GB Security Services deals blow to Punjab Tax Authority

M/s GB Security Services (PVT) Limited is at the heart of a judgment that could reverberate across the service industry and potentially challenge tax authorities in Punjab. Lahore High Court has delivered a decisive blow to the provincial taxman’s efforts to broaden the sales tax net. At the heart of the matter: whether the salaries paid to security personnel should be subject to sales tax when their services are provided by a security firm. The court’s answer: a resounding “no”.  

The case, originating from a petition filed by GB Security Services, pitted the security firm against the Federation of Pakistan and other respondents, including the Punjab Revenue Authority. The core dispute, as laid bare in the court’s chambers, revolved around a fundamental interpretation of the Punjab Sales Tax on Services Act-2012 (PSTS-Act).  

The Punjab Revenue Authority had asserted that sales tax should be levied on the entire invoice amount, a sum that included the salaries and allowances disbursed by security service providers to their on-the-ground personnel. This expansive interpretation, they argued, was consistent with the “gross amount” wording introduced into Section 7(1) of the PSTS-Act through the Punjab Finance Act, 2014.  

However, Barrister Muhammad Hamza Akhtar and Syed Hasnain Abbas, representing the petitioners, contended that this interpretation was a misreading of the PSTS-Act’s provisions. Their argument hinged on the crucial distinction between the “service” provided and the underlying “economic activity” of the service provider. Notably, Section 6(3) of the PSTS-Act specifically excludes the activities of employees providing services in that capacity to their employer from the purview of “economic activity”.  

Justice Sultan Tanvir Ahmad, presiding over the case, concurred with the petitioners. In his judgment, he emphasized that for a service to be taxable, it must be an “economic activity of the service providers conducted as a business, profession, or trade”. Crucially, the court found that the salaries reimbursed to the security personnel were not part of the economic activity of the service provider, nor were they part of the consideration paid for the services rendered.  

The court’s ruling aligns with a precedent set by the Supreme Court of Pakistan in the “Messrs Quick Food Industries” case, which similarly addressed ambiguities arising from tax rule amendments. That judgment affirmed that sales tax on services is based purely on the value charged by the service provider for the service itself, excluding amounts that are essentially reimbursements for employee salaries.  

This judgment is more than just a victory for M/s GB Security Services; it sets a precedent that could significantly impact other service industries in Punjab. It serves as a critical clarification on the scope of taxable services, potentially narrowing the base for sales tax collection by the provincial authorities.

For businesses, it offers much-needed clarity and potentially reduces their tax burden. For the taxman, it signals a need to revisit their interpretation and collection strategies in light of this definitive judicial pronouncement.

The future may now hold new rounds of debate over what truly constitutes the “value” of a service in the eyes of the law and the tax collector. Click here for more.