LAHORE: The Punjab Revenue Authority and the Lahore Waste Management Company (LWMC) have locked horns over sales tax collection on cleaning services and are likely to face a legal battle as the Punjab government is ‘reluctant’ to deduct tax from payments to international contractors, involving Turkey.
The LWMC has decided to appeal before Commissioner (Appeals) against the Punjab Revenue Authority’s notices to recover Rs1.283 billion sales tax against Rs8.023 billion payments made to international contractors for execution of work and contractors providing services from 2013 to 2015.
The PRA, which has now expanded its influence to the Punjab government-run companies to collect ST on services by serving notices to the LWMC, initially faced ‘interference’ from the provincial government as sales tax with 16 per cent ratio had to be collected from the company which had outsourced cleanliness to two Turkish companies.
While the PRA takes plea that the LWMC is taking cleaning services from two Turkish companies on commercial grounds, the LWMC claims their services are only linked to the community service and not taxable.
The authority’s chairperson had refused to withdraw the tax liability after a company’s delegation met him a couple of weeks ago to settle the issue.
In an executive order, issued by the PRA, on Oct 30, 2015 and served to the LWMC, the PRA states that the LWMC is a company registered under the Companies Ordinance, 1984 and has been established to maintain cleanliness in Lahore. The LWMC has been enrolled with the PRA as withholding agent since Nov 7, 2013 for the purpose of sales tax on services.
A scrutiny of Punjab sales tax payments made on account of withholding of tax by the LWMC has led to a revelation that it has committed a default because it failed to properly withhold or deduct tax under the Punjab Sales Tax on Services (Withholding) Rules, 2015. However before an order was passed to that effect and proceedings initiated to recover the tax due, the company was provided vide a letter, dated 17-08-2015, an opportunity to show cause under Rule 14 of the said (Withholding) Rules, 2015 for the default committed in the manner.
The company was accordingly called upon to show cause for failing to deduct/withhold due ST on payments and not recovering an amount of Rs 1.283 billion.
The aforesaid payments made without deduction of tax have not been denied by the LWMC.
M/s ALBAYRAK, one of the contractors, is a non-resident company registered with the Federal Board of Revenue (FBR) for income tax and sales tax purposes at NTN 4015058-5 as well as with the SECP under section 451 of the Companies Ordinance, 1984 for establishing a place of business in Pakistan. M/s Ozkartallar Ltd, another contractor, is registered in the category of association of persons (AOP) at NTN 3903734-7 for income tax purposes. Both the companies have their branch offices located at Shaheen Complex Lahore are not registered with the PRA as service providers.
The LWMC agitated the contents in the show cause notice, dated 17-08-2015, before the Punjab government. The matter was clarified by the Punjab Finance Department vide No. SO(TAX)1-2/97 dated 23-09-2015 that the LWMC was to comply with the Punjab ST law in letter and spirit, including discharging liabilities as a withholding agent, including payments made to the contractor for contractual execution of work.
After careful perusal and considering of the defence put forth by the LWMC, in all of its legal and factual aspects, it is concluded that the company received taxable services from the international contractors which squarely fall in the purview contractual execution of work with annual total value exceeding Rs50 million under Sr No 16 of the 2nd Schedule.
It also failed to deduct /withhold Punjab ST due on payments made against construction services. In case of later, the LWMC offered no mentionable legal defence to discharge the allegation of default except that “It is also not built for commercial purposes it is the ultimate disposal of waste dumping, therefore payments of construction of land fill is not liable to Punjab ST.” The company has thus committed a default of Rs1.283 billion on Rs8.023 billion payment.
LWMC Chief Financial Officer Moeezur Rehman, however says, the company will appeal before the Commissioner (Appeals) of the PRA within 30 days after a final notice which was served on Nov 2.
“Though being withholding agent, we are supposed to deduct ST against payments to contractors, but cleaning services the company is providing to community are not taxable as the PRA rules clearly specify the ST on commercial roads and buildings.”
Mr Rehman says irrespective of the fact who wins the case the Punjab government will have to pay tax and not Turkish companies as the government is funding loan for the cleaning project.
Published in Dawn, November 25th, 2015
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