Provinces to Include More Services in Sales Tax for IMF Credit Line
Islamabad: In a significant policy shift, provinces have agreed to extend the sales tax to more services from the next fiscal year, fulfilling IMF requirements for a new $7 billion credit line.
All four provinces have made a written commitment to changing the sales tax on services from a positive list to a negative list system starting next fiscal year. This new approach will tax all services except those explicitly exempt, diverging from the current system, which taxes only listed services.
At the provincial level, sales tax is applied to specific services known as the positive list, which are subject to different tax rates, while all other services are exempt. On the other hand, the federal sales tax applies to all goods unless they are specifically mentioned in the 6th Schedule to the Sales Tax Act 1990 or exempted under section 13 of the same act.
In line with the IMF agreement, provinces will finalize a negative list of services that will be exempt from sales tax, similar to the 6th Schedule for goods. This change is expected to broaden the scope of tax collection.
In FY24, the Sindh Revenue Authority reported Rs236.85 billion in sales tax on services, the Punjab Revenue Authority reported Rs239 billion, and the KP Revenue Authority reported Rs41.77 billion. The Balochistan Revenue Authority’s final collection data is still pending and will likely be considerably lower than KP’s total.
In 2000, a sales tax on a few services was implemented for the first time. From July 1, 2000, to June 2011, the FBR had the authority to collect it. Following 2011, provinces enacted the Sales Tax on Services Act 2011, establishing a positive list of Taxable Services.
From the outset, provinces have encountered taxpayers who have raised classification disputes and contended that their economic activity does not qualify as services.
Despite the presence of definitions for multiple taxable services, the number of disputes and litigations continues to grow.
Positive to negative list All four provinces and Islamabad Capital Territory will alter their separate sales tax laws to accommodate the negative list idea.
This will also allow for the harmonization of Pakistan`s sales tax policy. On the other hand, the negative list means that the IMF will continue to pressure the government to remove services from the negative list and charge them to raise revenue. This harmonization is only achievable if the World Bank hires specialists to create a negative list, as only some provinces can do so.
Experts on sales tax on services have outlined several steps for implementing the negative list, noting that creating an effective classification code for services is a major challenge. The existing code from Chapter 98 of the Pakistan Customs Tariff needs to be revised to define service transactions adequately.
The process of developing the negative list must address Pakistan’s economic and political challenges. Mapping existing and new classifications is essential to avoid disputes for taxpayers.
Engaging all stakeholders throughout the compilation of the negative list is important to ensure a smooth transition. Moreover, a consistent inter-provincial consultation process will be essential for the successful and dispute-free implementation of the new system.
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