Sindh overhauls sales tax structure on services

June, 17 2025 (MLN): In a significant tax reform move, the Sindh Finance Bill 2025 proposes a complete structural shift in the provincial sales tax framework by replacing the existing positive list approach with a negative list system for the taxation of services.

The bill, presented on June 13, 2025, by the Chief Minister in the Sindh Assembly, marks one of the most extensive reforms in the Sindh Sales Tax on Services Act, 2011.

Under the new system, all services will be considered taxable by default unless specifically exempted, fundamentally reversing the earlier approach where only listed services were subject to tax.

This change is accompanied by the adoption of the United Nations Central Product Classification (CPC) system, aligning Sindh’s tax regime with international standards and removing outdated and redundant service classifications.

Another major development is the redefinition of the term "service" to broadly cover any activity, facility, or advantage provided in Sindh, moving away from the limited interpretation previously confined to a scheduled list.

Additionally, five levies Professional Tax, Entertainment Duty, Drainage Cess, Cotton Fees, and Local Cess are proposed to be abolished, streamlining the tax structure further.

The motor vehicles tax is also proposed to be reduced.

Despite these structural changes, the standard sales tax rate remains unchanged at 15%.

However, the Second Schedule is proposed to be split into two parts, identifying services subject to either higher or lower than standard rates.

Services such as telecommunication, internet, and vehicle tracking will be taxed at an increased rate of 19.5%.

Meanwhile, various other services including construction, transport, IT, restaurants, and insurance will benefit from reduced rates ranging from 3% to 8%, subject to specific conditions.

Notably, a revised penalty structure has also been introduced.

For example, the penalty for late filing of returns is now a flat Rs100 per day, while failure to deposit due taxes attracts a fine of Rs10,000 or 5% of the payable tax, whichever is higher (if the default exceeds five days).

The bill also proposes expanding provincial jurisdiction by clarifying that any physical “office” (not just registered head offices) of a non-resident entity in Sindh would be deemed a separate entity for tax purposes, thereby broadening the tax net.

Furthermore, the Board will be empowered to resolve classification disputes, and such decisions will be final.

The SRB will also require proof of both registration and "active taxpayer" status before issuing or renewing licenses for taxable services.

While the tax rate remains unchanged for many services, some categories such as toll manufacturing for non-industrial consumers will now attract a higher rate of 8%, replacing the earlier reduced rate of 3% applicable to only textile and leather goods.

The Sindh Finance Bill 2025 demonstrates a focused effort to modernize and expand the province’s tax base, enhance compliance, and align with international standards while ensuring rate stability and streamlining procedures.

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