MUHAMMAD HASHIM KHAN KAKAR, J. Since common questions of law and facts are involved in both these petitions, as such, we propose to dispose of the same through this common judgment.
The petitions carry the following prayer clauses: "i. The Notification bearing No.FD.SO(MPR)1-46/BST/20203714-48 dated 04-05-2020, being illegal, unlawful, capricious, arbitrary, vexatious, whimsical and ultra vires to Balochistan Sales Tax on Services Act, 2015 ("BSTS") may kindly be declared as ab-initio null and void. ii. The service portion in a contract be separated from other heads i.e., goods and only services i.e. labour be charged with and in accordance with law contained in Balochistan Sales Tax on Services Act, 2015. iii. As the Sales Tax on services is an indirect tax which is always borne by the service recipient i.e. Government of Balochistan be added to the sub-total of the bid cost separately and then be withhold and returned by the Government exchequer as per law in the like manner as is done in the sister province. iv. Any other relief, which may deem fit and proper in the circumstances of the case may be awarded. v. Cost of the petition may also be awarded."
2. Brief facts for disposal of these petitions appear that the petitioners are contractors by profession and engaged in construction and works contracts with Government Departments. The petitioners are registered with the Pakistan Engineering Counsel (PEC) under the PEC Act, 1976, The petitioners are agitating charge of Balochistan Sales Tax on Services ("BSTS") under the Balochistan Sales Tax on Services Act, 2015 ("the Act"). The petitioners have challenged Notification bearing No.FD.SO(MPR)1-46/BST/20203714-48 dated 04-05-2020 issued by the Finance Department to the Accountant General Balochistan and all District Account Officers asking them to withhold BSTS @ 6% on construction services under Tariff Heading 9814.2000 of the Schedule to the Act. The petitioners have also challenged the levy of BSTS on the ground that since the Government is end user of contract services hence it should bear the burden of BSTS. The petitioners also agitate the rates of BSTS and their application on running bills.
3. Mr. Muhammad Ishaq Nasar, learned counsel for the petitioners stated that the impugned Notification is ultra vires to the Act and has no legal binding as it cannot override the provisions of the statute i.e. the BSTS Act, 2015, hence it is not binding on the Balochistan Revenue Authority ("BRA") or the Government of Balochistan. The learned counsel also contended that the BRA can only charge BSTS on services portion of the amount of a contract and not the whole amount of the contract. Therefore, the BRA should bifurcate the payment between the goods segment and the services segment and charge BSTS only on services segment. The learned counsel further argued that since BSTS is an indirect tax whose ultimate burden is to be borne by the end consumers, hence the Government of Balochistan, being the end user in the case of contract services has to bear burden of BSTS. Hence the Government of Balochistan should pay the BSTS to the BRA and the petitioners should not be held liable for payment of BSTS. The learned counsel further contended that rate of 6% without input adjustment is on higher side when compared with the other Provinces.
Therefore, the rate of BSTS should be reduced and rationalized. The learned counsel further contended that the rate of BSTS @6% (@4% from 1.7.2023 onwards) should be applied on new bills only and not on the running bills.
4. Mr. Shai Haq Baloch, learned AAG and Mr. Jam Saka Dashti, Advocate, appearing on behalf of the respondents argued that the impugned Notification is merely an explanation of the provisions of the BSTS Act, 2015 issued for the information of the general public and government departments.
The impugned notification is not intended to override the provisions of the Act, which provides charge of BSTS @15% with input adjustment and 66% (@4% from 1.7.2023 onwards) without input adjustment in the case of construction services under Tariff heading 9814.2000 in Part B of the Second Schedule to the BSTS Act. The learned counsel differed with the contention of the petitioners that the Government is the end user; hence burden of BSTS should be borne by it. The learned counsel stated that the Government is the buyer of services/goods and the withholding agent. The Government is not the end user rather it uses such goods and services for furtherance of economic activity in terms of section 6 of the BSTS Act. The learned counsel further stated that end user is consumer from public at large. The end consumer is not liable to be registered under the sales tax law or required to file sales tax return. The end consumer is not allowed input tax adjustment. The end consumer is the one who consumes the end product or service and who does not use the product or service for furtherance of economic activity in terms of section 6 of the BSTS Act.
5. The learned counsel for the respondents further contended that the BSTS Act provides two sets of tax rates i.e. 6% (45 w.e.f. 1.7.2023 onwards) without input tax adjustment and 15% with input tax adjustment. The contractors are at liberty to opt for any of these rates. He further stated that while paying BSTS to withholding agent or at the time of submitting their monthly returns the petitioners may give option for either of the said two rates of taxes. Regarding contention of the petitioners that BSTS should be charged only on the services portion of contract, the learned counsel for the respondent explained that contracts fall in the category of composite transactions under the sales tax laws (Sales Tax Act, 1990 and Provincial Sales Tax on Services Acts) hence it is difficult to bifurcate such transaction into services and goods portions. The learned counsel stated that works contract involve both goods and multiple services like engineering services, architectural services, labour services etc. Therefore, it is practically not possible to bifurcate a works contract into goods and services. To cater for this issue both the Sales Tax Act, 1990 and Provincial Sales Tax on Services Acts provide a common definition of input tax (sales tax on purchase of goods or services) so that a registered person/ taxpayer may claim input tax from both the Federal Board of Revenue (FBR) or the Provincial Sales Tax on Services Authorities (PRAs) again their output tax (tax paid on sale of goods or services). If the contractors wish to get adjusted their input tax against output tax, then they have to file monthly returns with FBR and PRAs. Regarding contention that rate of BSTS is on higher side the learned counsel for the respondents stated that each Provincial Legislature has fixed such rates in view of respective conditions of the Province and different rates are charged by each Province ranging from 16% (with input adjustment) and 5% (without input adjustment) in the case of Punjab to 15% (with input adjustment) and 4% (without input adjustment) in the case of Balochistan. The learned counsel on the application of rate of tax on new bills and not running bills stated that tax is charged on the amount of payment whether it pertains to running bills of ongoing contracts or new contracts.
6. Arguments have been heard, record perused and relevant provisions of the Sales Tax Act, 1990 and Provincial Sales Tax on Services Acts examined. The scheme of said sales tax laws is such that sales tax is charged on sale of goods or services by the supplier or service provider. The tax so charged on the supplier or service provider constitutes its "output tax". The supplier or service provider in its turn deduct sales tax at the time of purchasing goods or service from the sellers of such goods or services which constitutes its "input tax". At the time of filing of monthly sales tax returns the service provider may adjust its "input tax" against the "output tax" resulting into either sales tax liability or sales tax refund. The standard rate of tax under the Sales Tax Act, 1990 is 18% whereas under the Provincial Sales Tax on Services Laws standard rate 'ranges from 13% in Sindh, 16% in Punjab and 15% in KM and Balochistan. The standard rate of sales tax allows adjustment of "input tax" against the "output tax". The Provincial Sales Tax on Services Laws also provide lower rates without input tax adjustment (sales tax deducted on purchase of goods or services) against the "output tax" (sales tax paid on sale of goods or service).
7. Sales tax is charged on each stage of economic activity hence a chain of economic activity is established. At the end of said chain is the end consumer who ultimately bears the burden of sales tax. The economic activity regarding sale of goods or services falls into three categories of transactions. First category is sale of goods. Second category is providing of services. Third category comprises composite transactions involving both sale of goods and providing of services.
The First category is covered under the Sales Tax Act, 1990. The Second category is covered under the Provincial Sales Tax on Services Laws. The Third Category of economic transactions however falls under both the said laws. Therefore, both the laws provide a common definition of "input tax" to enable suppliers and service providers a mechanism for adjustment of such input tax so that such tax is ultimately passed on to the end consumer from the public at large. To enable the suppliers and the service providers to adjust their input tax against output tax both the Sales Tax Act, 1990 (related to sales tax on goods) and the Provincial Sales Tax on Services Laws provide a common definition of input tax. Such definition under the Sales Tax Act, 1990 is as follows: Section 2(14) "input tax", in relation to a registered person, means -
(a) tax levied under this Act on supply of goods to the person;
(b) tax levied under this Act on the import of goods by the person;
(c) in relation to goods or services acquired by the person, tax levied under the Federal Excise Act, 2005 in sales tax mode as a duty of excise on the manufacture or production of the goods, or the rendering or providing of the services;
(d) Provincial Sales Tax levied on services rendered or provided to the person; and]
(e) levied under the Sales Tax Act, 1990 as adapted in the State of Azad Jammu and Kashmir, on the supply of goods received by the person;
8. Similarly definition of input tax under the BSTS Act, 2015 is as follows: Section 2(86) "Input Tax" in relation to a registered person, means-
(a) tax levied under the Act on the services received by the person;
(b) tax levied under the Sales Tax Act, 1990, on the goods imported by the person;
(c) tax levied under the Sales Tax Act, 1990, on the goods or services received by the person; and
(d) provincial sales tax or Islamabad Capital Territory sales tax levied on the services received by the person:
9. The chain of economic activity under the sales tax law is run by three players. These are withholding agents, suppliers or service providers and the end consumer from the general public.
The withholding agent or the person making payment on purchase of goods or services withholds sales tax from the supplier or service provider. The supplier or service provider also plays the role of withholding agent when making purchases of goods or services. The supplier or service provider at the end of economic activity chain includes the sales tax in the price of goods or services and passes on its burden to the end consumer from public at large. Sales tax is withheld at each step of economic activity chain and added to the price of goods or services which, ultimately passes on to the end consumer from public at large who finally bears the burden of sales tax being an indirect tax. The end consumer from public at large is the person at the end of economic activity chain who ultimately consumes the goods or services but who does not use such goods or services for furtherance of economic activity. Each supplier/service provider has to file monthly sales tax return with FBR (in case of supplies) and with PRAs (in case of services) wherein he can adjust his input tax (sales tax paid on purchases) against output tax (sales tax paid on sale) resulting into either sales tax refund or sales tax liability. However, such adjustment of input tax is subject to provisions of the Sales Tax Act, 1990 and Provincial Sales Tax on Services Acts. Through this exercise ultimate burden of sales tax passes on to the end user or the consumer from the general public at large who cannot shift such burden further. Each law puts certain restrictions on claim of input tax to ensure documentation of the economy e.g. input tax related to un-registered persons or payments in cash or through non-banking channels are not allowed.
10. The service provider/supplier is required to pay sales tax and file monthly sales tax returns with the respective tax authority. The withholding agent is required to withhold sales tax from the supplier/service provider, pay to the respective tax authority and to file withholding statement to the respective tax authority. Most of the suppliers/service providers also perform the role of withholding agents when making purchases of goods or services. The end consumer from the public at large bears the ultimate burden of sales tax when consuming goods or services. The end consumer is neither required to file sales tax return/ withholding statement nor he can pass on burden of sales tax to any other person hence sales tax is ultimately paid by him.
11. We have also gone through the sales tax on services laws of the four provinces with reference to tax rates applicable to contractors. These laws of the four provinces provide following sales tax rates for the contractors: Punjab Sindh KPK Balochistan i) 16% with input adjustment ii) 5% without input adjustment13% with input adjustmenti) 5% without input adjustment for contracts ii) 2% without input adjustment on ADP/PSDP funded projectsi) 15% with input adjustment ii) 4% without input adjustment
12. The above rates give two options to the contractors. They may either opt for standard rate and get adjusted their input tax against their output tax. Alternatively, they may go for the lower rate and forgo adjustment of input tax against the output tax.
13. Now coming to the contentions of petitioners we are in agreement with the learned counsel for the respondents that impugned Notification is merely an explanation of the provisions of the BSTS Act, 2015 issued for the information of the general public and government departments. The said notification has no binding force to override the provisions of the Act. Therefore, its presence or absence does not make any difference to the application of provisions of BSTS Act, 2015.
14. As far as the second contention of the petitioner that sales tax is to be charged only on the services component and not on the whole bill is concerned we feel that it based on misconceptions regarding scheme of sales tax law and the nature of works contracts. The BSTS Act, 2015 provides two rates of sales tax i.e. standard rate of 15% with input tax adjustment and lower rate of 6% (4% from 2023) without input adjustment. This option of tax rate is to be exercised both at the time of getting payment from withholding agent and at the Lime of filing monthly sales tax return. The standard rate of 15% provides an option to the contractors to pay sales tax at higher rate and get adjusted input tax of goods and services against output tax and shift their burden to next level of economic activity chain which will ultimately pass on to the end consumer from the public at large. They also have an option to pay sales tax at the lower rate or 6% (or 4 %) if they do not want to get adjusted input tax on goods and services. The lower rate is provided' by the legislature on the basis of approximate portion of services in the whole contract. The works contract is a composite transaction of economic activity which involves both supply of goods and providing of multiple services e.g. engineers, architects and laborers etc. Each stage of economic activity in contracts involve purchase of goods and services hence it is not an easy task to bifurcate the contract into goods contract and services contract. However, if the contractors want to precisely work out burden of sales tax on services and sales tax on goods separately and then pass on to the end consumers from the public at large then they may opt for the standard rate of sales tax on services. Needless to mention that if the contractors are filing both the return of sales tax on good with the FBR and the return of sales tax on services with the province, then they will have to opt for standard rate of sales tax on services. In view of these facts we are not convinced with the contention of the petitioner on this issue.
15. Now coming to the next contention of the petitioners that the sales tax on services being an indirect tax is to be paid by the Government of Balochistan being end consumer, we find that the petitioners have misconceived the term end consumer. We are in agreement with the arguments of the counsel for the respondents that the end user or consumer from the public at large may be defined as having following characteristics: o Who is not liable to be registered under the sales tax law, o Who is not allowed input tax adjustment, o Who cannot pass on the burden of sales tax to another person, o Who consumes the end product or service and; o who does not use the product or service for furtherance of economic activity in terms of section 6 of the BSTS Act.
16. The Government of Balochistan is in no way having above characteristics. On the contrary the Government of Balochistan is a withholding agent and one of the players in the chain of economic activity who utilizes the services of contractors for furtherance of economic activity in terms of sales tax law. We are therefore not inclined to agree with the arguments of the learned counsel of the petitioners.
In the light of above legal and factual aspects of the petition we find no merit in the instant petition hence it is dismissed.