M. Yousuf Adil Saleem& Co.

Chartered Accountants
Member of Deloitte Touche Tohmatsu Limited

Commentary on Sales Tax Special Procedure (Withholding) Rules, 2007

Amendment in Rules through SRO 98(1) (2013) dated February 14, 2013

1. Preamble
Sales Tax Special Procedure (Withholding) Rules, 2007 were issued by the Federal Government vide its notification SRO 660(I) 2007 dated June 30, 2007. These Rules envisage upfront tax withholding of sales tax by the specified withholding agents on payment for taxable goods and services. Through notification SRO 98(I)/2013 dated 14 February 2013, the Federal Government has extended the scope of Sales Tax Withholding Rules and all companies and exporters are now required to withhold tax at one-fifth (l/5th) of the applicable rate of sales tax shown on tax invoice. Whereas before such amendments, persons registered with Large Taxpayer Unit (LTU) were required to withhold 1% sales tax of the value of taxable supplies from persons registered other than LTU.

2. Withholding Rules prior to notification of SRO 98(I)2013

2.1 For the purposes of these Rules, withholding agents were sub-divided into following broad categories:i) ii) Federal and Provincial government departments, autonomous bodies and public sector organizations; Taxpayers falling in the jurisdiction of LTU for the purpose of sates tax, federal excise duty or income tax; and

iii) Recipients of service of advertisement, who were registered for sales tax. 2.2 Withholding agents falling in category (i) above, were required to deduct an amount equal to one fifth (20 per cent) of the total sales tax shown on the Sales Tax invoice issued by a registered person. However, while making payment on account of taxable goods purchased from unregistered persons, sales tax was required to be deducted at the applicable rate of the value of taxable supplies. Withholding agents falling in category (ii) purchasing goods from a registered person (other than one registered with LTU) were required to withhold sales tax equivalent to one per cent of the value of taxable supplies from the payment due to the supplier. Withholding agents falling in category (iii) receiving advertisement services provided or rendered by a person based in Pakistan or abroad, were required to deduct the amount of sales tax mentioned in the invoice issued by the service provider. In case the amount was not indicated in the invoice, sales tax was still required to be deducted at the applicable rate of the value of taxable services.

2.3

2.4

3. New withholding agents introduced vide SRO 98(I)/2013

3.1 The scope of Withholding Agent has been widened and now following categories are also included in the definition of Withholding Agent:

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Companies as defined in the Income Tax Ordinance, 2001 (hereinafter referred as ITO 2001) registered for sales tax, federal excise duty or income tax; and Persons registered as exporters.

3.2

Company has been defined in the ITO 2001 to mean: i. ii. iii. iv. a company as defined in the Companies Ordinance, 1984; a body corporate formed by or under any law in force in Pakistan; a Modaraba; a body corporate formed by or under any law of a country outside Pakistan relating to incorporation of companies; v. a trust, a co-operative society or a finance society or any other society established or constituted by or under any law for the time being in force; vi. a foreign associate, whether incorporated or not, which the FBR has, by general or special order, declared to be a company for the purposes of ITO, 2001; and vii. a provincial government and local government; and viii. a small company.

4. Withholding Rules after amendments notified vide SRO98 (I)/2013

4.1 By virtue of amendments introduced by the subject SRO, companies registered with FBR with reference to income tax, sales tax or federal excise duty purposes and all persons registered as exporter, are now required to deduct an amount equal to one fifth of the total sales tax shown in the sales tax invoice issued by the registered person and make payment of the balance amount to registered person. Previously, taxpayers registered in the jurisdiction of LTU were classified as Withholding Agent and were required to withhold sales tax on the invoices issued by the persons registered with Regional Tax Office (RTO) only. Now, the definition of Withholding Agent has been broaden and all companies and person registered as exporter, whether falling under the jurisdiction of LTU or RTO, shall withhold sales tax shown on the sales tax invoices issued by a registered person either with LTU or with RTO. Previously, the persons registered with RTOs were required to withhold sales tax on payments made on account of advertisement services only. Individuals and AOPs (if not registered as exporter), whether registered with LTU or elsewhere, are still not required to withhold any amount under these Withholding Rules, with the exception of payment made on account of advertisement services. Rate of sales tax withholding has been increased from one percent (1%) of sales value to 3.2% of sales value. In other words, earlier 6.25% (1 percent) of the sales tax charged on an invoice was to be withheld which has now been increased to 20% of sales tax shown on invoice. Under previous regime, except for invoices received by Governments Authorities, Autonomous Bodies, Public Sector Organizations; and recipient of advertisement services, sales tax withholding was applicable on sales tax invoices issued against supply of goods only and services was not covered under these rules. However, it appears that after the amendments in the Withholding

4.2

4.3 4.4

4.5

4.6

3 | Commentary on Sales Tax Special Procedure (Withholding) Rules, 2007 Amendment in Rules through SRO 98(1) (2013) dated February 14, 2013

Rules, invoices issued by service providers registered under provincial Sales Tax Ordinances (including Islamabad Capital Territory) are also liable to sales tax withholding. 4.7 Sales tax invoices issued by the person under the provisions of the Sindh Sales Tax on Services Act, 2011 and the Punjab Sales Tax on Services Act, 2012 does not fall under the scope / purview of these Withholding Rules. These services shall remain subject to Withholding Rules as issued by respective provincial revenue boards. The manner in which the amendment has been made, it transpires that Withholding Rules are also applicable on the goods and services chargeable to federal excise duty under sales tax mode. Sales tax withholding is still not required to be made on invoices issued by unregistered persons, except invoices issued against supply of goods to Governments Authorities, Autonomous Bodies, Public Sector Organizations and provision of advertisement services to the person registered for sales tax purpose.

4.8 4.9

5. Tax withholding obligation on advertisement invoices

No change has been made with respect to sales tax withholding on advertisement services. Therefore, persons registered for sales tax, receiving advertisement services shall deduct the entire amount of sales tax as mentioned on the invoice issued by the service provider, from the payment due. In case sales tax amount is not indicated on the invoice, the recipient shall deduct sales tax at the applicable rate of the value of taxable services from the payment due.

6. Federal and Provincial government departments, autonomous bodies and public sector organizations
No changes have been introduced with respect to payments against goods and services received by the Federal and Provincial government departments, autonomous bodies and public sector organizations. Therefore, they will have to withhold sales tax in the manner as previously being done.

7. Procedural aspects
7.1 The above amendments are applicable from February 14, 2013. Therefore, Withholding Rules should be applied on all payments made against taxable supplies made on or after the effective date of such notification. This understanding is developed by an earlier clarification of FBR issued vide letter C.No.3 (10)ST-L&P/2007 (Pt) dated 17 August 2009. On the same analogy it is viewed that amendments brought by SRO 98(I)/2013 dated 14 February 2013 shall be applicable on payments made against taxable supplies made or services provided on or after 14 February 2013. The matter is however not free from doubt and it is expected that FBR may issue further clarification on the matter. Withholding Agents registered for sales tax or federal excise purposes are required to declare the withheld amount in Annexure-A by selecting the Document Type as STWH in Annexure-A. Whereas, the suppliers are to report their output withheld in Annexure-C by selecting the documents type STWH. In case withholding agent is also registered under the Sales Tax Act, 1990, or the Federal Excise Act, 2005, he shall file the return and deposit the withheld amount of sales tax in the manner as

7.2

7.3

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provided under Chapter II of the Sales Tax Rules, 2006, along with other tax liability and such person is not required to file the withholding sales tax return as applicable to non-sales tax register persons. {Rule 2 (6)]. 7.4 Withholding agent having NTN only is required to file sales tax return for withholding agent electronically and deposit the amount deducted at source in the manner as provided for electronically return filing under Rule 18 of the Sales Tax Rules, 2006. {Rule 2 (6)}. A certificate showing deduction of sales tax shall be issued to the supplier by the withholding agent duly specifying the name and registration number of supplier, description of goods and the amount of sales tax deducted. (Rule 8). The withholding agent, intending to make purchases of taxable goods, shall indicate in an advertisement or notice for this purpose that the sales tax, to the extent as provided in Withholding Rules shall be deducted from the payment to be made to the supplier.

7.5

7.6

8. Exclusion from the Withholding Rules

Sales Tax Withholding Rules shall not be applied to the following goods / services, namely: a) b) c) d) e) Electrical Energy Natural Gas Petroleum Products supplied by PP&E Companies, Oil Refineries, & OMCs Mild steel products Production made from sheets of iron or non-steel alloy, stainless steel, or other alloy steel such as pipe almirahs trunks etc. f) Paper; in roll or sheet g) Plastic products including pipes h) Vegetable ghee and cooking oil; and i) Telecommunication services

9. Penalties for non-compliance

Non-compliance of the Withholding Tax may result in levying varying penalties as provided under Section 33 of the Sales Tax Act, 1990.

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