advance tax should be introduced on sale of Agricultural
produce, such as sugar cane, wheat, cotton which should be adjustable against income
tax payable on net income basis.
• Link and Interface with the National Tax Number: All persons holding land should
obtain a Provincial Tax Number (PTN), like the NTM maintained by FBR
• Definition of agricultural income should be amended to include all agricultural
activities like non-corporate dairy farming and poultry.
• Rent income for the use of Agricultural Land should be subject to same rate of tax as is
currently in vogue on property income under the FBR system.
(Details of page No. 7)
5. Other Tax broadening Measures
• Tax authorities should use technology, data analytics including Artificial Intelligence
tools and make better/effective utilization of NADRA database and other documented
sources to ensure that all income earners from services are included in the provincial
taxpayers list
• Sales tax collection from other cities in Punjab and new sectors of services should be
shared at least quarterly with the stakeholders, like OICCI, showing growth faster than
in collections from mature markets like Karachi
• Sales tax rate on services for non-filers of Income tax returns should be double the rate
for filers.
o Preferential treatment to active filers like fast-tracks utility connections.
• Expand ambit of income from services by requiring Marriage halls, Art exhibition halls,
and other public places holding large receptions to provide names and addresses of the
respective persons to provincial tax authorities.
(Details of page No. 8)
C. INCENTIVES FOR NEW INVESTMENTS FOR
ECONOMIC GROWTH
6. Reduction In Sales Tax Rate
• PRA sales tax rates on services should be aligned with Sindh sales tax rate, which
is 13% and gradually reduced to 10% over next three years to be aligned with the
regional countries. The current rate should be maintained for unregistered
entities. The rate gap will encourage registration of the unregistered taxpayers to
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avail the benefits of input adjustment and will enhance documentation.
(Details of page No. 10)
7. Admissibility of Input Sales Tax on Goods/Services Liable at Reduced Rate
• Amendments be made Provincial Sales Tax Act on services to allow the registered
persons to claim input tax related to procured goods/services taxable at whatever rate
(lower, standard or higher).
(Details of page No. 12)
8. Zero Rating for Exports
• A separate schedule should be inserted in Provincial Sales Taxes Act for zero rating. All
services provided to foreign companies outside Pakistan which result in inflow of
foreign exchange and export of all taxable services should be exempt from Punjab Sales
Tax on Services.
(Details of page No. 13)
9. Provincial Sales Tax on ‘toll manufacturing’
“Toll manufacturing” should be deleted from the list of services, as it is
taxable under the Federal Sales tax
(Details of page No. 14)
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INCREASED COST OF DOING BUSINESS
OICCI members continue to express concern that the cost of doing business in Punjab is higher
than Sindh, on account of the fact that the sales tax rate on services in Punjab @16% (on telecom
services is much higher side i.e. 19.5%.) is the highest sales tax rate amongst all the Revenue
Boards of the country.
Taxes levied in Punjab are recommended to be harmonized with other provinces of the country,
to ensure the competitiveness of the investments in Punjab through providing level playing field
to all business segments. The consolidation of taxes will also make compliance easy for taxpayer.
ALL REVENUE COLLECTIONS UNDER ONE MINISTRY/BODY
1. Integration of all Revenue Collections
Currently revenue collections of the Province of Punjab fall under the following
Ministries/Bodies.
• Punjab Revenue Authority (PRA)
• Excise & Taxation
• Board of Revenue (Punjab)
Recommendation
Total revenue collection should be merged under one Ministry/Body. The provincial
government can devise an in-house mechanism to allocate the share of the revenue of
the above three bodies through intra-government fund transfers.
o This would add considerably to the ease of doing business (EODB), a matter
which should be a priority for all policy makers in the country since Pakistan
has fallen from 75 in 2010 to 161 in 2020, in the World Bank – EODB survey.
TAX BROADENING MEASURES
2. Agricultural Income Tax
As per the statistics mentioned in the Government of Punjab “White Paper – Budget 2015-
16” employment of 45% of the population of the province is dependent upon agriculture and
the sector accounts for 21% of the overall national production. “However, the collection of
agricultural income tax is estimated to be even less than 1% of total collection of Federal and
Provincial taxes.”
The above disparities in tax levies between different incomes segments need to be
addressed. It is recommended that the Punjab government and revenue authorities take all
possible measures to increase revenue collection from the agriculture sector.
The original rationale of keeping agriculture out of tax net to facilitate small agriculturists is
not applicable, due to non-implementation of land reforms, and the benefit of the tax
exemption is being availed, as per common perception, by big landowners earning huge
incomes. Furthermore, income and wealth is also transferred by unscrupulous elements to
businesses fronting as agriculture sector.
Some of the key issues related to agriculture income are identified as follows:
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• Principle of Non-Discrimination: In principle, income from all sources, including
agriculture, if exceeding the minimum threshold, applicable for other sources of income,
should be taxed without any discrimination.
• Determination Basis: A transparent, easily understandable and applicable manner of
determining such income should be designed.
• Flexible Income Based System: At present, the Agricultural Income Tax has effectively
become a land tax, based on land holding, that leads to the perception that there is no tax
on agricultural activities.
• Identification and Linkage with National Tax Number: There is no identification of
even the small number of agricultural income taxpayer as they are not on the national
tax number (NTN) system
Recommendation
In light of the above, following proposals are made:
a) Income Based System: At present, the tax is payable on ‘land holding’ or ‘net
income’ whichever is higher. However, the manner of determination of net
income is complicated and, in almost 100% of the case, tax is received on land
holding basis. This discourages the taxation on net income basis. Therefore,
taxability of income on land holding should be abolished and taxes collected
on ‘net income basis’.
b) Adjustable withholding tax: Advance tax should be introduced on sale of
agricultural produce such as sugar cane, wheat, cotton and others. There are
only around 10 to 15 agencies and enterprises which acquire such crops. The
advance tax should be adjustable against income tax payable on net income
basis. Rates of withholding and the threshold for the same should be aligned
with other products – for example any payment exceeding Rs 25,000 should
be subject to advance tax at the rate of 1 to 3 percent as the case may be.
Federal taxation system may be used for such collection on behalf of the
provincial government in the same manner as is being done in other cases by
the provincial governments.
c) Link and Interface with the National Tax Number: All persons holding land
should be required to obtain a National Tax Number (NTN), like the one
maintained by FBR, and may be modified by adding one or two digits so as to
identify that source of income is agriculture. [PRAL facilities may be used for
such purposes in coordination with NADRA].
d) Definition of Agricultural Activity: Definition of agricultural income should be
amended to include all agricultural activities like non-corporate dairy
farming and poultry etc.
e) Rent for the Use of Agricultural Land: Under the specific provision, the rent
for use of agricultural land, which is general practice, especially for large
landowners, is an agriculture income. There is effectively no mechanism to
ensure completeness of recovery of taxes from such receipts. Such rent
income should be subject to same rate of tax as is currently in vogue on
property income under the FBR system.
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3. Other Tax Broadening measures
Recommendation
i. Tax authorities should use technology, data analytics including Artificial
Intelligence tools and make better/effective utilization of NADRA database and
other documented sources to ensure that all income earners from services are
included in the provincial taxpayers list.
ii. Sales tax collection from other cities in Sindh and new sectors of services should be
shared at least quarterly with the stakeholders like OICCI showing growth faster
than in collections from mature markets like Karachi
iii. In order to extent the ambit of income from services, Marriage halls, Art exhibition
halls, hotels and other public places holding large receptions should provide names
and addresses of the respective persons involved in these business activities to the
provincial tax authorities on a quarterly basis.
SALES TAX ON SERVICES
4. Coordination Between Federal/Inter-Provincial Sales Tax Authorities
All four Provinces and Federal Government have introduced distinct sales/service tax laws
for their respective jurisdictions, with some of the clauses in clear conflict with each other
resulting in foreign investors being pursued and harassed by the Federal and Provincial
revenue collectors (FBR, PRA, SRB, KPRA and BRA) demanding tax on the same transactions
creating undue hardship and double taxation claims for taxpayers. This situation is highly
undesirable and creates complexities for investors.
As an example, a service provider registered in Sindh providing taxable services to recipient
in Punjab is liable to pay sales tax in Sindh whereas the withholding agent (recipient of
service) is registered in Punjab and is liable to withhold sales tax and pay the same to
Government of Punjab.
Although, we have noted some improvements in the coordination between the revenue
authorities, investors’ concerns continue, as the issue of levy of sales tax at ‘origination’ and
'termination' of service in both the provincial legislations on services has still not been
resolved.
Section 60A and 60B of the Income Tax Ordinance, 2001 has not been amended to allow
contribution to Provinces in respect of WWF and WPPF.
Recommendation
In line with International and Regional practices a uniform service tax law may be
drafted and agreed upon by the tax authorities of the Provinces and Federal
Government, for implementation in their respective jurisdiction. Furthermore, a
uniform tax return may also be introduced for the taxpayers.
The above points can be addressed by taking the following four steps which will lead
to effective management and expansion of the tax base:
i. A policy board comprising of the Chairmen of the Federal and Provincial revenue
authorities (FBR, PRA, KPRA, BRA and SRB) should be formed to ensure
synchronization of the policies, standard tax rates, basis of apportionment of
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revenues and removal of all anomalies/ conflicts between the laws of the different
revenue boards (for example issues of jurisdiction, sales tax on toll manufacturing,
clarity on jurisdiction and deductibility of WPPF/WWF expenses paid to the
provinces).
ii. Revenue authorities should decide the basis of levy of indirect tax, which can be
ORIGINATION or TERMINATION, to establish jurisdiction of taxation of services;
iii. To promote transparency and uniform interpretation, a ‘Standard schedule’ should
be introduced covering all services along with standard Tariff Headings and
Standard definitions. The standard schedule should be adopted by all provinces and
Islamabad Capital Territory while levying sales tax on services in their respective
jurisdictions
iv. One return may be filed with identification of provincial head of account and direct
deposit of share of tax of each province.
v. PRA should take up with FBR for appropriate amendment in IT Ordinance, 2001 to
ensure that payments made to the provincial tax authorities on account of WWF and
WPPF are allowed as tax deductible expense.
vi. PRA should take up the matter with FBR for the proper mechanism for adjustment
of input tax on franchise service payable in reverse charge mode.
Rationale or Benefit
Duplicate taxation is causing hardships to taxpayers and has given rise to unnecessary
litigations and is one of the deterrents in attracting FDI in Pakistan.
5. Single Federal/Provincial Return and Consolidation of all taxes and levies
Recommendation
i. All provincial taxes should be consolidated into one, including labor levies e.g.
EOBI/SESSI/WPPF/WWF.
ii. Integration of tax data should be ensured at all levels through one return including
Federal and Provincial,
6. Reduction in Sales Tax Rate
OICCI commends the PRA for a number of steps introduced over the last few years to
streamline the sales tax on services structure, which has given a positive message to
investors based in Punjab. However the sales tax rate continues to be very high – even in
comparison to the sales tax rate on services in the other provinces: lower by 3%, in the
province of Sindh and by 1% in the provinces of KPRA and BRA.
Recommendation
i. As a first step the PRA sales tax rates on services should be aligned with the Sindh
sales tax rate on services which is 13% and gradually reduced to 10% over the next
three years, whilst the current rate should be maintained for unregistered entities.
This reduction in rate will encourage the registration of the unregistered
taxpayers to avail the benefits of input adjustment and will enhance
documentation.
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ii. Subsequently, a study of the rates in the regional countries, with comparable
economic parameters should also be done and sales tax rates be made more
competitive.
(A similar recommendation has also been given in the OICCI Taxation Proposals
2018-19, submitted to FBR in respective of Federal Sales Tax)
7. “Reverse charge mechanism” and subsequent recovery by the taxpayer.
The Provincial Statue provides that service provided by non-resident service provider is
liable to tax under reverse charge mechanism i.e. in the hand of service recipient. A non-
resident has been defined to mean a person who is not registered with the relevant
provincial statute.
Such a tax framework tantamount to double taxation, in case where service provider is
located in other province of Pakistan as the service provider becomes liable to tax in his
respective Province; while the recipient of service becomes liable to tax in the Province of
his residence.
Moreover, Provincial Statues do not allow registered services recipient to claim sales tax
paid on reverse charge as input tax against their own name.
Recommendation
i. Reverse charge should be restricted to such cases where service provider is
located outside Pakistan. Further, tax paid under reverse charge mechanism
should be allowed as input tax and for claiming input tax the requirement of tax
invoice should be done away and input tax should be allowed on the basis of
agreement/payment proof as well.
Rationale or Benefit
To avoid double taxation, allow input tax and reduce cost of doing business.
8. Exemption of Withholding Agents from deducting Sales Tax from payments to
Registered persons and Reduction of rate for unregistered persons
Withholding of sales tax from registered sales tax persons with PRA, does not provide any
benefit and only creates hardships for genuine taxpayers of reconciliations and delay in
adjustments. Similar to Federal Sales Tax law, exemption be given if payment being made to
sales tax registered person against withholding sales tax.
Withholding tax rules are applicable on active taxpayers also.
Recommendation
i. The rate of withholding sales tax against the invoices of unregistered persons
should be reduced to 5% in line with the FBR’s Withholding Sales Tax regime as
applicable under SRO.660 (I)/2007.
ii. Withholding tax rules should not be applicable on active taxpayers.
Rationale or Benefit
The withholding agents are unnecessarily burdened with deduction of sales tax which is not
claimable as input tax and resulting in increasing their cost of doing business.
The purpose of withholding tax deduction is to ensure that non-active & non- registered
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taxpayers can be detected. Compliance burden of businesses can be reduced by exemption
of deduction at source for active taxpayers. PRA allows similar provision [Rule 3 of Punjab
Sales Tax on Services (Withholding) Rules, 2015].
9. Withholding Tax
Under the Punjab Sales Tax Rules, all payments made for services received from unregistered
persons, the service receiving company attracts withholding tax @ 16%. Under the current
economic scenario, where the cost of doing business is very high, such requirement is draining
out liquidity of businesses.
Recommendation
i. The requirement for withholding sales tax on services provided by unregistered
persons should be removed or brought in line with the provisions of Sales Tax Act
1990 whereby only 1% tax needs be withheld on purchases from unregistered
person.
10. Elimination of PST withholding for all registered persons
As per rule 5 of the Punjab Sales Tax on Services (Withholding) Rules, 2015, withholding agent is
required to withhold the whole amount of sales tax shown in the tax invoice issued by a registered
person as service provider.
Recommendation
i. It is suggested that withholding of sales tax on purchases from registered
persons should be abolished after successful implementation of STRIVe.
Rationale or Benefit
The real-time verification system introduced by PRA already covers risk of revenue
leakages by non-compliant tax payers.
11. Admissibility of Input Sales Tax on Goods/Services Liable at Reduced Rate
As per clause (g) of section 16B(1) of the Punjab Sales tax on Services Act 2012, a registered
person shall not be entitled to claim input tax adjustment in respect of procured goods and
services that are liable to a tax rate lesser than standard rate of 16%.
Recommendation
i. Clause (g) of section 16B(1) should be abolished from the said Act and allow the
registered person to claim input tax related to procured goods/services taxable
at whatever rate (lower, standard or higher).
Rationale or Benefit
Under VAT mode, this is the legal right of a registered taxpayer to claim input tax paid
on providing taxable services no matter what the applicable tax rate on procured
goods/services is. Federal sales tax law does not bar any such admissibility so provincial
tax authorities should also allow.
12. Reduction In Sales Tax On Telecom Services
The high growth rates of cellular Industry in Pakistan have slowed down due to various
reasons, including high taxation. Pakistan cellular industry is one of the highest taxed in the
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region. This has resulted in the relative decline in growth with consequential decrease in
revenue.
Currently over 70 million Pakistanis have access to transformative technologies, including
mobile broadband. This increase in access is bringing wide-ranging benefits to the Pakistani
economy and society which is boosting productivity and is supporting increased economic
growth. However around 100M Pakistanis do not have access to mobile services, particularly
in rural areas, resulting in Pakistan remaining below global and regional averages, in terms
of subscriber penetration.
Recommendation
i. The current sales tax rate on telecommunication services of 19.5% should be
brought at par with the general sales tax rate on all other services in order to
harmonize all sales tax on all services by providing the level playing field for all
business segments without undue discriminations.
Rationale or Benefit
This will not only harmonize the tax rates and may also increase the tax collections by
helping telecom operators tap lower income population of Pakistan.
13. Zero Rating for Pharmaceutical Inputs
All pharmaceutical products are exempt from Sales Tax. Consequently, any sales tax paid by
pharmaceutical industry on goods or services purchased, can neither be passed on to the
consumer nor can be claimed as input, and has to be absorbed by the manufacturers in their
costs. It is resulting in increasing the cost of doing business, amidst already spiraling
inflation, and frozen prices of finished products.
This is also against the philosophy of sales tax which is supposed to be borne by the
consumer.
Recommendation
i. Services received by pharmaceutical industry should be zero rated.
Rationale or Benefit
Since pharmaceuticals prices are controlled, sales tax paid on inputs can neither be
added to the selling price nor separately charged.
14. Zero Rating for Exports
As per the Fifth Schedule to the Sales Tax Act 1990, exports made by a registered person are
zero-rated. Presently, there is no concept of zero-rating in Provincial Sales Tax Acts.
Resultantly, the companies providing services to foreign companies and bringing foreign
exchange in Pakistan need to pay sales tax from their own account.
Recommendation
i. A separate schedule should be inserted in Punjab Sales Taxes Act for zero rating.
All services provided to foreign companies outside Pakistan which result in
inflow of foreign exchange and export of all taxable services should be exempt
from Punjab Sales Tax.
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15. Provincial Sales Tax on ‘toll manufacturing’
Punjab and Sindh provincial government is are treating toll manufacturing activity as a
‘service’ and PRA after levying Sales tax at the rate of 16 percent effective July 1, 2013,
reduced the rate to 5% from July 2020 but if this reduced rate is taken, if is not adjustable
against output tax. Notwithstanding the fact that toll manufacturing is not a ‘service’ and
therefore outside the constitutional scope of Provinces to charge PST, such a levy has directly
increased cost of doing business, especially for pharmaceuticals which are exempt from
Federal Sales Tax. It may be noted that toll manufacturing activity, since inception of sales
tax regime, has always been treated as ‘a manufacturing activity’. Since pharmaceutical and
some other supplies are exempt from sales tax under the FST Act, no Federal Sales Tax was
leviable under the FST Act. The position is further aggravated owing to the fact that prices of
pharmaceutical products are regulated by Drug Regulatory Authority of Pakistan; therefore,
effect of such levy has to be borne by pharmaceutical company itself.
Recommendation
i. “Toll manufacturing” should be deleted from the list of services, as it is taxable
under the Federal Sales tax
Rationale or Benefit
It will avoid double taxation and bring the practice in line with the norm besides
adding to ease of doing business as presently this law is in conflict with Federal law.
16. Labour and Manpower Service
“Labor and Manpower Services' have become an essential need of modern business. This
business is operated with very low margins. Generally, service charge is based on percentage
of salary / wage reimbursement of per hour of labour. These services are taxable at the rate
of 16% in Punjab and 13% in Sindh.
Under the Punjab sales tax law, these services are chargeable to tax at the rate of 16% and
taxable value is not allowed to exclude reimbursement of salary/ wage component. As a
result, a very high cost is to be borne by the recipient. Salary/ Wage being a reimbursement
cost is also taxed which is against the spirit of the law.
Recommendation
i. It is suggested to amend the Punjab sales tax law in order to cater the aforesaid
situation. Special procedure should be introduced for chargeability of sales tax on
the services of 'labour and manpower'. These services are highly essential for
conducting business and very strong support for enhancing employment
opportunity in the province. Reimbursement is not revenue for service provider
in any manner.
17. Joint and several liability of registered persons where tax is unpaid:
[Section 19 of PSTSA]: The Provincial Statutes stipulate that where a registered person,
receiving a taxable service from another registered person, is in the knowledge of or has
reasonable grounds to suspect that some or all of the tax payable in respect of that taxable
service or any previous or subsequent taxable service provided would go unpaid, such person
as well as the person providing the taxable service shall be jointly and severally liable for
payment of such unpaid amount of tax.
14 | P a g eOICCI TAXATION PROPOSALS (2021-2022) – PUNJAB PROVINCIAL LEVIES
Recommendation
i. The provision should be aligned with Section 8A of STA, 1990. Accordingly, the
burden to prove that the service provider and service recipient acted in
connivance, should rests upon the tax authorities.
Rationale or Benefit
To bring harmony among federal and provincial sales tax laws.
18. Certificate By The Auditors
[Section 31(5) of PSSTA]: The registered service providers, whose accounts are subject to
audit under the Companies Ordinance 1984, are required to submit a copy of the annual
audited accounts along with a certificate by the auditors certifying the payment of the tax
due and any deficiency in the tax paid by the registered person.
Recommendation
i. The condition for provision of certificate by the statutory auditors should be done
away with. Instead, special audits may be conducted by the revenue authorities
through special auditors, wherever desired, under the existing provisions of
provincial sales tax laws.
Rationale or Benefit
With the current scope of statutory audit, the auditor cannot certify the payment of the
sales tax due and any deficiency in the tax paid by the registered person.
19. Tax Exemptions For Social Cause
Under STA, sales tax exemption is available on certain goods / areas which directly concern
the common man or which are basic commodities and service for every livelihood.
Accordingly, agricultural produce, medicines and medical equipment, food, machinery
supplied to certain social organization, goods supplied to hospitals run by the Federal or
Provincial Governments, etc. are exempt from sales tax.
Recommendation
i. In line with Federal Government’s policy to exempt social areas from Federal sales
tax, the chamber recommends that services provided in / to such sectors should
also be exempted.
Rationale or Benefit
To remove inequality in provincial sales tax laws.
20. Admissibility of Input Sales Tax on Advertisement
As per Rule 13(2) of Punjab Sales tax on services (withholding) Rules, no adjustment or
credit shall be admissible to the persons registered under the Act in case the tax is deducted
or withheld and paid in respect of advertisement services”.
Recommendation
i. Rule 13(2) should be abolished from the withholding Rules by giving the legal right
to claim of input tax to service provider in respect of advertisement services.
Rationale or Benefit
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This is a legal right of the tax payer to claim input tax paid on providing taxable services.
Moreover, the bar imposed through Rule 13(2) looks more like an anomaly as no such
bar is imposed in the PST Act or The Punjab Sales Tax on Services (Adjustment of Tax)
Rules 2012 and primarily it is against the VAT mode of taxation.
21. Exemption of Capital Value Tax for Islamic Banking Institutions
The Federal [Provincial]* Government may, by notification in the official Gazette, exempt any
person or class of persons or assets or class of assets from the Capital Value Tax. [Sub- section
(10) of section 7 (10)]
* After Eighteenth Constitutional Amendment, CVT has become provincial subject (reference
is made to Circular No. 3 of 2012 issued under Finance Act, 2012).
Recommendation
Under sub-section (10) of section 7 of the Finance Act, 1989, the Provincial
Government may issue a suitable notification to be published in official gazette.
i. “The sale or purchase of immovable property by the banks or financial institutions
under any Islamic mode of financing approved by the State Bank of Pakistan or the
Securities and Exchange Commission of Pakistan shall be exempt from the levy of
Capital Value Tax.”
Rationale or Benefit
The registration of sale of property is subject to stamp duties, registration fees, capital
value tax and town taxes which approximately comes to 6% of the sale value, which has
a significant impact on cost of doing business.
22. Valuation of Franchise Services on Beverage Companies
[Rules 57(2) of the Punjab Sales Tax on Services (Specific Provisions) Rules, 2012]
Recommendation
i. This provision should be deleted “Where franchiser is a foreign or local beverage
company and there is no proper or formal agreement between franchiser or
franchisee, the assessable value for the purpose of levy of the tax shall be payable
on the value of concentrate or syrup or similar input material supplied by the
franchiser to the franchisee.”
Rationale or Benefit
The value of concentrate (which is a good) cannot possibly be taken to be the whole
value of services. It is not only double taxation but unconstitutional that a good be taxed
twice.
23. Exemption be restored from PST on life and health insurance
Life insurance / health policy is not a service, rather it is an underwriter’s promise to pay to
the policy holder in the future, a specified sum of money, either on occurrence of an identified
event or on maturity of the policy. The exemption earlier allowed was withdrawn
w.e.f. November 1, 2018.
16 | P a g eOICCI TAXATION PROPOSALS (2021-2022) – PUNJAB PROVINCIAL LEVIES
Recommendation
i. It is recommended that both, life insurance and health insurance, which do not fall
within the scope of definition of service, should be permanently included in the list
of exempt of exempted services.
PROCEDURAL AND STRUCTURAL PROPOSALS
24. Active Taxpayer List
Under the income tax regime, the FBR provides list of ATL in excel form. This provides ease to
the WHT agent to verify the status of tax payer. Such documents also became a reference/
supporting documents in case any dispute arises with the FBR/ suppliers on the status of the
tax payer. Currently no such facility is available for PST registered person which should be
provided on PRA portal.
Recommendation
i. Active Provincial Taxpayers List (ATL) be provided in excel form.
25. Recovery of tax demands
A new clause (bb) in sub-section (1) of Section 70 of the Punjab Sales Tax on Services Act, 2012
was inserted through Punjab Finance Act, 2020. The said clause enabled PRA to directly recover
any amount due from a person by means, which inter alia include credit or finance facility availed
by such person from a financial institution/banking company which we believe too harsh and
against the Government’s vision to provide ease of doing business especially multinationals
responsible to bring foreign direct investment in Pakistan. This amendment may pose serious
business disruptions especially for telecom companies having country wide operations.
Recommendations
i. The said clause should be abolished being inconsistent and against the principals of natural
justice and detrimental to the business operations of the taxpayers as no tax demands can
be recovered from the liabilities of the taxpayer in whatsoever manner.
OTHER LEVIES
26. Exemption to Banking Companies on transactions under Islamic mode of financing
In order to ensure tax neutrality for Islamic Banking Institutions as well as fulfilling the
registration requirements under the Registration Act, 1908 with regard to sale/purchase of
immovable property for the purpose of extending finance under Islamic modes to their clients,
the registration fee, stamp duties, district, municipal or town taxes, etc. shall be levied once and
not twice. Whereas in case of sale and lease back contracts, no stamp duty etc. shall be levied
both at the time of purchase of immovable property by the bank or Special Purpose Vehicle
created for the purpose and sale back at maturity of the financing contract.
[Section 9A of the Stamp Act 1899]: Power of Provincial Government to exempt certain
instruments– The Provincial Government may by [notification in] the official Gazette, generally
exempt from payment of the whole or any part of the duties on any instrument executed by or
in favor of a banking company in the normal course of its banking business.
17 | P a g eOICCI TAXATION PROPOSALS (2021-2022) – PUNJAB PROVINCIAL LEVIES
[Sub-section 2 of section 14 of Stamp Act 1899]: (2) ‘Instrument’ includes every document by
which any right or liability is, or purports to be, created, transferred, limited, extended,
extinguished or recorded.
Special Purpose Vehicle means a Special Purpose Vehicle as defined in the Asset Backed
Securitization Rules, 1999.
Recommendation
Under the section 9A of Stamp Act 1899 the provincial governments may issue following
SRO/notification and publish in their respective official gazettes.
i. “The registration of sale or purchase of immovable property by banks or financial
institutions under any Islamic mode of financing arrangement approved by State
Bank of Pakistan or Securities and Exchange Commission of Pakistan shall be
exempt from the levy of registration fee, stamp duty, district, municipal or town
taxes or any other related taxes.”
Rational or Benefit
We strongly believe that such exemptions should be provided on Islamic financing
transactions involving transfer of immovable property in Pakistan as already provided in
developed countries such as Malaysia and United Kingdom so that it may act as the
necessary stimuli for facilitation of Islamic banking in the country and the Islamic financial
institutions can have a level playing field. Currently the sale/purchase of immovable
property by IBIs is subject to taxes which approximately come to 6% of the sale value.
These taxes consequently render transactions involving transfer of immovable properties
for Islamic financing purposes unviable. This issue was even faced in issuing GOP Sukuks.
27. Punjab Infrastructure Development Cess
Prior to the enactment of the Punjab Infrastructure Development Cess Act in 2015, the
example of Punjab Province was given to the Sindh government requesting for elimination of
the Sindh Development & Maintenance Infrastructure Cess introduced in 1994 which is today
a matter under litigation. This levy is a big contributor to the cost of doing business also to the
impediments in ease of doing business. The Punjab government has recently waived off this
cess till june 30, 2020 as part of the reliefs for businesses due to COVID-19
Recommendation
i. It is proposed that Punjab Development Cess be withdrawn in its entirety.
Rationale or Benefit
The cess adversely affects cost of doing business in Punjab and elimination of the same will
reduce unnecessary burden on businesses operating in Punjab Province.
The current COVID-19 related crisis impacting businesses and creating liquidity and
profitability issues is perhaps the right time for the Punjab Government to eliminate this
disputed levy and help the businesses in their struggle to continue business operations
and pay their monthly wage bills.
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