ISLAMABAD: In a significant development, the provinces have agreed to expand the scope of sales tax to include a wide range of services from the next fiscal year. This action is in line with the International Monetary Fund (IMF) requirements under the Staff-Level Agreement reached for a new $7 billion credit line.

All four provinces have made a written commitment to transition the services from a positive to a negative list approach, which implies that all things that are not explicitly exempt will be taxed.

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.

As part of the IMF agreement, provinces will now finalise services for a negative list that will be exempt, just like the 6th Schedule of sales tax on goods. This transition is expected to bring about a wide range of new tax collection services.

IMF wants finalisation of a negative list by next fiscal year

Sindh Revenue Authority collected Rs236.85bn in sales tax on services, Punjab Revenue Authority Rs239bn and KP Revenue Authority Rs41.77bn in FY24. However, the Balochistan Revenue Authority has yet to reveal its final collection data, which will be significantly lower than the KP.

In India, service taxation was implemented through a positive list in 1994-95, with only three taxable services, which was subsequently expanded to 119 services by 2011-12.

However, provinces (states) collect sales tax on items, whereas the central government (federal government) collects on services. The collecting procedure is exactly opposite to that of Pakistan’s sales tax on products and services.

It is worth noting that in India, there are disagreements and litigation over several service classifications. In these cases, Indian taxpayers argue that their services fall outside the scope of the positive list defined by Indian service tax law. A comparable case already exists in Pakistan, and the proposed transition will add to the classification conflicts.

In 2000, a sales tax on few services was implemented for the first time. From July 1, 2000 to June 2011, the Federal Board of Revenue (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.”

This issue became more complex when the courts issued a temporary order in favour of the litigant service providers and their associations, leading to the non-enforcement of sales tax on services and the obstruction of sales tax on services.

Many lawsuits have been in the court system for several years. 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 idea of a negative list. This will also allow for the harmonisation 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 harmonisation is only achievable if the World Bank hires specialists to create a negative list, as few provinces cannot do so.

The current challenge is that the provinces have not yet harmonised the existing positive list. In this situation, provinces will confront major obstacles when establishing a harmonised negative list. However, this will necessitate collaborative efforts at the provincial and federal levels.

The experts on sales tax on services outlined several steps regarding the timeline for adopting the negative list. The challenge will be to create a classification code for services. The existing code, which is based on Chapter 98 of the Pakistan Customs Tariff, is deficient and full of flaws. Such a code is required to avoid disputes about whether a particular transaction constitutes a service.

The creation of the negative list must also take into account economic, political, and other challenges in Pakistan. It is also necessary to map existing and new classifications to help taxpayers avoid disputes.

Furthermore, consultation with all stakeholders throughout the compilation of the negative list will aid in the smooth transition. Furthermore, a consistent inter-provincial consultation process is essential for dispute-free implementation.

Published in Dawn, July 17th, 2024