OVERSEAS INVESTORS CHAMBER OF COMMERCE AND INDUSTRY

Transcription

1 OVERSEAS INVESTORS CHAMBER OF COMMERCE AND INDUSTRY TAXATION PROPOSALS SINDH PROVINCIAL TAXES AND LEVIES March, P a g e

2 TABLE OF CONTENTS Page Nos Introduction 03 Multiple Taxes and Increased Cost of Doing Business 04 All Collections Under One Ministry/Body 04 Tax Broadening Measures 04 Sales Tax on Services 06 Procedural and Structural Proposals 17 Other Levies 19 Levies 2 P a g e

3 INTRODUCTION The Overseas Investors Chamber of Commerce and Industry (OICCI), represents the largest bloc of foreign investors in Pakistan. It is the largest Business Chamber in the country based on contribution to the national and provincial exchequers, as well as to the GDP, as over one third of the total revenue collections in the country by the Federal and Provincial revenue authorities, come from OICCI members. OICCI members also have a large footprint on CSR activities as, besides the monetary contributions, employees spend over 800,000 man hours in community welfare work, which last year benefited over 40 million persons belonging to the underprivileged communities across the country. 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 190 Foreign Investors Shareholders from 35 countries / Representation in 14 business sectors 56 listed on Karachi Stock Exchange / 50 associates of 2017 Global Fortune 500 companies Major contributor to the Economy of Pakistan Approximately one-third of government taxes/levies collected from OICCI members OICCI members invested USD 2.2 billion, in new capital expenditure, in Members provide employment to around one million people CSR activities of members benefit over 40 million underprivileged sections of society. Tax Environment OICCI members are fully tax compliant and share the concerns of the government on the very low tax to GDP ratio, which is primarily due to the fact that a significant portion of the economy continues to remain outside the tax net. Members appreciate and support all initiatives of the government to document the economy, penalize non-filers with higher withholding tax rates, and harmonize the property valuation besides the actions taken recently for potential access to multiple sources of tax evaded assets held locally or overseas. However many more measures and strict enforcement measures need to be incorporated in the relevant laws to ensure a more compliant tax culture in Pakistan, where there are rewards for the compliant tax payer and enforceable penalties for tax evaders. As OICCI members are fully committed to a tax compliant environment, they do not support introduction of tax amnesty schemes in any shape or form. The balanced views of the Chamber, based on research and operating experience of its members in Pakistan is closely followed by various international business chambers, diplomatic missions based in Pakistan and visiting foreign business delegations who come to get firsthand information of the business environment for potential foreign investors, and other stakeholders looking for a stake in the growing economic potential of the country/region. OICCI avails these regular interactions to highlight the business potential and various tax and fiscal incentives available to foreign investors, as well as to share success stories of member companies in Pakistan. 3 P a g e

4 MULTIPLE TAXES AND INCREASED COST OF DOING BUSINESS OICCI members appreciate the fact that the 13% Sindh sales tax on services is the lowest sales tax rate amongst all the Revenue Boards of the country. However members continue to express concern that the cost of doing business in Sindh is higher than the other provinces, on account of certain levies, for e.g. SDMI, which are not applicable in other provinces. Taxes levied in Sindh should be harmonized with taxes in other provinces of the country, to ensure that investors in Sindh do not lose on competitive edge. Secondly, the taxes should be levied rationally, e.g. marking fee and stamp duty, are charged without any concrete rationale and without considering its negative impact on business. The consolidation of taxes will also make compliance easy for taxpayer. ALL REVENUE COLLECTIONS UNDER ONE MINISTRY/BODY 1. Integration of all Revenue Collections 4 P a g e Currently revenue collections of the Province of Sindh fall under the following Ministries/Bodies; Sindh Revenue Board (SRB) Ministry of Excise and Taxation and Sindh Board of Revenue (BoR) responsible for taxes on all transactions related to immovable property, stamp duties and agriculture tax OICCI strongly recommends that all revenue collections should be merged under one Ministry/Body. The provincial government can devise an in house mechanism to share the revenue of the above three bodies through intra-government fund transfer. 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 147 in 2018, in the World Bank EODB survey. TAX BROADENING MEASURES 2. Agricultural Income Tax As per the constitution of Pakistan, right of taxing income lies with the federal government except income from agriculture which is taxable under the respective provincial laws. Agriculture related activities contribute approximately 20% 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 Sindh 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 and unscrupulous elements by transfer of income and wealth to businesses fronting as agriculture sector.

5 Some of the key issues related to agriculture income are identified as follows: 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 In light of the above, following proposals, given last year, are again given below: 1. 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 therefore in almost 100% of the cases 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 ; 2. 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 government. 3. 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]. 4. Definition of Agricultural Activity: Definition of agricultural income should be amended to include all agricultural activities like non-corporate dairy farming and poultry etc. 5. 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. 5 P a g e

6 SALES TAX ON SERVICES 3. 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. 6 P a g e 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, for e.g. 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. 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 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. III. IV. Revenue authorities should decide the basis of levy of indirect tax, which can be ORIGINATION or TERMINATION, to establish jurisdiction of taxation of services; 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 One return may be filed with identification of provincial head of account and direct deposit of share of tax of each province. 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.

7 4. Reduction In Sales Tax Rate The expectations of the investors that the Sindh Revenue Board will continue the reduction of Sales Tax rate on services to 13%, as done in fiscal year will be repeated in , remained unrealized. Although, investors appreciate that the Sales Tax rate in Sindh province at 13% is the lowest in the country, it remains higher than comparative regional tax rates, as per the rates given in the graph below: 20% 15% 10% 5% 0% 7% 7% Regional Sales Tax Rates 10% 11% 12% 13% Thailand Singapore Indonesia Sri Lanka Philippines Sindh Revenue Board 17% Pakistan To keep in-line with the regional developing countries, reduction in sales tax on services should be made by 1% in the Sindh Finance Act and should be continued in the next coming budget and gradually reduced to 10% over the next three years for registered entities, whilst the current rate should be maintained for unregistered entities. This reduced rate will encourage the registration of the unregistered taxpayers to avail the benefits of input adjustment. Secondly, the option to opt for the basic rate or normal regime should be given to all the service provider who fall under the reduced/fixed rate regime. This option will reduce the cost of doing business for recipient of services as lower tax is not available for input tax adjustment. 5. Reverse Charge [Section 3(2) of & Rule 22 of SSTSA]: 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 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. 7 P a g e

8 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. To avoid double taxation, allow input tax and reduce cost of doing business. 6. Reduction In Sales Tax On Telecom Services The high growth rates of cellular Industry in Pakistan have slowed down due to various reasons which include higher taxation. Pakistan cellular industry is one of the highest taxed in the region. This relative decline in growth has resulted in decrease in revenue from cellular industry. Currently, sales tax rate on telecommunication services is 19.5%. It is proposed that this should be brought at par with other services - sales tax on telecom services be equivalent to general Sales Tax rate on services, in order to harmonize all sales tax on services rates. This will increase the tax collections by helping telecom operators tap lower income population of Pakistan. 7. Exemption/Reduction of Withholding Agents from deducting Sales Tax from payments to unregistered persons 8 P a g e Section 9 of the Sindh Sales Tax on Services Act, 2011 (Sindh Act), provides that where a taxable service is provided by a non-resident unregistered person in the context of Section 3(2) of the Sindh Act, the liability to pay the tax shall be on the resident person receiving the service. On the other hand, the provisions of the Sindh Sales Tax Special Procedure (Withholding) Rules, 2011, provide that a withholding agent is required to deduct sales tax at applicable rate against any taxable services obtained from unregistered persons at gross value of the services. Both provisions of law are not consistent with each other, and scope of deduction of withholding sales tax against the invoices of unregistered service providers has been enlarged beyond the charging provision of Section 9(2) of Sindh Act to the extent that it applies on resident as well as non-resident unregistered service providers. Withholding agents registered with large taxpayers unit should be exempted from deduction of Sales Tax at applicable rate against the payments to the unregistered persons. The rate of withholding sales tax against the invoices of unregistered persons should be reduced to 1% in line with the FBR s Withholding Sales Tax regime as applicable under SRO.660 (I)/2007. The withholding agents are unnecessarily burdened with deduction of sales tax which is not claimable as input tax and is thus resulting in increasing their cost of doing business. Similar matters have already been decided by the courts in case of sales tax withholding rules of FBR and PRA. The ultimate objective of the taxpayer is that indirect tax should not

9 increase its cost of doing business. Moreover these enforcement measures have negative bearing on the regulated sector only. 8. Admissibility of Input Sales Tax on Services As per section 18 Sindh Sales Tax on Services Act, 2011 read with rule 22A of the Sindh Sales Tax on Services Rules, 2011, the input tax may not be claimed by a registered person on the goods in respect of which sales tax has not been deposited in the Government treasury by the respective supplier. It is an unreasonable expectation by tax authorities from the buyer to ensure the deposit of the sales tax into Government Treasury by the seller, as the buyer does not have any enforcement power over the seller. Section 18 should be suitably amended to exclude the taxpayers falling under Large Tax Payers Unit who are already subject to greater scrutiny and tax audits. This will remove the undue pressure on legitimate taxpayers, as it is not the responsibility, neither the jurisdiction of the service recipient to ensure that the supplier has deposited output tax. Furthermore, legitimate taxpayers will not face harassment from tax authorities. 9. Admissibility of Input Sales Tax on Goods The input sales tax adjustment has been restricted to 13% as per section clause (k) of section 15A of the Sindh Sales Tax on Services Act, The Act should be amended and claim of input tax should be allowed at the actual amount of sales tax paid by the registered buyers in order to save them from any extra cost burden. This will remove the undue pressure on cost of legitimate taxpayers, as it is the basic right of the tax payer to claim sales tax on such goods as input tax. Further removing such kind of restriction will save both authorities and tax payer from unnecessary litigation. 10. Claim of Input Tax [Section 22] 9 P a g e The input tax can only be claimed if the same is paid rather than following the accrual method of accounting. Further, the input tax has to be claimed within next four months from the relevant tax period. This restriction will give rise to filing of refund which resultantly brings administrative hassle to taxpayer and tax collector. It is recommended that claim/adjustment period of input tax should be increased to six months and adjustment should be allowed on payable basis rather than paid basis i.e. in line with the mechanism adopted by FBR.

10 11. Input tax claim for reduced rate services Input tax paid for reduced rate services should be allowed to be claimed under SRB The concept of sales tax is to allow adjustment of input tax with output tax 12. Joint and Several Liability of Registered Persons in Supply Chain where Tax is Unpaid [Section 18 of SSTSA]: 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. The provision should be aligned with Section 8A of STA. Accordingly, the burden to prove that the service provider and service recipient acted in connivance, should rests upon the tax authorities. To bring harmony among federal and provincial sales tax laws. 13. Use of technical knowhow/ information for manufacturing be eliminated from the definition of Franchise services [SSTSA 2(46)]: The definition of Franchise Services is very broad and generic that covers technology transfers being made through use of technical knowhow/ information for manufacturing in Pakistan, which generates employment, saves foreign cash outflows for imports and contributes to society. Use of product knowledge, technical know-how/ information for manufacturing should not be included in the definition of Franchise Services. Taxpayers suffering from increase in cost of doing business even on account of technology transfers will get some relief and provide an incentive to foreign investors. 14. Franchise Services at reduced rate Since Jul 2017, Franchise Services has been included in reduced rate services and the option available to pay at normal sales tax has been withdrawn, which resulted in litigations, which is not beneficial both for taxpayer and SRB in the long run. 10 P a g e Option be restored to pay Sales tax at normal rate on Franchise Services, as applicable upto Jun 30, 2017.

11 Litigations are costly, create administrative hardships and cause unnecessary carry of provisions and contingencies in the financial statements. 15. 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. Services received by pharmaceutical industry should be zero rated. Since pharmaceuticals prices are controlled, sales tax paid on inputs can neither be added to the selling price nor separately charged. 16. 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. 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 Sind Sales Tax. This will result in harmonization of tax laws in Pakistan and would ensure convenient compliance with tax laws through uniform systems across the country and would also contribute towards the economic development of the Country. 17. Common Sales Tax Return Filing Portal Requirement specification for FBR, SRB, KPK, BRA & PRA should be same for filing of monthly sales tax return rather than submitting same return at different portals, one portal accessible to all tax authorities should be there. This would save operational cost of taxpayer as well better visibility for Federal and provincial tax authorities. 11 P a g e

12 18. Provincial Sales Tax on toll manufacturing Sindh and Punjab provincial governments are treating toll manufacturing activity as a service and have levied sales 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. Toll manufacturing should be deleted from the list of services. It will bring practice in line with the norm. 19. Permanent Exemption of Life and Health Insurance from Provincial Sales tax 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. Each year, the life/health insurance companies have been approaching the Sindh Revenue Board (SRB) for an exemption, which is granted annually. The current exemption for life insurance, is valid till June 30, However, after the lapse of exemption for Corporate Health Insurance, on June 30, 2016, the same has not yet been renewed, and only Individual Health Insurance has been exempted, till June 30, The life and health insurance industry is based largely in the province of Sindh, where, the medical sector itself is exempt from SST. Accordingly, subjecting the corporate health insurance to SST is making it uncompetitive, in Sindh, by adding on to the cost of health insurance. Discussions are still ongoing with the Chairman SRB, and the Chairperson, Sindh Board of Investment, for exemption on the same. SST on Services Act, 2011: 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 by incorporating the same under the under table of exempt services specified in SRB s notification no. SRB 3-4/7/2013 dated June 18, 2013, as per the following: S. No. Tariff Heading Description Life Insurance Health insurance, rendered to both, individuals and corporates. 12 P a g e It may be mentioned that in Punjab Life and Health insurance is already exempt, however, in Sindh these are taxable services.

13 A 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 assertion that insurance is not a service, has also been legally tested in the USA in the Fairbanks v. Superior Court, 46 Cal.4th 56 (March 20, 2009), wherein the California Supreme Court ruled that life insurance policies are not services and described Insurance as a contract of indemnity under which, in exchange for the payment of premiums, the insurer promises to pay a sum of money to the designated beneficiary upon the death of the named insured. The Punjab Revenue Authority has exempted both, life and health insurance, and the Khyber Pakhtunkhwa Revenue Authority has exempted life insurance from the purview of taxable services. There needs to be rationalization and uniformity of provincial taxation to enable ease of business throughout the country. Furthermore, Sindh having taxed this as services, has brought the health insurance industry of Sindh at a disadvantage both, within the province itself and in comparison to the other provinces, making it difficult to do business in Sindh vs Punjab. Such tax is highly discriminatory as entire health sector itself remains exempt and is not taxed. This creates a deterrence for insurance business, as a person obtaining insurance would be paying additional 13% as well as cost of insurance, compared to directly obtaining health services, where he does not have to pay this tax. This is clearly discriminatory and in violation of Article 25 of the Constitution of Pakistan. 20. Sec 2(87) of the Sindh Sales Tax on Services Act 2011 The definition of Sponsorship includes.naming an event after the sponsor, displaying the sponsor s logo, trade name, brand name or product name, giving the sponsor exclusive or priority booking rights, sponsoring prizes or trophies for competition or game or sports; but does not include financial or other support in the form of donations and gifts, given by a donor, subject to the condition that the service provider is under no obligation to provide anything in return to such donor..." However, it does not exclude the activities carried out under the ambit of CSR. For example, the Guidelines for Continuing Medical Education (CME) issued by the Pakistan Medical & Dental Council (PM&DC) also prohibit promotional activities during such CME events. The definition of sponsorship should exclude CSR activities since these are performed for non-commercial objectives. This change will increases the capacity to invest in human and community development activities. 13 P a g e

14 21. Definition of Other Services [2nd Schedule of SSTS (Taxable services] Definition of other services (2nd Schedule Taxable services 9813: 4990 SSTS) Other services not specified elsewhere The heading other services not specified elsewhere should be deleted from the schedule. It is a generalized term without any definition and gives unlimited power to tax any services. 22. Value of Taxable Services [(Section 5 (iii)) of SSTS), (Section 7 (4) of PSTS) and Section 23 (III) KPKSTS] If a person provides a services for no consideration or at a discount, in such case the value of the service shall be the open market price for the similar services. It means that Sales tax will be applicable, on even if the services are free of charge. These Sections should be deleted. There should be no sales tax on free services. In other cases, sales tax should be directly related to consideration for services. Banks can allow discounted services depending on the category of the account holders. 23. Normal sales tax rate be applied for services provided by authorized car dealers under tariff heading Sales tax on services by authorized car dealers under tariff heading , is at reduced rates and input sales tax is barred, while no such position is available under any of the other Provincial sales tax laws. Further, no option is available to the service provider to pay sales tax at the normal 13%, instead of reduced rate, as provided for other services under notification No. SRB 3-4/5/2015 dated Jul 01, 2015, e.g. Construction services, Transportation services, Concrete services etc. Normal sales tax rate be applied for services provided by authorized car dealers under tariff heading Alternatively, Option be provided to authorized car dealers of vehicle manufacturers to pay sales tax at normal rate under tariff heading , as provided to other services. Application of standard rate will eliminate the discrimination arising on services provided by Dealers in Sindh against other provinces and cost of doing business will reduce for service providers and recipients. 14 P a g e

15 24. Sindh Sales Tax on inter-city transportation services on petroleum products. The Sindh Revenue Board have recently issued rules on Transportation of Petroleum Oils through Oil Tankers vide notification SRB-3-4/I/2018 dated February 2, The rules require withholding of tax by OMCs for services provided by transporters and to deposit 50% of the tax in Sindh (where the transport has originated) and 50% in the province of termination / destination The law should be kept in abeyance till the time, the other four provinces, namely (KPK, Baluchistan, Punjab and Federal) have issued their rules validating the deposit of only 50% of the tax withheld in their jurisdiction. SRB cannot solely dictate the tax law governance of other provinces. 25. Time to Claim Input Tax [Rule 22 of SSTSR[: Time to claim input tax credit is four months from the end of relevant tax period. Such time frame is insufficient and does not cater to business needs. s The time period for claiming input tax on purchases should be increased to one year. Rationale To facilitate Taxpayers and harmonization of laws. 26. 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. In line with Federal Government s policy to exempt social areas from Federal sales tax, the Institute recommends that services provided in / to such sectors should also be exempted. Rationale To remove inequality in provincial sales tax laws. 27. Provincial Sales Tax on Manpower Due to a recent amendment in provincial sales tax laws, sales tax is now levied on salary reimbursement in addition to service charges. Since the sales tax is added to the cost of the product instead of being passed onto the consumer, it adversely affects the business. We propose that the sales tax should only be charged on service charges, as the salary reimbursement is effectively not a service obtained. 15 P a g e

16 Rationale This proposal will help the businesses to reduce their cost of doing business. 28. Sindh Sales Tax on Services Act, Second Schedule respective tariff heading The act defines a threshold of Rs. 4 Million (annual turnover of the service provider) below which the following services that are otherwise taxable remain exempt from sales tax: Restaurants, Caterers, Contractual execution of work or furnishing of supplies, Contractor of building, construction services, Auto workshops, workshops for electric or electronic equipment or appliances including computer hardware, dry cleaners or launderers, car or automobile service stations. However, the act does not define a procedure that a recipient of such services may adopt to verify the status of an unregistered person providing such services that is whether the services are exempt due to the applicable threshold limit The act needs to be amended to define a procedure that a recipient of such services may adopt to verify the status of an unregistered person providing such services that is whether the services are exempt due to the applicable threshold limit. Rationale The proposed change will help ensure compliance of withholding rules. 29. 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). 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. 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 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. 16 P a g e

17 PROCEDURAL AND STRUCTURAL PROPOSALS 30. 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 SST registered person which should be provided on SRB portal. Active Taxpayers List (ATL) be provided in excel 31. Launching of STRIVe in SRB portal As successfully launched by FBR and PRA, SRB should also adopt and launch STRIVe in SRB portal. STRIVe will benefit both registered persons and tax authority. Rational or Benefit For registered person STRIVe will enable them to claim genuine sales tax invoices and for SRB it will help them in their real-time audit and monitoring of sales tax claimed made by registered persons. 32. Withholding of sales tax on services Elimination of SST withholding for all registered persons The withholding agents are unnecessarily burdened with deduction of sales tax which is not claimable as input tax and is thus resulting in increasing their cost of doing business. It is suggested that withholding of Sindh Sales Tax should be restricted to Unregistered Persons or persons who are not active taxpayer in sales tax. Rational or Benefit The ultimate objective of the taxpayer is that indirect tax should not increase its cost of doing business. Moreover, these enforcement measures have negative bearing on the regulated sector only. 33. Assessment Of Tax - Section 23(5) Any assessment order can be amended by the tax officer on the basis of any subsequent information, etc. Such powers are arbitrary and unjust and may open the doors for harassment and corruption. 17 P a g e The taxpayer should first be confronted with a show-cause notice with substantial reasons / evidence(s) that warrant reopening or amending the assessment order. Further, the powers to amend any assessment order should only vest with the Commissioner or Board.

18 Rationale In order to introduce transparency in the system and provide justice to the taxpayer. 34. Retention of Records - Section 27(1) The taxpayer is liable to retain books / records for a period of 10 years from the date of relevant tax period. Further, show cause notice may be served to any taxpayer within a period of 8 years from the date of relevant tax period. The time period for retention of records and assessment of tax should be rationalized till 5 years, which was in place prior to Sindh Finance Act Rationale To save taxpayers from practical difficulties, unnecessary hardship and to keep the exchequer more vigilant for taking timely action. Further, the proposed timeframe of 5 years should be in line with other tax laws of the STA and ITO. 35. Obligation To Produce Documents And Provide Information - Section 52(1) The tax officer is empowered to solicit any information or record from any person without specifying any reason and without specifying the reference of any case being investigated by him. Scope of Section 52(1) should be restricted to specific parties and transactions already identified by SRB instead of a mere fishing enquiry. Rationale To provide equity, fair play and to avoid harassment and corruption by tax officials. 18 P a g e

19 OTHER LEVIES STAMP DUTY 36. The definition of the term 'instrument' The definition of the term 'instrument' as contained within the Stamp Act 1889, applicable for the province of Sindh, was amended in 2006 to broaden its scope. Subsequently through an amendment in the Sindh Finance Act of 2009, the term Purchase Order (PO) was included to the stamp schedule for purposes of levy of the stamp duty on POs generated at the rate of 0.25% of the amount of the PO. The progressive nature of the tax is increasing the cost of doing business and further raises the issue of double taxation, in the presence of income and sales tax as direct and indirect taxes respectively. The levy is currently enforced only in Sindh and therefore causes serious hardships for corporate sector registered or carrying out business in Sindh Province as against other provinces. It is recommended that the Stamp Duty on Purchase 0.25% should be eliminated as it is a tax on instrument' and not on a transaction. If it is not a transaction tax on purchases then there can t be a dual charge under the constitution on same nature of transaction. Furthermore, Stamp Duty is payable on enforceable instruments. PO in commercial sense is a document only acknowledging the transaction that will be undertaken and does not fall within the ambit of Stamp Act. 37. Exemption to Banking Companies on transactions under Islamic mode of financing [ 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. Explanation For the purpose of this Section, Banking Company shall have the same meaning as in the Banking Tribunals Ordinance, 1984 [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. 19 P a g e New legislation to be drafted in the light of below comments: 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. Explanation: In case of sale or purchase of immovable properties by banks or financial institutions 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

20 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. Special Purpose Vehicle means a Special Purpose Vehicle as defined in the Asset Backed Securitization Rules, Exemption of duties under Stamp Act 1899 In order to ensure tax neutrality for Islamic Banking Institutions as well as fulfilling the registration requirements with regard to sale/purchase of immovable property under the Registration Act, 1908, the provincial governments may be requested to exempt the registration of sale/purchase of immovable properties for the purpose of extending financing facilities under Islamic modes of financing by IBIs. Section 9A of Stamp Act 1899 empowers the provincial governments to do the needful, as proposed. We strongly believe that such exemptions should also be provided on Islamic financing transaction involving transfer of immovable property in Pakistan 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. Accordingly, provincial governments may be requested to issue the proposed SRO/notification in their official gazettes. Rational or Benefit In order to facilitate Islamic financing transaction involving transfer of immovable property, developed countries such as Malaysia and United Kingdom have specifically allowed exemption to Islamic financing transaction from such levies. Whereas, in Pakistan the sale/purchase of immovable property by IBIs is subject to stamp duties, registration fees, capital value tax and town 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. 38. Sindh Development & Maintenance Infrastructure Fee/ Cess Sindh Finance Act, 1994 (as amended from time to time) levied Cess/ Fee for the maintenance and development of infrastructure on all imports. It is proposed that Sindh Development & Maintenance Infrastructure Cess be withdrawn in its entirety. We understand that this levy is adversely affecting in terms of increasing the cost of doing business in Sindh. Elimination of the same will reduce unnecessary burden on importers through Sindh Province. 20 P a g e