Overview of Sales Tax Withholding Provisions (focusing SRB)

Withholding sales tax can be termed as an extension of value added taxation implemented around the world.

However, in Pakistan the Value Added Taxation failed to implement due to certain complications arising regarding the jurisdictions of Provincial and Federal government on supply of services versus supply of goods.

The sale of supplies comes under the jurisdiction of Federal government, however, the supply of goods comes under the respective provincial governments.

Therefore, implementation of a single value added tax law became difficult resulting in introduction of separate laws i.e. Sales Tax Act 1990 for the purpose of covering supply of goods and certain services falling under the jurisdiction of Federal government and respective sales tax on service acts passed through the provincial assemblies regarding the supply of services falling under the jurisdiction of provincial governments.

The withholding provisions regarding the sales tax were initially introduced in 2007 against the taxable supplies and that too only made to government organisations.

Subsequently, the necessity for the same was felt across the board and the scope of the same was further extended to cover various categories of withholding tax agents.

Moving forward the provincial sales tax authorities also begin to implement the relevant withholding tax provisions in their respective provinces realizing the importance of the same.

This also resulted in various disputes regarding the ownership of the taxes in certain cases where the services were provided to different provinces or incase of media channels in different cities airing content all over the country resulting in difficulty to determine the place of taxation and ownership of the revenue generated.

Currently, there are following statues lying down the procedures of withholding taxes in case of sales tax:

· Sales Tax Special Procedure Withholding Rules, 2007; 

· Sindh Sales Tax Special Procedure Withholding Rules, 2014; 

· Punjab Sales Tax on Services Withholding Rules, 2015; 

· Khyber Pakhtunkhwa Sales Tax on Services Special Procedure Withholding Regulation, 2015; and 

· Interim guidelines vide letter dated 23rd August 2016;

In general a withholding agent is required to withhold sales tax at the time of purchase on certain payments whether purchasing from registered or an unregistered person at the applicable rates as prescribed under the relevant laws on the total amount of sales and the tax deducted should thereon be reflected in the tax invoice. 

After deducting tax the remaining balance should be paid to the respective supplier or service provider and the withholding agent issues sales tax withholding certificate so that the supplier or the service provider should be able to claim the tax deducted under such withholding sales tax provisions in his return.

Withholding agent registered for sales tax is further required to deposit item wise details of sales tax withheld on the purchases made and the same should be declared under the Annexure A of the monthly sales tax whether Federal or Provincial.

The following persons are described as the withholding agents under the said laws:

· Federal and Provincial departments 

· Autonomous bodies 

· Public sector organisations 

· Companies as defined under Income Tax Ordinance 2001 or registered for Sales Tax, FED or Income Tax purposes

· Recipient of Advertisement Services registered for Sales Tax with FBR 

· Exporters

The procedure for withholding Sales Tax as prescribed by Sindh Revenue Board shall be as under:

The withholding agent (except incase of clause f) if purchasing services from a registered service providers shall deduct 1/5th of Sindh Sales Tax amount and if in case the sales tax was not charged at all than the withholding agent shall deduct 100% of the Sindh Sales Tax.

However, in case of withholding agent (except clause f) purchases from an unregistered service provider shall detect sales tax at the applicable rates on gross value of the services.

Under the clause f the withholding agent who is registered and is a person providing services of advertisement, auction, renting of immovable or inter-city transportation service shall deduct sales tax at the rate prescribed on value of services.

Following taxable goods and services are exempted from Federal withholding Sales Tax under rule 5 of Federal withholding Sales Tax rules

· Electrical energy 

· Natural gas 

· Petroleum products as supplied by Petroleum Production and Exploration Companies, Oil Refineries and OMC's, dealers of motor spirit and high speed diesel

· Registered persons paying Sales Tax under retailers fixed sales tax regime 

· Vegetable ghee and cooking oil

· Telecom services 

· Goods specified in the third schedule fruit juices, ice cream, aerated water, tea, fertilizers etc 

· Supplies made by Commercial Importers who paid value added tax on such goods at the time of import

· Supplies made by active tax payer to another registered person with exception of advertisement services

Following services are exempt from withholding Tax under the Provincial withholding Sales Tax rules

The sales tax on services under the Sindh Revenue Board rules shall be deducted on the earlier of the following: 

· On the day when the payment is made to supplier 

· On the month when the input tax is claimed by the withholding agent

· Where the withholding agent is registered with Singh Revenue Board, however, fails to claim the input text within 4 months or is entitled to claim the input tax shall deduct the withholding tax earlier of the month in which payment was made to the supplier or the date within 4 months of the date of invoice.

In case of any other type of withholding agent not covered as above shall withheld the sales tax on services under Sindh Revenue Board on earlier of the following dates:

· The 15th day of the following second month in which the invoice was issued by the service provider or

· The date on which the payment was made to the supplier or service provider