Govt Proposes Universal Provincial Sales Tax Regime for E-Commerce

The Commerce Ministry has proposed harmonized provincial sales tax regime through the application of uniform sales tax rates on services by avoiding double taxation and simplifying the filing procedure for online businesses under the draft e-commerce policy.

The currently applicable rates of sales tax in Punjab, Sindh, KPK and Balochistan 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 an online business having transactions’ data recorded in digital format, maintained the draft policy.

The ministry has proposed:

(i) Harmonized provincial sales tax regimes through the application of uniform sales tax rates on services and avoiding double taxation.

(ii) Simplified filing procedure through the introduction of a one-paged sales tax return form.

The cabinet is likely to approve the policy next week.

E-Commerce Policy Framework

The Commerce Ministry, in consultation with other stakeholders, has finalized E-commerce policy framework to create an enabling environment for holistic growth of e-commerce across all sectors of the country, with a special focus on development and promotion of SMEs to transform Pakistan into a significant player in the regional and global digital economy.

The ministry has maintained that taxation is one the major issues for stakeholders of online marketplaces. The primary concerns relating to taxation are 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, the demand of online marketplaces for tax exemptions seems plausible for their growth and strengthening the economy, while on the other hand, tax authorities are rightly concerned about the country’s revenue base.

Likewise, if the 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 the 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, the preference is to collect at destination or point of sale, while Sindh prefers collecting at the point of origin of services.

Issues in the Taxation Structure

Some of the key issues in the taxation structure include

1. 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 the VAT system, revenue loss to the provinces, adverse effects overtax to GDP ratio and increase in the undocumented part of the economy.
2. Currently, sales tax on services is being applied at the 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.

Increase in Registration of E-commerce Merchants

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.