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Fashion, tax and the PRA

It was just a matter of time before the tax-man cracked down on fashion designers but given the state of bureaucracy in the country, was it a fair trial or a witch-hunt? Instep takes you through the last ten days…

Fashion, tax and the PRA
Is high-end couture a product or a service taxable under provincial law? Designers under the umbrella of the PFDC and the Punjab Revenue Authority are in talks to decide the issue.

The days prior to fashion week are marked by a whirlwind of activity as designers buckle down to putting finishing touches on their collections and generally try and create hype about their upcoming ramp outings.  With PFDC L’Oreal Bridal Week right around the corner (the event kicks of on the 16th of September in Lahore), there is the usual stream of social media previews, last-minute design changes and fittings; but this time around the usual excitement was replaced by a flurry of activity of a different nature.

A dark shadow fell over the ateliers of couturiers who previously had only the adda-wala’s lack of precision or a model’s unexpected weight gain to worry about. The concerns facing Lahore’s designers in the last ten days were much more serious – accusations of tax evasion were thrown around faster than you can say ‘couture’; the Punjab government dispatched a foot soldier in the form of one Ms. Ayesha Ranjha to carry out a crackdown against designer outlets failing to comply with legal requirements.

The turn of events

Last Thursday, 13 designer shops were raided and sealed in Lahore for failing to register with the Punjab Revenue Authority (PRA) under the Punjab Sales Tax on Services Act 2012 and pay a 16% service tax liable on them under the act. The raids were carried out by Ayesha Ranjha, Additional Commissioner, Punjab Revenue Authority (PRA), who maintained in an exclusive conversation with Instep that the drastic measure of sealing the outlets was taken only after numerous warnings and notices, both telephonically and in written form, were sent to the designers in question. These include: Muse, Zara Shahjehan, Nida Azwer, Sania Maskatiya, Shirin Hassan, Mini Bindra’sRubaiyaat and Ammar Belal. Most shops were open for business again the next day following negotiations with the provincial government, save for Muse, which chose to go the legal route. The brand filed a petition in the Lahore High Court against the sealing of its outlet and PRA was “directed to provide them the opportunity of being heard,” says Ranjha. The Muse shop in Gulberg Galleria has been open again as of Wednesday.

The background

The passing of the 18th Amendment in 2010 led to a devolution of power and provinces were granted more authority. While the collection of sales and income tax remained a federal matter under the Federal Bureau of Revenue, the taxation of services came under the control of the provinces, specifically the PRA in Punjab.The Punjab Sales Tax on Services Act 2012 lists 68 types of services to be taxed, including fashion designers, salons, cable operators, travel agencies, advertising agencies and restaurants.

Simply put, not abiding by an act of the provincial government is breaking the law. Barrister Waqqas Mir, an Advocate of the High Court, states, “The Act of 2012 provides a list in its Second Schedule of taxable services. Fashion designers are included in this list hence they are bound to register. Anyone not registering is circumventing the law. Furthermore, any person who fails to register can be compulsorily registered and be punished –with a financial penalty as well as possible imprisonment.”

Legal loopholes

The whole case was not that simple. The chief argument in favour of the designers is the fact that they are providing a product and not a service. “Whether we are selling a bridal or something off-the-rack, what we are handing to the customer at the end of the production line is a product in the form of a garment,” maintained one of the designers targeted by the PRA.

Ranjha had a rebuttal ready. “PRA understands the difference between retail and customized clothes. There’s a reason why retail chains such as Khaadi weren’t targeted, because they supply mass clothing in predetermined sizes and designs to a nationwide market. That is a product. Our focus is on those who take customized orders and prepare outfits that are one of a kind in terms of size and design. That’s a service being provided, despite the fact that goods are used in the execution of that service. It’s the same case as with restaurants. Let me also clarify that there is no personal agenda here. Our purpose is not to defame anyone but to follow the law.”

You might be wondering that if the PRA was so eager to bring tax evaders into the provincial tax bracket, why did it take them so long to take action? The organization maintains that work had been underway for over a year now to compile relevant data on the businesses in question and their operations and to carry out the necessary legal requirements. Designers, however, muttered about a more sinister motive. “The PRA is given a certain target each year and they were failing to reach that. So they decided to use this as a means to fill their coffers and also get cheap publicity,” accused one of them on the condition of anonymity.

While Ayesha Ranjha was being hailed as the “Dabangg Lady of Lahore”for taking action against “corrupt” practices, Barrister Mir cautioned against jumping the gun when it came to heralding the PRA for being completely above reproach. “A lot of people have been vocal in mocking the designers who have had their business premises sealed. However, such an attitude is perhaps rooted in ignorance about the law and the frequency with which PRA acts arbitrarily,” he said.

Another grey area was the scope of the PRA. Did the organization even have the authority to tax design-related services? Barrister Sardar Mohammad Ali, one of the lawyers being consulted on the matter by the designers, believed that a case could be made to argue that the PRA, in fact, did not possess that authority. “Our firm successfully petitioned the LHC on behalf of several architectural firms challenging the PRA over the same law. According to the constitution, anything that is copyright-related is exclusively the federal government’s domain and the provinces cannot infringe on that area. A major component of architectural services are drawings and plans, which are copyrightable, hence we successfully argued that the PRA could not impose on a federal matter. The same case can be made for customized, bespoke items because they are design-related and copyrightable.”

End game

The Pakistan Fashion Design Council (PFDC) intervened and took ownership of the situation while officially representing designers in their tussle with the PRA. While individual designers were told not to communicate with the media, the council issued an official statement, questioning the manner in which the raids were conducted and the resulting “defamation of the fashion industry at large”. In order to address the controversial tax contention itself – specifically on its services vs. goods applicability, the statement read, “The PFDC and designers had already been engaged in a dialogue, legally and otherwise, with the PRA prior to these incidents of shop sealing.”

The PFDC and the provincial government are currently in talks to work out a mutually acceptable solution to the issue; it seems an uneasy peace has been brokered for the time being. We just hope that justice will be served, whether it is penalizing designers who evade taxes or acquitting to those who have clean operations.

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