Reverse charge should only be levied on service providers located outside Pakistan

Reverse charge should only be levied on service providers located outside Pakistan

KARACHI: Sindh Revenue Board (SRB) has been advised that reverse charge should be restricted to such cases where service providers are located outside Pakistan.

Overseas Investors Chamber of Commerce and Industry (OICCI) in its budget proposals for 2020/2021 submitted to SRB said that all provincial statues provide 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 is 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 provide mechanism for registered services recipients to claim sales tax paid on reverse charge in case of payment to service providers based outside the country.

Sale tax at 3 percent is charged on export of call center services (9835.0000) and standard rate is charged on both export sales of Software or IT based system development consultants (9815.6000) under reverse charge provisions.

No separate category for IT based & ITES is available in Sindh Sales Tax on Services Act, 2011 whereas both Punjab Revenue Authority (PRA) and Federal Board of Revenue (FBR) recognize IT based and ITES as distinct from other categories.

The OICCI presented recommendations:

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.

ii. All exports for which foreign remittance is received through banking channel in business bank account should be exempt. At the very least exports of IT and IT enabled services should be exempted to make it consistent with SRB Notification 3-4/11/2017 (Software Services exempt only) & Notification No. SRB-3-4/7/2013 dated 18.6.2013].

iii. IT-based and ITES should be recognized with separate tariff code and lower rate should be offered on local services as well.

Giving rationale to the proposals, the OICCI said that all export of services are exempt under PRA, whereas export of IT Services & IT Enabled Services are exempt under FBR.

As a result call centers and software development businesses are moving towards Punjab and ICT where rates are lower.

It said that Pakistan has huge potential in IT and ITES sector with respect to exports and development of local businesses since the cost of providing such services is usually low. Putting such services in same category as other services where there is consumption of input tax is not favorable.