The report is prepared as a guide to discuss and assess options for an efficient and effective sales tax mechanism on freight services by oil transporters (ie petroleum products transported through road only). Similar to freight services, many other services are in litigation due to complexion and confusion of sales tax charge on origination and/or termination basis. Hence, this report can be a benchmark for the design of a smooth and effective sales tax mechanism for many other services too, on which the provinces and federation have been in quarrel since long.
Ashfaq Tola suggested that an option for a fixed sales tax between 5 paisas to 15 paisas may be incorporated directly into the price of subject petroleum products on account of freight services. A mechanism of depositing such sales tax may be designed by OGRA, wherein OMCs are made responsible for charging, collecting and depositing such sales tax on the basis of volumes of petroleum products supplied. A challan against such charging of sales tax may be issued by the OMCs to the transporters which would be a valid evidence of discharge of their sales tax liability.
The transporters who do not opt for fixed sales tax regime may continue to be charged sales tax in normal manner under respective provincial boards/authority and they shall be required to fulfill all their responsibilities under respective provincial boards/authorities of maintaining records, preparing and filing sales tax returns and charging and depositing sales tax as per respective provincial boards/authority.
Several representations were made to Ministry of Petroleum and Natural Resources along with other relevant provincial and federal ministries and three major issued were raised: whether sales tax on transportation services is to be levied on origination or termination?; will the tax be adjustable or single stage?; and what sort of adjustment service providers will get from freight pool and what will be the mechanism?
Tola was assigned to submit a comprehensive report on an equitable mechanism for collection of sales tax on services of inter-city transportation of petroleum products.
Background of the issue revealed that after the 18th amendment in the Constitution, the provincial governments were empowered to charge and collect sales tax on service through their respective boards/authorities under their statues. As to date all the four provinces have enacted their respective statutes. Sindh was the pioneer to enact Sindh Sales Tax on Services Act, 2011 followed by Punjab Sales Tax on Services Act, 2012, KPK Finance Act, 2013, Balochistan Sales Tax on Services Act, 2015, in the provinces of Punjab, Khyber Pakhtunkhwa and Balochistan respectively. Moreover, through Finance Act, 2015, the federal government had also substantially enhanced the list of taxable services by amending Islamabad Capital Territory (Tax on Services) Ordinance, 2001. The Sindh government in the year 2014 imposed sales tax on services of inter-city transportation of goods, which is a tax having a direct negative effect on the people of Pakistan living below poverty line in addition to manifold practical limitations for the service providers to charge. Both the transportation service providers specially Oil Tanker Association of Pakistan and the local community strongly rejected imposition of sales tax on transportation services and recorded many protest and strikes against the this new tax. Subsequently, the governments of Punjab and Balochistan also followed the action of government of Sindh and introduced this new tax in Punjab and Balochistan too. However, to date none of the provincial governments has been able to collect sales tax on transportation services due to its complex nature and incapability of the service providers to understand and pay this new tax.
There are two types of taxes which can be levied on the services including Value Addition Tax (VAT) system and Single Stage Sales Tax System.
To arrive at a fixed sales tax rate, estimated revenues were first calculated by assuming hypothetical fixed sales tax rates. Secondly, estimated sales tax revenues were calculated by applying existing provincial sales tax rates on freight services.
Revenues using fixed sales tax rates: Data from OMCs in Pakistan have been gathered with respect to quantum of petroleum products ie high speed diesel (HSD) and motor spirit (MS) transported through road from one province to another and within the provinces. As per the data received from the OMCs, in FY 2016, a total of 29.24 billion liters (24.59 billion liters in FY 2015) of petroleum products were transported through road within Pakistan. To estimate the potential sales tax generation, the said value of 29.239 billion liters may be multiplied by arbitrary values of fixed sales tax rates of 5 paisa per liter, 10 paisa per liter and 15 paisa per liter. The estimation projects revenues of Rs 1.46 billion, Rs 2.92 billion and Rs 4.38 billion for fixed sales tax of 5 paisas, 10 paisas and 15 paisas respectively.
Revenues using existing sales tax rates: Now, the revenues are to be calculated by applying existing provincial sales tax rates on freight services on volumes of petroleum moved among provinces. Data with respect to per liter weighted average freight (WAF) for transportation of petroleum products was also sought. The results were interesting as between same provinces, the values varied highly by only switching originations and destinations. For example, WAF for transporting one liter from Punjab to Balochistan is Rs 2.90, whereas, for transporting on liter from Balochistan to Punjab is Rs 4.37. Similar is the case with other provinces.
To estimate revenue generation from freight services, weighted average freight per liter was multiplied with volume of petroleum products moved among provinces using a specific equation.
The said calculation stipulates that total freight services revenues in FY 2016 in Pakistan amounted to Rs 40.5 billion approximately. Out of these Rs 40.5 billion service revenues, highest revenues were with respect to originations from Sindh (ie Rs 22.67 billion) and lowest were with respect to originations from others (ie Rs 42.52 million).
The first approach, ie, fixed sales tax rates, yields sales tax revenues of Rs 1.46 billion, Rs 2.92 billion and Rs 4.38 billion for fixed sales tax of 5 paisas, 10 paisas and 15 paisas respectively; whereas, the second approach yields sales tax revenues of Rs 5.786 billion, Rs 6.193 billion and Rs 6.092 billion.
Apparently the second approach seems lucrative, however, it should also be noted that the revenues from the first approach are guaranteed, non-adjustable and carry no additional administrative costs. Whereas, the revenues from first approach will be less than the revenues from second approach if the specific factors are accounted for.
Ashfaq Tola added that there is no guarantee whether sales tax will be charged, collected and deposited on 100 percent transactions due to overall low compliance level in the country and particularly goods transporters. Majority of transporters are illiterate and cannot be expected to understand the sales tax charge and documentation mechanism. Furthermore, a common man is deterred from even the name of tax, let alone its compliance. Approximately only 50 percent of the transporters are expected to be compliant with normal sales tax mechanism. The rest shall slip as in other sectors of the economy.
The sales tax figures as per second approach are not the figures that will be deposited into treasury. In fact these figures are subject to adjustment of input sales tax suffered by the transporters, if any. There are additional administrative costs to revenue department associated with normal sales tax mechanism. Examples include cost of monitoring, auditing, refund procedures, appeals, etc. Given these factors, revenues as per first approach would be greater than the revenues that will effectively accrue to the exchequer, the TRC member added.
Copyright Business Recorder, 2017