Govt likely to authorise FBR to collect FED on digital services in provinces

The Federal government is likely to authorize the Federal Board of Revenue (FBR) to collect Federal Excise Duty on digital services in provincial jurisdiction in next year’s budget 2023-24.

Sources said that the current Reverse Charge Mechanism (RCM) is a complex system that is difficult for businesses to understand and comply with. What is the reason for that? RCM is a mechanism under which the service recipient’s end is the one where tax is levied, instead of the service provider’s end merely because digital services can be offered from anywhere. If this was not complex enough there are provisions for a Joint Reverse Charge Mechanism where both parties are engaged under separate sets of rules. There have been loopholes pointed out on this front in the past as well that has led to debates, but to no avail.

The problems that arise here are manifold which can even lead up to double taxation. However that is not what the government of Pakistan is concerned with. Sources have revealed that this has led to a significant amount of tax evasion by businesses which is the government’s main concern.  Businesses are able to avoid paying taxes by claiming that they are not the end-user of a service.

Even though relevant provisions are available under provincial sales tax laws, a whole new set of controversies arise on the constitutional right of the province to tax services originating from abroad, particularly from outside Pakistan.

Sources said that the Ashfaq Tola led Commission has also recommended that provinces should agree to allow federation to collect FED on services (particularly digital services provided virtually) which are subject to sales tax under the reverse charge mechanism.

Allowing the federal government to collect FED on services would also help to address the issue of tax avoidance by multinational corporations. Adding to this, sources also said that multinational corporations often use complex structures to avoid paying taxes in Pakistan. By collecting FED on services, the federal government would be able to tax these corporations regardless of where they are located.

It is pertinent to note that FED is a simpler tax than sales tax, and it would be easier for businesses to understand and calculate. This would lead to a decrease in tax evasion and an increase in the federal tax revenue. However, where this will leave the provincial revenues is a question that still remains unanswered.