Service tax in Pakistan doesn’t work the way most people assume — there’s no nationwide “service tax” law; rather services are taxed by the provinces according to their sales tax on services legislation, while a limited number of services fall exclusively under the federal administration of FBR. If you run a business providing any form of service, this is one of the first things you should know to know who you must register with and file tax returns with.
Why Services Are Taxed by Provinces, Not FBR
Following the 18th Constitutional Amendment, taxation of services became a provincial subject. As a result, you must register for taxation with either Sindh Revenue Board, Punjab Revenue Authority, Khyber Pakhtunkhwa Revenue Authority or Balochistan Revenue Authority depending on the location of your business (not FBR, for most services).
While federal administration does collect sales tax on goods and a number of specific services, most of what constitute “service tax” are actually a provincial sales tax on services.
Who Needs to Register
Anyone whose business earns revenue via taxable services needs to register with the relevant provincial authority upon crossing the registration threshold set by them once your business starts earning revenue.
Registration thresholds and list of taxable services varies slightly between Sindh, Punjab, KP and Balochistan, so be sure to consult the relevant authority in your province before registering.
Standard Rates
Most provinces levy a standard rate of 15-16% on taxable services, with some services (IT and IT-enabled services in particular) charged lower rates (as low as 3-5%) in order to incentivize them. Rates are subject to change every year via the finance bill of the respective province, so make sure to double-check before issuing any invoice.
Filing and Compliance
Service providers who are required to register for taxation purposes file monthly sales tax returns with the relevant authority just like with FBR — with the amount of output tax on services rendered, input tax adjustment (if any) and the net amount due.
Failure to file or late submission attracts penalties and default surcharge under the relevant provincial sales tax on services act.
Common Pitfalls Businesses Encounter
The most common error businesses make is to assume that service tax is one uniform system nationwide and registering under the wrong province. Multi-province businesses sometimes need to register for taxation in every province from which they provide services, not just the one where they are incorporated.
If you intend to register a business entity, consult our business registration guide. For more information on provincial rules, consult the Sindh Revenue Board or Punjab Revenue Authority website directly.
