HARMONISATION

OF SALES TAX LAWS

– A RAY OF HOPE

By: M. Muzammil Hemani

ACA, LLB, ADIT (UK)

This article was published

by The Express Tribune dated 08 May 2023
The National Tax Council [NTC] was established back in March 2020 by the Federal Government of Paki-
stan with the federal and provincial �inance ministers as its members. The NTC was formed with several
Terms of References [TORs], amongst them the most important was to create ease of doing business for
the taxpayers. One of the signi�icant ways in which ease can be brought is to harmonise the sales tax laws
on services of all provinces and the Islamabad Capital Territory [ICT]. It doesn’t portray a good image of
our country in general when the investor sitting outside Pakistan in particular while considering the feasi-
bility of investment in Pakistan sees the con�licting provisions of sales tax on services laws and when more
than one tax authority demanding the sales tax on a single service just due to the dispute between them
which could ultimately result in an excess cash out�low of the potential investor.

The primary and most important dispute that

mainly prevails is whether the jurisdiction from
where the service has originated would be collect-
ing the sales tax on that service or the jurisdiction
where that service is being terminated i-e; based
on the destination principle. This not only
consumes a lot of the time of the taxpayer and the
tax administrator rather it also increases the com-
pliance cost for the taxpayers and administrative
costs for the tax administrator, as in case of
disputes the taxpayer will go into a legal battle and
incur more legal costs to avoid paying double tax
on the same service while tax administrator would
need more staff cost to enforce same. Not only
there have remained immense pressure from the
different tax bars and business associations etc. to
resolve these issues but it also came from our main
lender the International Monetary Fund [IMF] to
sort it out to complete the checklist for required
�inancing. Therefore, the NTC, considering the
economic position of Pakistan, has �inally started to
bring about long-awaited harmonisation between
sales tax laws of services which is evident by noti-
fying the “Place of Provision of Services Rules,
2023’’ (the Rules) through consensus between all
four provinces and ICT.

The Rules aim to provide clear guidelines about the situations in which the sales tax would be charged
based on origination and the circumstances under which sales tax would be levied based on destination.
Initially, the services which have been covered through these rules include advertisement, advertising
agents, insurance, insurance agents, franchise, transportation or carriage of goods and electric power
transmission services. For the other services, the provisions of relevant Act or Rules of the respective
province or ICT is to be applied. Whereas in the case the speci�ied service of these Rules is to be provided
in more than one province, the service provider shall claim attributable input tax in the same proportion
attributable to the amount of declared taxable values of the services, by the relevant Act or Rules of ICT /
Province.
The Rules would be applicable from 1 May 2023 for
all the speci�ied services except for electric power
transmission services which would be applicable
from 1 July 2023 after the Federal Government
would bring necessary changes in the Sales Tax Act,
1990 to exclude them from the de�inition of goods.
The Rules at glance give more emphasis to the
location where the service provider resides or the
place from where the services are rendered, for
instance, in the case of an advertisement on a
website or webpage or internet, the location of the
person owning or managing such website or web-
page or internet and in case of life insurance and
health insurance services of�ice, the branch of the
insurance company providing the insurance
services is considered as the place of provision of
service.
However, the rights for taxation have also been
given to destination jurisdiction, for instance, in the
case of franchise services and intellectual property
services provided or rendered by a person whether
resident in Pakistan or otherwise, the place of
provision of service is the location of the resident
person receiving or procuring such services. Inter-
estingly, in the case of services of transportation or
carriage of goods by road or, through pipeline or
conduit, both origination and destination jurisdic-
tion would share the tax equally thereby, solving
this dispute by settling the same administratively.
Although the current initiative is something that
should be appreciated. However, there is a lot more
to be done which could include similar sales tax
rates across the country, similar principles and
de�initions levying sales tax on services, data
sharing and access between different tax authori-
ties and most importantly, what exactly should be
covered in goods and what in services should be
speci�ied leaving behind no ambiguity for
taxpayers.

The writer is a tax practitioner, researcher, and corporate trainer. He has studied International Taxation at
the Chartered Institute of Taxation in the UK and is also a member of the Institute of Chartered Accountants
of Pakistan (ICAP). He can be reached at muzammil@hemaniassociates.com.

The article was published by The Express Tribune on 08 May 2023, which can be viewed at :

https://tribune.com.pk/story/2415549/harmonisation-of-sales-tax-laws-a-ray-of-hope