ISLAMABAD: The requirement of filing monthly sales tax return is the main reason for Pakistan’s low ranking in the Paying Taxes Indicator of the World Bank.
The World Bank in a recent report on Pakistan taxation said that the country’s tax system is complex due to overlapping jurisdictions with different laws, exemptions, and frequent policy changes.
It said that service providers operating across Pakistan are obliged to file sales tax on services returns with all five jurisdictions every month, resulting in a total of 62 tax returns based on five different sets of rules and formats for sales tax on services alone.
“The requirement to file monthly sales tax returns is one of the main issues for Pakistan’s low
score and ranking in the Paying Taxes indicator, which is the country’s worst ranking in the 2019 Doing Business report.”
Pakistan is ranked 173nd among 190 economies for this indicator with 47 payments and an estimated time to comply with tax obligations of 293.5 hours per year, down from 311.5 in the previous year.
The World Bank said that the Constitution assigns income taxes (except for income derived from agriculture), Sales Tax on goods, customs duties, federal excises, and the Capital Gains Tax (CGT) to the federal level.
These taxes are collected by the Federal Board of Revenue (FBR).
The Constitutions assigns the following taxes to the provinces: sales tax on services, tax on professions, Agricultural Income Tax (AIT), Motor Vehicle Tax (MVT), Urban Immovable Property Tax (UIPT), and other taxes related to real estate (e.g. stamp duty, Capital Value Tax).
This tax assignment essentially fragments Pakistan into five markets in the services sector, with important consequences for tax authorities and taxpayers alike.
The World Bank said that several taxes are often levied on the same transaction (e.g. stamp duty, registration fee, Capital Value Tax, and Capital Gains Tax on property transactions) and/or affect the same taxpayer segments (e.g. professionals are liable to income tax, professions tax, and sales tax on services).
Double taxation is particularly serious problem for firms that provide services across the country.
These firms are liable to Corporate Income Tax paid to the FBR and sales tax on services paid to each of the provinces where they operate and to the FBR for operations in the Islamabad Capital Territory.
The five jurisdictions have different rates for sales tax on services and apply different principles in levying this tax (e.g. some levy the tax based on the firm’s registered address, others based on the customer’s location).
Disagreements on the definition of goods and services also affect the restaurant and catering sector, which the federal level subjects to sales tax on goods (food and beverages), while the provinces also levy sales tax on services.