The Khyber Pakhtunkhwa Revenue Authority, set up last week, will start collecting sales tax on services and receive returns from August 15.

The KP Sales Tax on Services Act 2013, enacted earlier, authorises the provincial government to administer the sales tax on services in the province. The KP Sales Tax Ordinance 2000 was repealed.

The authority will follow the Federal Board of Revenue (FBR) rules until it formulates its own rules.

While the sales tax on services is passed on to the end consumers, the government has the power to exempt any person or sector from the levy under the Act.

KP turned out to be the third province in a row, after Sindh and Punjab, to establish its own authority for the collection of sales tax on services, which was devolved to provinces after the 18th amendment in April 2010. Sindh took the lead from July 1, 2011, followed by Punjab from July 2012.

In both cases, the collection of sales tax on services witnessed a robust growth and yielded additional revenue for these provinces.

Their collections were a marked improvement over the FBR’s performance.

To begin with, the KP government has kept the coverage only to the 14 categories of services that were covered under the repealed ordinance of 2000. These services are hotels, clubs, caterers, advertisements on TV and radio (including cable TV), customs agents, ship handlers, stevedores, telecommunication, insurance and re-insurance, banking companies, non-banking financial institutions, stock brokers, shipping agents and courier services.

Sales tax on these services was earlier collected by the FBR for the KP government.

A senior official of the KP finance ministry said, “We are considering expanding the scope of the sales tax to other services in the province,” but did not spell out the exact date for the policy announcement in this regard. The Sindh Revenue Board has already expanded the coverage to many new services, the official added.

The KP government has established a hybrid model of the Punjab and Sindh revenue authorities.

The rate of the services tax is 17 per cent, except for telecommunications, where it is 19.5 per cent, of the value of taxable service. The person who provides the taxable service is responsible for collecting and paying the service tax to the government.

The target set for the sales tax collection on services for the year 2013-14 is Rs6 billion, which is much below potential. In 2011-12, KP received Rs8.9 billion, which was collected by the FBR, and after it had deducted its services charges.

The medium-term fiscal framework of the provincial government has projected that the proceeds from the sales tax collection on services would grow to Rs10.9 billion in the fiscal year 2013-14, and to Rs11.96 billion in 2014-15. These estimates were made at a time when the sales tax rate was 16 per cent. The increase in sales tax rate to 17 per cent in the budget 2013-14 should certainly raise the collection as well.

On the administrative side, the KPRA will work as an affiliate of the provincial excise and taxation department. It will have a director general and four directors with a minimum staff.

The major revenue spinner of sales tax on services will be the telecom sector, which includes calling card and scratch card firms, and tour operators, traveling agencies, beauty salons, banquet halls, restaurants etc. Around 80 per cent of the sales tax collection comes from the telecom sector.