This blog is written by Mr. Abdul Hafeez, Senior Manager Taxation and Corporate Services. Please read this blog and provide your valued comments.
Reverse Charge Mechanism
In many VAT systems that operate an invoice – credit method, the VAT on cross-border business-to-business supplies of services and intangible are collected by the reverse charge mechanism. This is a tax mechanism that switches the liability to pay the tax from the supplier to the customer.
What is its scope?
The reverse charge does not apply to supply of services where both the supplier and the customer belong to the same country. It only applies where services are supplied from one country by a supplier and are received by a service recipient of the other country.
What is the effect of the reverse charge?
If you can attribute the input tax due under the reverse charge to your taxable supplies/services (and so can reclaim it in full) then the reverse charge has no net cost to you. If you cannot (because, for example, you make exempt supplies/services) the effect is to make you pay VAT and that will be your cost.
Reverse charge mechanism and its adjustment under Pakistan Sales Tax Federal and Provincial Laws.
- Goods
1.1 Reverse charge Mechanism
Sales tax on VAT mode is being collected at import stage on the taxable goods on the concept of reverse charge basis under section 3(3)(b) of the Sales Tax Act, 1990 [ST Act] in a manner that a person is liable to pay sales tax on the goods imported by him.
1.2 Adjustability of sales tax paid at the time of import of goods under reverse charge mechanism is allowed under section 2(14)(b) read with section 7 of the ST Act. However, sales tax paid on reverse charge under provincial laws cannot be adjusted under section 2(14)(d) read with section 7 of the ST Act due to the fact that FBR web portal is not accepting the similar NTN of buyer (i.e. service recipient) and supplier of goods.
- Services
2.1 Sindh Sales Tax on Services Act, 2011. [SSTS Act].
2.1.1 Under section 3(2) of the SSTS Act a service that is not provided by a registered person shall be treated as a taxable service if the service is listed in the Second Schedule to SSTS Act and is provided to resident person by a non-resident person in the course of economic activity. Here, for the sake of discussion we treat non-resident person is a person living outside Pakistan. Under section 9(2) of the SSTS Act, where a service is taxable by virtue of sub-section (2) of section 3 the liability to pay the tax shall be on the person receiving the services.
2.1.2 The adjustability of sales tax is allowed in SSTS in a way that in case a person receiving or procuring taxable services from a nonresident service provider based in a country outside Pakistan paying standard rate of sales tax.
2.2 Punjab Sales Tax on Services Act, 2012 [PSTS Act]
2.2.1 Reverse charge mechanism is illustrated under section 4(5) of the PSTS Act where rendering of taxable service originates from outside Pakistan but is received or terminated in Punjab, the recipient of such service shall be liable to pay the sales tax to the PRA.
2.2.2 Adjustability of sales tax paid on Reverse Charge Basis under Rule 6 of the Punjab Sales Tax on Services (Adjustment of Tax) Rules, 2012 no input tax adjustment is allowed which is paid under reverse charge mechanism in spite of paying standard rate of sales tax on services.
2.3 KPK Finance Act, 2013 [KPK Act]
2.3.1 Reverse charge mechanism is illustrated under section 20(5) of the KPK Act where rendering of taxable service originates from outside Pakistan but is received or terminated in Khyber Pakhtunkhwa, the recipient of such service shall be liable to pay the sales tax to the KPK.
2.3.2 Adjustability of sales tax paid on Reverse Charge Basis under Section 43 of KPRA sales tax on services regulations, 2017, no input tax adjustment is allowed which is paid under reverse charge mechanism in spite of paying standard rate of sales tax on services
2.4 Baluchistan Sales Tax on Services Act, 2015 [BSTS Act]
2.4.1 Reverse charge Mechanism is illustrated under section 4(5) of the BSTS Act where rendering of taxable service originates from outside Pakistan but is received or terminated in Baluchistan the recipient of such service shall be liable to pay the sales tax to the BRA.
2.4.2 Adjustability of sales tax paid on Reverse charge basis is not expressly defined in the BSTS Act. However, since the Baluchistan sales tax is taken on VAT mode, sales tax paid on reverse charge basis should be allowed. Moreover, the BRA has almost adopted the SRB law and borrowed eportal of SRB, it is believed that there would not be any problem in availing sales tax adjustment paid under Reverse charge Basis.
ABDUL HAFEEZ
