THOUGH divergent views of the provinces on the mode of sales tax collection on services have turned into a serious dispute, they have recently agreed to avoid double taxation, so that the cost of doing business does not rise.

The federating units differ over the mode of collection of sales tax on services: whether it should be on the basis of ‘origination’ or ‘destination’.

Punjab and Khyber Pakhtunkhwa are of the view that services received or consumed in their jurisdiction should be subjected to sales tax. But Sindh argues that services originating in its territory should be subjected to sales tax even if they are delivered or consumed in other provinces.

This is not only a critical issue and an irritant between federating units, but also a hurdle in taxability of different types of services due to which taxpayers are suffering and have no option but to pursue courts for resolution of the problem.

A large number of taxpayers have already approached the courts to get relief because they are being double taxed, and their cost of doing business has increased.

Three federating units — Sindh, Punjab and KP — have their own revenue collecting arms, whereas Balochistan has yet to set up its own revenue authority. The federation is collecting the tax on its behalf.

The issue also cropped up during a recent panel discussion after a workshop on ‘Sales Tax Laws on Services,’ jointly organised by the Pakistan Tax Bar Association (PTBA) and the Karachi Tax Bar Association (KTBA).

Some heated arguments were exchanged by dissenting parties, with the Sindh representative insisting that sales tax on services be collected on the basis of ‘origin,’ and Punjab sticking with ‘destination,’ which was strongly backed by the KP representative.

For some time, the organisers and moderator M Zeeshan Merchant found it difficult to control the situation, and reminded both sides to keep in mind the spirit of the memorandum of understanding recently signed by the Federal Board of Revenue (FBR), Sindh Revenue Board (SRB), Punjab Revenue Authority (PRA) and KP Revenue Authority.

The SRB believes that after the 18th constitutional amendment, collection of sales tax on services has come under the domain of provinces, and therefore, Sindh would not allow anyone to question its jurisdiction. As per the SRB’s interpretation, the constitution allows collection of tax on services on the basis of origin.

Senior representative of the Sindh Revenue Board Mushtaq Kazmi argued that the province is a pioneer in starting sales tax on services under the 7th NFC Award, and that the Sindh Sales Tax Act 2011 is a close model of, and contains features distinctive features of the FBR, which principled its revenue collection on the basis of origin.

He argued that section 4 of the Punjab Sales Tax Act 2012, which has also been adopted in totality by KP for collecting sales tax on services, talks about extraterritorial jurisdictions, and, in a way, trespasses the federal government’s territorial jurisdictions.

Under Article 148 of the constitution, all matters and issues falling outside the territorial borders of Pakistan fall under the domain of the federal government.

Mr Kazmi asked if one were to accept collection on the basis of ‘destination,’ who would carry out enforcement and audit of a taxpayer who is registered in Sindh. Similarly, in case of shortages, if the country imports potato and tomato through Wagha border, who will collect sales tax.

Arguing forcefully before the panel, Mr Iftikhar Qutab, chairperson of the Punjab Revenue Authority, said the value added tax (VAT) the world over functions on the basis of ‘destination’ — but at the national level. Therefore, the European Union agreed in 2004 that for the purpose of VAT, the union will be taken as one country.

Under the destination principle, he elaborated that the product originates from one place but is consumed in another where tax is imposed. In support of his argument, Mr Qutab cited that while goods exported from Pakistan are zero-rated, the importing country imposes tax on a destination basis. Then why is a different method being demanded in Pakistan, when it negates the principle of economic justice, he questioned.

After listening to the PRA chairperson’s arguments, KP’s secretary of excise and taxation department Dr Raheal Ahmad Siddiqui reiterated that the KP Revenue Authority fully endorsed his views, and said there cannot be any other opinion on the issue. The authority started functioning from August 14, 2013.

If the KP government attracts multinational companies by providing them safe haven in an enclave with all sorts of facilities, “I would like to ask my SRB friends what should be the basis of collection of sales tax on services”.

However, there was realisation that whoever collects the tax, the taxpayers would be the same at the federal or provincial level, and that taxpayers should not be engaged in litigation, but their conditions eased by avoiding double taxing business activities.

Abdul Qadir Memon, chairman of the PTBA Academy of Taxation, told Dawn that while there were hints of going to the Supreme Court for sorting out the issue, it would be in the best national interest if the FBR mediates amongst provincial tax authorities.