Sindh slaps tax on rental for commercial activities

KARACHI: Sindh government has slapped sales tax on income from properties rented for commercial activities, although there is tax exemption if annual rent is below Rs400,000 and in case of renting for residence, a senior official said.

The official at Sindh Revenue Board (SRB) told The News that services sales tax has only been imposed on income from renting shops, banks or other commercial operation.

“There are misconceptions after the provincial parliament approved a bill, which brought rent of immovable property under the ambit of economic activity,” Mushtaq Kazimi, adviser Tax Policy of SRB said.

“If an immovable property has been rented for residence then it is exempted under the law. Even if it is rented for a commercial purpose but the (rental) income is below threshold under Income Tax Ordinance 2001 there is tax exemption too.”

In February, the provincial assembly passed a bill to empower tax authorities for collection of sales tax on moveable or immovable properties rented or leased out.

Kazimi said the bill approved by the Sindh Assembly stated that a renting property is subject to sales tax on services. Though the provision was already available under the Sindh Sales Tax on Services Act 2011 the new legislation removed the ambiguity as taxpayers and tax officials were contesting on the definition of property.

The tax on renting of property was initially brought through Sindh Finance Act 2015. The law was further amended over the period.

Initially, the sales tax rate was six percent with no input tax admissibility, but the tax was later increased to eight percent in 2016.

In 2017, the rate was cut to three percent. Recipients of services are held responsible to withhold and deposit sales tax involved on such services to SRB.

The amendment to the Act made in 2015 was challenged in the Sindh High Court. In August 2017, the higher court declared the tax collection as illegal, observing that renting property was not a service. The court observed that the renting of immovable property was not covered within the scope of economic activity as defined under Section 4 of the Act.

Sindh assembly removed the deficiency in the latest legislation through another amendment that validated the applicability of the provisions of renting of property, giving an overriding effect to such amendment and to the proceedings by officers of SRB for levy, collection, recovery of tax on renting of ‘immovable’ property, over any judgments of the court and any other law for the time being in force.

Tax experts said despite the amendments, the questions as to whether renting of immovable property itself is a service and that the same involves execution of economic activity or not, remain unanswered.

The provinces have been empowered to collect sales tax on services under the 18th Amendment into the constitution in 2010. Sindh was the first to make legislation for the imposition of sales tax on services.

The provincial government recorded a 17 percent growth in sale tax collection to Rs47.3 billion during the first seven months of the current fiscal year of 2018.