KARACHI: Institute of Chartered Accountants of Pakistan (ICAP) has recommended harmonization of federal and provincial tax laws to facilitate the taxpayers.
In its budget proposals for fiscal year 2019/2020 the ICAP suggested following measures for harmonization of federal and provincial taxes:
Integration of Taxation Authorities for One-Window Solution
The ICAP believes, there should be a strong integration of all revenue authorities in such a way that each authority would maintain its existence but should provide one-window solution for the taxpayer.
This would be not only for enabling inter-adjustment of refunds, but also for one return for both the Federal and Provincial Taxes.
In this regard, STRIVE should be implemented at provincial level also along with integration with the Federal return.
The Federal Board of Revenue (FBR) is practically not allowing refunds for Provincial sales tax, owing to settlement disputes / claims pending with the Provincial Tax Authorities.
Further, unnecessary notices are issued against input tax claims, on account of non-verification of Provincial sales tax in FBR’s system.
This issue needs to be taken up with the Provincial sales tax authorities for its resolution at the earliest.
Federal and Provincial Policies – Enforcing Uniformity
A policy board comprising Chairman of the FBR as well as the Provincial Boards should be formed to ensure uniformity in policies, tax rates and procedures of the Federal and Provincial Revenue Boards. Standard Schedule of services should also be introduced.
Classification rules play a vital role and are generally crucial in the identification of a correct tariff heading for levying tax.
The provincial statutes should provide classification of taxable services in a more consistent manner to provide clarity and help reducing unnecessary litigation.
Sales Tax Rate to be Standardized
Another key area for correction is different Sales Tax rates prevailing across provinces. For example, standard rate of sales tax in Punjab is 16 percent, which is high as compared to other provinces and, therefore, needs some standardization.
Standard rate of Sales Tax should be reduced to 13 percent, in line with the SST to attract more taxpayers into the tax net; reduce cost of doing business; and bring equity with other provinces.
Concept of Reverse Charge under Provincial Sales Tax on Services
All Provincial Statues provide that service provided by a non-resident service provider is liable to tax under reverse charge mechanism i.e. in the hand of service recipient.
A nonresident has been defined as a person who is not registered with the relevant provincial statute.
Concept of reverse charge is used in many countries so that service exporters do not have to get themselves registered in the jurisdiction of the service importer.
In Pakistan, inter-provincial transactions are not zero-rated, or exempt in the jurisdiction of origin.
Accordingly, such a tax framework is tantamount to double taxation in case where service provider is located in other province of Pakistan, because the service provider becomes liable to tax in his/her respective Province; while the recipient of service becomes liable to tax in the Province of his/her residence.
It is suggested that the reverse charge should be restricted to such cases where service provider is located outside Pakistan.
Further, tax paid under the reverse charge mechanism should be allowed as an input tax.
Export of Services
Unlike STA, zero rating of services is not available in other provincial statutes in line with the best international practices.
In PSTSA, zero rating is allowed on the basis of certain harsh conditionalities; while under SSTSA, such benefit is only extended to Accountants & Auditors and Software Consultants.
Zero rating on export of all taxable services should be allowed without any conditionalities by all provinces in order to promote export of services in the international market, and to harmonize the service tax laws with the federal tax law; in line with the best international practices.
Time to claim Input Tax
Presently, the time to claim input tax credit in all provinces is six months, and that in PRA is four months from the end of the relevant tax period.
Such period is insufficient and does not cater to business needs.
It is, therefore, suggested that the time period for claiming input tax credit be consistent across all the Provincial Statutes and be also increased to one year.
Single Base for Calculating Property Related Taxes
It is proposed that a single base be defined to calculate all the Provincial and Federal taxes applicable on acquisition and disposal of property.
This would help in documentation of the untaxed money parked in the real estate sector. Appropriate changes in the Constitution of Pakistan are also desired for the purpose.
Sales Tax Withholding
Except for Punjab, all the Provinces require withholding of sales tax for registered / active taxpayers as well. This results in unwarranted administrative and operational issues.
In this regard, it is suggested that in all the Provinces, sales tax withholding be exempted in cases where service provider is registered. Where a service is provided by an unregistered person to the registered service recipient, the liability to pay the tax practically falls upon the
person receiving the service in almost all cases.
The whole amount of sales tax is required to be withheld from the payment made to the unregistered person.
It is suggested that the rate of withholding tax for unregistered service providers may be reduced to 1 percent; in line with the Federal Sales Tax Rules.