Sales tax on services

LAHORE: Provincial revenues have improved after establishment of provincial revenue authorities to collect services tax and other provincial levies.

However, the lack of coordination between federal and provincial revenue authorities helps the services sector escape the income tax net.

If we may recall, value added tax (VAT) now renamed as general sales tax was introduced in Pakistan in 1987 with an aim to document every economic activity at all stages of the chain.

All businesses were required to register under the sales tax regime and deposit the sales tax collected at each stage with the sales tax wing of the Federal Board of Revenue (FBR).

This sales tax then becomes the basis for calculating the gross income of each business.

For instance, if a supplier deposited sales tax worth Rs17 million, then its gross revenue at current sales tax rates would be Rs100 million.

The supplier would be required to furnish details of documented expenses on the gross income available with the FBR. This would determine its income tax.

Though the sales tax regime is operating in a truncated way because of flaws and corruption in the FBR, it still offers the most transparent system to calculate income tax. This is the reason that many businesses, particularly the traders, refused to register under the sales tax regime. But those that have been pursued to register cannot escape income tax.

Earlier, the FBR collected sales tax on both goods and services. Later, sales tax on service was placed under the domain of the provinces.

Now, the federal government collects mostly the sales tax on goods and the FBR through the available technology can calculate the gross income of all sales tax registered goods manufacturing entities.

But the sales tax collected on services by the provinces does not generate this information as the record sharing of provincial revenue authorities with the FBR is opaque.

This perhaps is the reason that despite a weight of over 55 percent in our GDP, the income tax collection from the services sector is pathetically low.

There are numerous issues that can be resolved through technology.

One is that the sales tax rate of each province is different and less than what FBR charges on goods.

The second reason is that there is no uniform sales tax rate on different services in each province.

This only complicates matters; but technology has the power to resolve this issue if all the provincial revenue authorities keep a permanent liaison (again through a software) with the FBR.

A software can be developed to compile complete data of services sales tax received from each service provider in different provinces and calculate the gross income. The FBR could then charge income tax after deducting documented expenses.

This is a hanging fruit that should be grabbed when Pakistan is in dire need of revenues.

There are other issues as well. Many services like that of doctors, hospitals, lawyers, engineers and many others are not covered by the provinces under provincial sales tax regime.

More in the GST mode the sales tax paid at one stage of activity is adjustable in the next stage.

The sales tax collected on services by the provinces is not VAT mode, but is in the shape of non-refundable sales tax. The value chain in the services sector can easily escape income tax. The planners are not serious in bringing the services sector under the proper tax net.