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FBR to Remove Anomaly from Financial Bill Regarding Sales Tax for IT Services

Arshad Shehzad, a renowned sales tax specialist located in Karachi, delivered a presentation to the FBR.

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To make it clear whether services given by anyone other than software consultants or developers that are IT-based or IT-enabled are subject to sales tax or not, the Federal Board of Revenue (FBR) is likely to address a legal inconsistency in the Finance Act 2022.

In this context, Arshad Shehzad, a renowned sales tax specialist located in Karachi, delivered a presentation to the FBR.

Details show that entry #11 of Table-II of the Islamabad Capital Territory (ICT) law has been changed through the Finance Act of 2022. To read “Services supplied by software or IT-based system development consultant”. And is now subject to a 5 percent reduced rate of sales tax.

Further observation shows that entry #11 of Table I. Which also relates to the same service subject to sales tax at the standard rate, has not undergone any modification. This suggests that both the reduced and standard rates of sales tax are applicable to this service.

The relevant amended clause does not refer to entry #11 of Table-I. Which means that the service mentioned in entry #11 Table-I alone is still subject to sales tax at the rate of 16 percent. It is interesting to note that the standard rate of sales tax at the rate of 16 percent is replaced with the rate of 15 percent.

The tax expert said, “We understand the board either skipped adding entry #11. Or skipping eliminating entry #11 from Table-I. When cutting the standard rate of sales tax from 16 percent to 15 percent.”

Shehzad also took issue with the explanation of FBR about the most recent changes in its circular #9 of July 21st. Which suggests that services provided by consultants for the development of software or IT-based systems are subject to sales tax at a reduced rate. Without mentioning the application of the standard rate of sales tax on the same services. This strengthens the perception that the board has skipped entry #11 from Table-I from the ICT Law.

Additionally, the board clearly underlined that this reduced rate service only applies to the extent of software or IT-based consultants. And not to any other services while extending the explanation to this service. This may also lead to the question of whether or not services provided by anyone other than software consultants. Or developers that are IT-based or IT-enabled are subject to sales tax.

The above-modified stance of the ICT Law thus creates a severe legal problem. That needs to be addressed and resolved by the board, Shehzad continued.

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