The Commerce Ministry has proposed harmonized provincial sales tax regime through the application of uniform sales tax rates on services and in avoiding double taxation, besides simplified filing procedure for online businesses in the E-Commerce Policy.
Current applicable rates of sales tax in Punjab, Sindh, KPK, and Baluchistan are 16%, 13%, 15%, and 15% respectively. In general, the procedures for the filing of sales tax returns are also cumbersome and complicated; however, this may not be the case with the online business having transactions’ data recorded in digital format, maintained in the draft policy. The cabinet is likely to approve the policy next week.
Commerce Ministry Proposes Harmonized Provincial Sales Tax Regime For E-Commerce
The ministry has proposed (i) harmonized provincial sales tax regimes through the application of uniform sales tax rates on services and in avoiding double taxation; and (ii) simplified filing procedure through the introduction of one-paged sales tax return form.
The Commerce Ministry in consultation with other stakeholders has finalized e-commerce policy framework envisaging creating an enabling environment for holistic growth of e-commerce across all sectors of the country, with special focus on development and promotion of SMEs, for making Pakistan a significant player of the regional and global digital economy. The main goal of the policy is to augment the e-commerce industry’s growth to make it one of the key drivers of Pakistan’s economy.
The ministry has maintained that taxation is one of the major issues for stakeholders of online marketplaces. The primary concerns relating to taxation are the imposition of minimum income tax, withholding tax and provincial sales tax.
This policy framework proposes that for the purposes of provincial sales tax online businesses should be treated at par with other businesses and parallel to that, provincial sales tax regimes should be harmonized to address the concerns of online marketplaces.
According to the draft policy, taxation of online marketplaces has always been a contentious issue between e-commerce players and the revenue authorities all over the world. On one hand, demand of online marketplaces for tax exemptions seems plausible for their growth and strengthening the economy, on the other hand, tax authorities are rightly concerned about country’s revenue base. Likewise, if new technology enabled industry is not allowed due space to grow; it will not be able to bring its promised benefits to Pakistan’s economy. This makes taxation of e-commerce entities quite a controversial issue to deal with.
The Commerce Ministry maintained that taxation structure related to e-commerce businesses requires certain reforms in the form of harmonization in sales tax rates, avoidance of double taxation and simplified procedures in the filing of tax returns. Currently, provinces are responsible for the collection of general sales on services. They are applying different general sales tax rates on services and are using different criteria for collection of sales tax; for instance, in case of Punjab province, the preference is to collect at destination or point of sale, while Sindh province prefers collecting at the point of origin of services.
Some of the key issues in taxation structure include; (i) online marketplaces consider exemption from sales tax, as a major policy intervention for their growth. On the other hand, Revenue Authorities believe that the concessions in sales tax for online marketplaces would create distortions in the general market, where others dealing with the same goods are not exempted.
Moreover, it will cause undesirable tax aberration in VAT system, revenue loss to the provinces, adverse effects overtax to GDP ratio and increase in undocumented part of economy; (ii) currently, sales tax on services is being applied at provincial and federal level with different tax rates and application principle (origin/destination base), due to which online business face difficulty in meeting requirements under their respective statutes and at times face double taxation. Hence, it is essential to harmonize the system and simplify filing procedures.
In the first quarter of the financial year 2017-18, the number of registered e-commerce merchants was 496 which reached 1,094 by year-end and was around 1,242 by the first quarter of 2018-19. E-commerce transactions processed by these merchants are also increasing proportionately, maintained in the draft policy.
As per UNCTAD’s B2C E-Commerce Index, in 2017 Pakistan ranked 120 (out of 144 countries) on e-commerce readiness index with a score of 24. However, a noticeable surge has been witnessed in the recent past in the number of online vendors, local e-commerce platforms, online payment facilities introduced by banks and large cellular service providers. Improved internet accessibility and significant efforts of the government for financial inclusion in most parts of the country can be rightly credited for this.