FBR to Remove Anomaly Regarding Sales Tax for IT Services in Finance Bill

The Federal Board of Revenue (FBR) is likely to remove a legal anomaly in the Finance Act 2022 to clarify whether the IT-based or IT-enabled services offered by any persons other than software consultant or development is chargeable to sales tax or not.

In this regard, the FBR has received a presentation from a top Karachi-based sales tax consultant Arshad Shehzad.

As per details, through Finance Act 2022, entry #11 of Table-II of the Islamabad Capital Territory ( ICT) law has been substituted and replaced as “Services provided by software or IT-based system development consultant” and chargeable to a reduced rate of sales tax at the rate of 5 percent.

It is further observed that no amendment was made in entry #11 of Table-I which also pertains to the same service chargeable to sales tax at the standard rate and thus it implies that both reduced and standard rates of sales tax are made applicable to this service.

It is however interesting to note that the standard rate of sales tax at the rate of 16 percent is replaced with the rate of 15 percent without referring the entry #11 of Table-I in the relevant amended clause, which means the service mentioned in entry #11 Table-I alone is yet chargeable to sales tax at the rate of 16 percent.

“We understand the board has either skipped omitting entry #11 from Table-I or skipped adding entry #11 while reducing the standard rate of sales tax from 16 percent to 15 percent”, the tax expert stated.

Shehzad also objected that the explanation shared by the board on the recent amendments vide its circular #9 dated 21st July that suggests that software or IT-based system development consultant service is chargeable to sales tax at a reduced rate without mentioning the application of standard rate of sales tax on the same service which strengthen the understanding that board has skipped omitting entry #11 from Table-I from the ICT Law.

Moreover, the board, while extending the explanation to this service, specifically emphasized that this reduced rate service is only applicable to the extent of software or IT-based consultant and not to any other services. This may also raise the question of whether the IT-based or IT-enabled services offered by any persons other than software consultant or development is chargeable to sales tax or not.

Therefore a serious legal anomaly arises from the above-amended position in the ICT Law which needs to be taken up and clarified by the board, Shehzad added.



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