Simple & fair taxation for retailers
Dr. Ikramul Haq
The outcome of a meeting between Prime Minister and the business community on January 20, 2020 as expected ended with just clichés like “facilitation”, “concessions” and “waivers” etc. Prime Minister reiterated: “taxation is a key to revive national economy” and openlyadmitted that traders are excellent philanthropists but “do not contribute to the revenue generation” with the same spirit because of the “complex taxation system and the government’s inability to spend the tax money on public welfare”.
Although the Prime Minister admits that the State is not spending taxes for public welfare, yet till today has taken no practical steps in this direction. Now in the midst of enormous economic toll of Covid-19 pandemic, after 68 years Pakistan will close this fiscal year with negative growth. In this scenario, Dr. Abdul Hafeez Shaikh, Advisor to the Prime Minister on Finance & Revenue,in a Press Release issued on May 18, 2020, said, “We are preparing the next budget, we should be more vigilant, practical, and analyze the opportunities and challenges offered by the current environment”.
The State needs funds to run the affairs and help the needy as poverty is going to hit 40 million Pakistanis due to negative growth and stagnation due to Covid-19. The FBR made an admission before the Standing Committee on Senate on Commerce on October 22, 2019 that not more than 41000 persons who filed sales tax statements paid any tax! FBR alleges that “out of over 3.5 million traders only 312,361 have been filing tax returns” and that “only 104,219 traders filed income tax returns in five major markets of Karachi, Lahore, Islamabad, Rawalpindi and Faisalabad”. According to a report, during the last fiscal year, traders just paid Rs. 35 billion under the head income tax”.
According to a study [Industry Profile: “Wholesale and Retail Trade Sector in Pakistan] conducted in 2012, the contribution of traders in income tax was just 0.5% and in sales tax about 1%. According to FBR it has not improved much in the last eight years. This is acknowledgement of a reality that like the mighty absentee landlords who pay no or meagre agricultural income tax, retailers are also not paying taxes on actual income, they conceal sales and evade sales tax collected—a classic case of illegal enrichment!
The Government of Pakistan Tehreek-i-Insaf (PTI) despite tall claims of not surrendering before the traders gave them sweeping concessions on October 30, 2019 including relaxation in registration conditions, reduction of income tax rates by 66% etc.
Pakistan at the moment is struggling hard to overcome monstrous fiscal deficit that this year may exceed 10% of GDP. In these circumstances, the PTI Government must introduce fair and simple, low-rate tax incentivising traders to pay taxes honestly as per model suggested in Towards Flat, Low-rate, Broad and Predictable Taxes, [PRIME Institute, April 2016].
According to a study of retail business by Punjab Board of Investment and Trade [Project & Policy Research Wing: www.pbit.gop.pk]: “….Pakistan’s current retail market is estimated at USD 42 billion with sales in excess of USD 105”.
In order to tap the real tax potential of retail sector, in Finance Bill 2020, the following simple and fair tax system is proposed:
Section 3 (9) & (9A) of the Sales Tax Act, 1990 should be omitted and following new subsection (9) should be inserted:
“(9) Notwithstanding anything contrary contained in the provisions of this Act, tax on retailers be charged, levied, collected and paid as provided under rules issued under section 99B of the Income Tax Ordinance, 2001 at the rate of 4% of the gross turnover or at such a lower or higher rate as the Federal Government may specify by notification in official gazette.
Provided that provisions of subsection (7) of section 3 shall not be applicable in case of retailers covered under this sub-section”.
In the Income Tax Ordinance, 2001 substitute section 99B as under:
“Notwithstanding anything contained in any other law for the time being in force a tax shall be charged, levied, collected and paid at the rate of 3% of the gross turnover inclusive of Sales Tax as provided under subsection (9) of section 3 of the Sales Tax Act, 1990 on 15th of every month next following the month to which such turnover relates. The Federal Government may, by notification in the official Gazette, prescribe special procedure for scope and payment of tax, filing of return and assessment in respect of such retailers, as may be specified therein
Provided that the provisions of section 147, withholding of tax under Part “V” of Chapter X (except tax on salaries under section 149) and Chapter XII and provisions of Schedule 10 shall not be applicable to retailers covered under this section”.
The Federal Government may prescribe the following procedure for retailers covered under subsection (9) of section 3 of the Sales Tax Act, 1990 read with section 99B of the Income Tax Ordinance, 2001 as under:
- All retailers covered shall file monthly return and make payment on monthly basis along with return calculated as per formula provided below on 15th of every month next following the end of month to which such turnover relates.
Turnover PKR 10,000,000
Sales Tax on above @ 4% (A) PKR 400,000
Total Amount Subject to Income Tax PKR 10,400,000
Income Tax @ 3% on above (B) PKR 312,000
Total Tax Liability to be paid with return (A+B) PKR 712,000
- All retailers must get themselves connected with FBR through Point of Sale (POS) irrespective of their turnover. No audit shall be conducted for retailers who opt for POS.
- Retailers shall be allowed to incorporate profit in their books working back the income tax paid applicable to total income (imputable income).
- 1% cash back/rebate on yearly basis will be allowed to such retailers who have adhered to all the provisions prescribed. However, if it is proved on the basis of information that cash back/rebate was claimed on erroneous basis then notwithstanding anything contained in any law for the time being in force, such retailer shall be charged with a penalty of 5% of annual turnover and imprisonment that may be up to 5 years.
If we take even negative effect of Covid-19 pandemic, the retail sales in fiscal year 2020-21 will not be less than $105 billion, otherwise would have cross $ 140 as per study of Punjab Board of Investment and Trade. By applying sales tax of 3% and income tax of 4% on gross turnover, the total collection will be around Rs. 1,184,198 million as per calculation below:
Total budget USD 5 T = 31.2 B USD @ 160 each
4% of 105 B = 105,000,000,000
3% of above = 3,276,000,000
So total STax+ITax= 7,476,000,000 USD
Less 1% cash back of tax = 74,760,000
Net tax after rebate= 7,401,240,000 USD or
PKR 1,184,198,400,000 @ 1USD =160
This simple taxation will bring a large segment of undocumented sector into tax net, reduce fiscal deficit and revive the economy. The prices of all products will come down due to low tax rates and abolishing of withholding regime for retailers. This proposal has been given to the government, but there are apprehensions that the vested interest—unscrupulous traders, tax advisers and administrators—will resist it as it will end their blackmailing the taxpayers and making speed money.
The writer, Advocate Supreme Court, is Adjunct Faculty at the Lahore University of management Sciences (LUMS).