M Afzal
It is good to see the Sindh Revenue Board (SRB) achieving its revenue target of Rs. 49 Billion from sales tax on services imposed in Sindh in the just completed financial year of 2014-15 as well as SRB earning the reputation of being the least corrupt department amongst the various tax collecting agencies of the country. While we all wish SRB well in its efforts to achieve higher budgeted target in future from sales tax on services imposed in Sindh, yet at the same time it is our conscious duty to point out if there is any unconstitutional step which SRB may be taking or such a step may have been taken in the Sindh Finance Act, 2015 while imposing Sindh sales tax on services under the new heads of services.
From the amendments made in the Sindh Sales Tax On Services Act, 2011 (SSTS 2011) through the Sindh Finance Act, 2015 an impression has been created in the field that the rent from renting, letting, sub-letting, leasing, sub-leasing, licensing or similar other arrangements of immovable property for use in the course or furtherance of business or commerce has become liable to Sindh Sales Tax. In short it is being commonly understood that with effect of July 01, 2015 rent which may be called by whatever name from the built up immovable property used for business or commerce has become liable to Sindh Sales Tax @ 6% under SSTS 2011 as amended through the Sindh Finance Act, 2015.
This impression that with effect from July 01, 2015 rent from the built up immovable property used for business or commerce has become liable to Sindh Sales Tax @ 6% has been created by the amendment in section 2 as well as in Part B of 2nd Schedule of Sindh Sales Tax On Services Act, 2011 through the Sindh Finance Act, 2015.
Before making any comment on the common impression that rent from the built up immovable property used for business or commerce has become liable to Sindh Sales Tax or that this tax has been imposed constitutionally or not, we need to have a look at the text wording of actual amendment in this regard made in Sindh Sales Tax On Services Act, 2011. In section 2 of Sindh Sales Tax On Services Act, 2011 the following definitions have been added through the Sindh Finance Act 2015 for imposing Sindh sales tax on rent.
“(72B) “renting of immovable property” includes renting, letting, sub-letting, leasing, sub-leasing, licensing or similar other arrangements of immovable property for use in the course or furtherance of business or commerce, —
Explanation-I. Where renting of immovable property is effected under a single composite contract or agreement involving part of property for use in commerce or business and part of it for residential accommodation purpose, the entire property under the contract or agreement shall be treated, for the purpose of levy of tax under this Act, as property for use in commerce or business and, accordingly, the total value of the contract or agreement shall be treated as taxable value.
The term “rent” means any payment or consideration, by whatever name called, received or receivable under any lease, sub-lease, tenancy or any other contract or agreement or arrangement for use, occupation or right to use or occupy any immovable property, and includes any forfeited deposit paid under such lease, sub-lease, tenancy or other contract or agreement or arrangement.”
From the foregoing it becomes clear that the purpose of the above referred amendments in section 2 of Sindh Sales Tax On Services Act, 2011 is to impose Sindh sales tax on rent received from the built up immovable property used for business or commerce purpose as factories, offices including government offices or public offices, warehouses, laboratories, educational institutions, shops, showrooms, retail outlets, multiple-use buildings, etc. To achieve this purpose further amendment in Part A as well as in Part B of 2nd Schedule of Sindh Sales Tax On Services Act, 2011has been made through the Sindh Finance Act, 2015 including renting of immovable property services cod 9806-3000 in the taxable list of services in Sindh.
Before commenting as to whether these amendments made in section 2 and in 2nd schedule of Sindh Sales Tax On Services Act, 2011 will suffice to make it legal to impose Sindh sales tax on rent from immovable property we need to find out if Government of Sindh or any other provincial government is allowed under the constitution to impose sales tax on the income from rent from built up immovable property and for this we have to refer to the 4th Schedule of the Constitution of Pakistan which prescribes the tax heads on which the respective central or provincial government can legislate to impose tax which reads as under:-
“43. Duties of customs, including export duties.
44. Duties of exercise, including duties on salt, but not including duties on alcoholic liquors, opium and other narcotics.
47. Taxes on income other than agricultural income;
48. Taxes on corporations.
49. Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed, 780 [, except sales tax on services] 780
50. Taxes on the capital value of the assets, not including taxes 781 [] 781 on immovable property.
51. Taxes on mineral oil, natural gas and minerals for use in generation of nuclear energy.
52. Taxes and duties on the production capacity of any plant, machinery, undertaking, establishment or installation in lieu of any one or more of them.
53. Terminal taxes on goods or passengers carried by railway, sea or air; taxes on their fares and freights.
54. Terminal taxes on goods or passengers carried by railway, sea or air; taxes on their fares and freights.”
From the above quote from the 4th Schedule of the Constitution of Pakistan, it becomes clear that the provincial governments can impose taxes on alcoholic liquors, opium and other narcotics, agricultural income, sales tax on services only, Taxes on immovable property excluding the capital value of immovable property, fees etc. The imposition of sales tax by the provincial government is specifically restricted to the extent of services. Thus in the constitution (serial 49 &50) it is stated in clear terms that in respect of immovable property the provincial government does not have exclusive right to tax or to impose sales tax or impose any income tax on receipts arising from immovable property.
The provincial government has no tax jurisdiction whereby the rent received from built up immovable property may be taxed by the provincial governments. Therefore, the imposition of Sindh sales tax on rent income from immovable property is in violation of serial No 49 & 50 of 4th Schedule of the Constitution of Pakistan and its enforcement will be very much open to be challenged and is likely to be struck off.
Not only that but Sindh sales tax on rent of immovable property has been imposed by assuming that rent of immovable property is a payment for services. Is the rent received from built up immovable property a payment for services? Can rent from built up immovable property be termed as a payment for services. This assumption of the Sindh services tax law that rent of immovable property is a payment for services is open to debate which needs to be examined. For the examination of this assumption that rent of immovable property is a payment for services we better refer to the standing text wording of Sindh law and rules in this regard. For imposition of sales tax on services you need ,as a precondition, to identify a service provider; and a “Service provider” means a person who is engaged in the provision of service or providing of service in the course or furtherance of any economic activity and economic activity means any activity carried on by a person that involves or is intended to involve the provision of services to another person and includes—(a) an activity carried on in the form of a business, including a profession, calling, trade, or undertaking of any kind, whether or not the activity is undertaken for profit; (b) the supply of moveable property by way of lease, license or similar arrangement; or (c) a one off adventure or concern in the nature of a trade”.
In the above quote/reference there is mention of provision of services by one person to another person or an activity carried on in the form of a business, a profession, calling, trade, or undertaking of any kind, whether or not undertaken for profit; or providing moveable property (note the word movable) on lease, license or similar arrangement; Since the supply of moveable property by way of lease, license or similar arrangement has been included in service therefore, the immoveable property or the immoveable property on rent or on lease is excluded by law from being taken as a furtherance of an economic activity and furtherance of an economic activity is limited to the supply of moveable property by way of lease, license or similar arrangement. There is concept of movable and immovable property adopted in the Sind sales tax law and it is prescribed in the Sindh Statue that “moveable property by way of lease, license or similar arrangement can be taken as providing of service but any reference of immoveable property on rent or lease, license is not included as service. To rent an immovable property is not included in the definition of economic activity and providing service in the furtherance of an economic activity which is a pre-condition for the imposition of Sindh sale tax under the statue thus it stands excluded from the definition of service by the wording of the standing statue for imposing sales tax on services. More over in the charging section 3 of the Sindh Sales Tax on Services Act the word used is from a “person” and immovable property is not a person nor it is included in the definition of person given in section 2(63) of Sindh Sales Tax on Services Act. Therefore to impose Sindh sales tax on rent of immovable property is not permitted even by the text of Sindh Sales Tax on Services Act (SSTOS-2011).
Even if for argument sake it is assumed that the constitution allows the imposition of sales tax on rent from immovable property to the province or other objection raised above are ignored still it is legally wrong to assume that Sindh sales tax has been imposed on “rent from immovable property”. Due to defective wording adopted in the new amendment made through Sindh Finance Act, 2015 in SSTOS-2011 the sale tax on rent from immovable property cannot be imposed. What in actual has been done is that through the amendment in section 2 of Sindh Sales Tax on Services ACT “renting of immovable property” has been defined as a separately defined head of service and on the other hand” renting of immoveable property services” is again very much separately defined as a separate head of service. As per the statue “renting of immovable property” and “renting of immoveable property services” become two different heads of service recognized in Sindh (SSTOS-2011). If the intention is to impose Sindh sales tax on rent then “renting of immovable property” had to included in the list of taxable services as given in Part B OF 2nd Schedule of Sindh Sales Tax on Services Act 2011 which has not been done and instead on the other hand in actual “renting of immoveable property services” has been included in the list of taxable services as given in Part B OF 2nd Schedule of Sindh Sales Tax on Services Act, 2011. Thus even as per the wording of law only “renting of immoveable property services” has been made taxable to Sindh sales tax and “rent of immovable property” has not been taxable as it is recognised as a different head but not included in the list of taxable services as given in Part B OF 2nd Schedule of Sindh Sales Tax on Services Act, 2011 and” renting of immoveable property services” which has in actual made taxable is defined in Sindh Sales Tax on Services Act 2011 as under:-
(72C) “renting of immoveable property services” means any service provided or rendered to any person, by another person, in relation to renting of immoveable property or any other service in relation to such renting for use in the course or furtherance of business and commerce;”;
From the above, it is deduced that only the amount received by a person for providing services in relation to renting of immoveable property or any other service in relation to such renting for use in the course or furtherance of business and commerce is liable to sale tax @ 6% under the Sindh Sales Tax on Services Act, 2011 and the actual rent received from renting of immoveable property even for commercial use is not taxable under the Sindh Sales Tax on Services Act 2011 even when the constitutional objection is not taken into account.
