2009-10 budget: FED may be levied on new services

[Naveed Yaseen]

SOHAIL SARFRAZ
ISLAMABAD (May 22 2009): The Federal Board of Revenue (FBR) is likely to levy Federal Excise Duty (FED) in the mode of Value Added Tax (VAT) on a number of new services in budget (2009-2010) to enhance revenue collection from services sector. Sources told Business Recorder on Wednesday that the FBR is thoroughly reviewing list of existing services for identifying potential service providers.

The FBR is examining the list of services specified in the Chapter-98 of the Pakistan Customs Tariff (PCT) of the Customs Act, 1969. The FBR has given the names and nature of business of all service providers in the Chapter-98 of the PCT for reference purposes. The definition, classification and nomenclature of services have been given in the Chapter-98 of the PCT.

However, all these services are not liable to sales tax or FED in VAT mode unless specified in the First Schedule of the Federal Excise Act. Under section 3 of the Federal Excise Act, goods and services specified in the First Schedule shall be charged to federal excise duty at the specified rates.

The section 7 of the Federal Excise Act also deals with the applicability of excise duty on services. Therefore, the services not specified in the First Schedule of the Federal Excise Act are exempted from the FED. While the services specified in the Chapter-98 of the PCT would not be effective till incorporated in the Federal Excise Act.

Sources said that the FBR is reviewing the list of Chapter-98 of the PCT to pick the potential service providers for bringing them into the tax net. The FBR is also analysing the revenue implications, enforcement and compliance issues of the services for broadening the tax-base.

The list of services in Chapter-98 included: construction services; services provided or rendered by property developers and promoters; courier services, services provided or rendered by persons engaged in contractual execution of work or furnishing supplies, services provided or rendered for personal care by beauty parlours/clinics, slimming clinics and others, services provided or rendered by laundries, dry cleaners; telecommunication services, services provided or rendered by architects, town planners, contractors, property developers or promoters, interior decorators; architects or town planners, services provided or rendered by professionals and consultants, medical practitioners and consultants, legal practitioners and consultants, accountants and auditors, management consultants, technical, scientific, engineering consultants; software or IT based system development consultants, services provided or rendered by specialised agencies/specified persons or businesses like security agency, credit rating agency, market research agency and other such agencies; services provided or rendered by pathological laboratories and other services specified in the Chapter-98 of the Pakistan Customs Tariff.

When contacted tax advisors said that services sector has always been a difficult-to-tax area, but a mechanism has to be developed to tax economic activities taking place in this sector. The tax administration cannot ignore this sector whose overall contribution to GDP is over 50 per cent and this share is growing with the passage of time. Except for few sub-sectors like telecom, finance and insurance, electricity and gas distribution, and sale maintenance and repair of motor vehicles, most of the other services have been negligible tax contribution.

The revenue realised from construction, transport, storage and communication, sale, maintenance of motor vehicles and hotels and restaurants remain extremely below their respective potential. The enforcement in the services sector is relatively lacking because of many reasons. First, sales tax is liveable on self-assessment basis. Service providers used to misuse the facility of self-assessment procedure.

Secondly, the FBR faces shortage of staff and logistic supports, as a huge area has to be monitored regularly. In certain instances where the department tries to enforce the Sales Tax Act, 1900, law and order situations are created which requires active involvement of the provincial government/law enforcing agencies.

They further said that specific consideration needs to be given to implementation as well as enforcement. There is a need to re-organise the enforcement and the provinces have to be given an active role in the enforcement activity. This would require a proper action plan based on co-ordination and support by the provincial government so as to tap this sector and bring a considerable increase in the revenue collection.

For example, each provincial government may identify major cities where Collectorates of Sales Tax or their sub-offices are located. The provincial government may then nominate/appoint a focal person in each city to co-ordinate and assist the sales tax department in the enforcement of sales taxing pertaining to services sector.

This person as a co-ordinator may call the meeting of the concerned association and local administration will convince the associations regarding GST registration. Sales tax department would provide all the data, legal advice and technical assistance for enforcement of law and improvement of revenue collection pertaining to relevant service sector.

After settlement of the issue with the concerned association, the provincial government will be responsible to assist the sales tax department to ensure revenue collection from service providers as per their potential. The provincial departments could provide very useful assistance regarding these services and the potential revenue collection from such service providers could be objectively ascertained. Thus, FBR in co-ordination with the provincial government can improve substantial increase in sales tax collection from services' sector, sources added.

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