Tax Expert Explains Provincial Withholding Treatments on Services by Non-Residents

General

The Federal Board of Revenue (FBR) and provincial tax authorities are separately dealing with the matter of imposition of sales tax on services rendered by non-residents and unregistered persons through separate laws.

According to an analysis by Ashfaq Tola, a leading tax expert, a brief insight has been prepared on a seemingly simple yet very complicated matter. Tola has defined and explored the provincial withholding treatments on services performed both by non-residents and by unregistered persons. All provinces will be dealt with separately for an easier and more thorough understanding

Sindh

In Sindh, the sales tax on services is governed by the Sindh Sales Tax on Services Act, 2011 (“SSTS Act”). Under the SSTC Act, the following treatments have been set out for both non-residents and those persons having business conducted in Sindh or have received services in Sindh.

With respect to taxable services mentioned in the Second Schedule to the SSTS Act, tax on the sale of services shall be applied on all services provided by registered persons irrespective of whether these services were provided by the resident or non-resident persons. Furthermore, if these services are provided by a non-resident to a resident person, then it will be taxable irrespective of whether such a resident person is the end consumer or not.

Moreover, The Sindh Sales Tax on Services Rules, 2011 provides an additional procedure for services such as franchise services and intellectual property for a non-resident based anywhere other than Pakistan. Under these rules, liability for payment rests on the recipient of these services and the value shall be determined as per formal agreement (if it exists) on the gross amount of consideration. However, in a case where no formal agreement exists, then 10 percent of the turnover of the franchisee or intellectual property services recipient shall be payable.

Tola further explained that where a person has a registered office or place of business both in Sindh and another one outside of the province of Sindh, then the registered office or place of business in Sindh and the one outside will be treated as separate legal persons as per the SSTS Act.

Punjab

As with Sindh, Punjab also has a set governing law for tax on sales of services. i.e., the Punjab Sales Tax on Services Act, 2012 (“PSTSA Act”).

Under the PSTSA Act, if any person has a registered office and/or a place of business in Punjab and the other(s) outside of Punjab then the one in Punjab will be dealt with separately from the one outside of Punjab.

Furthermore, if a person provides taxable services in a province other than Punjab but the recipient is a resident in Punjab then the person providing such services shall be responsible to pay tax and vice versa, moreover, if a person provides taxable services in more than one province including Punjab, then such person is liable to pay tax to the Government to the extent the tax is charged from a person resident in Punjab and/or avails such service in Punjab.

If a person provides services anywhere in Punjab or from their office but the commencement or the termination of the activity is in Punjab, they will be subject to said tax irrespective of whether such services were provided to a resident or a non-resident person, he said.

Furthermore, if services are provided by a non-resident person to a resident, in the ordinary course of economic activity then it shall be treated as a taxable service, irrespective if such was to an end-consumer.

Moreover, where a taxable service originates from Punjab but terminates outside of Pakistan, such a person is liable to pay tax on this service to the government. Similarly, if the service originates from outside of Pakistan but is received and/or terminated in Punjab, then the recipient of such service shall be liable to pay tax.

Islamabad

The governing statute for sales tax on services in Islamabad is the Islamabad Capital Territory (Tax on Services) Ordinance, 2001” (“ICT Act”), however, the law is silent on the taxability and treatment with respect to non-residents and services rendered out of Islamabad.

Balochistan

For Balochistan, the Sales tax on services is governed by the Balochistan Sales Tax on Services Act, 2015 (“BSTS Act”) and shall be applicable all over Balochistan.

If a person has a registered office and/or a place of business in Balochistan and another one outside of Balochistan, then the one in Balochistan shall be treated as a separate legal entity.

Furthermore, if a person provides taxable services in a province other than Balochistan but the recipient is a resident in Balochistan then the person providing such services shall be responsible to pay the sales tax on services. Similarly, if a person provides taxable services in more than one province including Balochistan, then such person shall pay tax to the Government to the extent the tax is charged from a person who is a resident of Balochistan and/or a person who avails such service in Balochistan.

Any service provided by a person in a place in Balochistan or by a person from his office which includes the commencement and/or termination of the activity shall be chargeable to tax irrespective of whether such services were provided to a resident or a non-resident person. If it is provided by a non-resident person to a resident in the ordinary course of economic activity then, it shall be treated as a taxable service (irrespective of if such was to an end-consumer).

Furthermore, where a taxable service originates from Balochistan but terminates outside of Pakistan then such a person shall pay the tax on this service to the government. Likewise, if the service originates from outside of Pakistan but is received and/or terminated in Balochistan, then the recipient shall be liable to pay sales tax on these services.

Khyber Pakhtunkhwa

The Khyber Pakhtunkhwa (KP) Sales Tax on Services Act, 2022 (“KPSTS Act”) is enforceable and relevant in the entire province of KP.

All provinces will be dealt with separately for an easier and more thorough understanding. Under the KPSTS Act, if a person has a registered office and/or a place of business in KP and the other outside of KP then treatment of both shall be done separately, and if a person provides taxable services in a province other than KP but the recipient is a resident in KP then the person providing such services shall be responsible to pay tax. Similarly, if a person provides taxable services in more than one province including KP, then such a person shall pay tax to the Government to the extent the tax is charged from a person resident in KP that avails such service in KP.

However, an exception has been placed for incoming international calls, wherein the telecommunication companies shall pay tax on a reverse charge basis to the extent of their share of charges received from abroad, and their local representatives shall be treated as recipients.

He explained that any service provided by a person in a place in KP or by a person from his office which includes the commencement and/or termination of the activity shall be chargeable to a tax irrespective of whether such services were provided to a resident or a non-resident person. If it is provided by a non-resident person to a resident, in the ordinary course of economic activity then it shall be treated as a taxable service (regardless of whether it was to an end-consumer).

Furthermore, where a taxable service originates from KP but terminates outside Pakistan then such a person shall pay tax on this service to the government. Likewise, if the service originates from outside of Pakistan but is received/terminated in KP, then the recipient shall be liable for the tax liability.

Azad Jammu & Kashmir

For AJ&K the law governing the tax on sales of services is the Azad Jammu & Kashmir Sales Tax (Tax on Services) Act, 2001 (“AJKST Act”). For AJK the recipient of the service shall withhold tax as applicable for the services and shall be solely responsible for payment and registration, Tola added.

Source: Pro Pakistan