Dealing with traders—I 

Huzaima Bukhari & Dr. Ikramul Haq

“I will not give in to unreasonable pressure of the business community….I will not step back after countrywide strikes by the business and trading fraternity….”—PM vows not to bow to traders’ pressure, July 17, 2019.

 “…although there are gaps in the taxation system but that cannot be made the reason to call all the countrymen tax thieves hence, the Prime Minister Imran Khan should amend his statement—Business leaders condemn PM Imran Khan for calling everyone tax thieves, November 11, 2018

  “My government is still facing resistance from the status quo elements in implementation of reforms in different sectors but I vow to stand out against the corrupt mafia”—PM Imran Khan vows not to bow to pressure over reforms, December 28, 2019.

According to a Press report, tomorrow [January 20, 2020], Prime Minister Imran Khan is going to hold a meeting with the All Pakistan Traders Association (APTA). On January 12, 2020, the  spokesman of Federal Board of Revenue (FBR), while strongly refuting all rumours of rift between the Chairman FBR (who went on two-weeks leave till January 20, 2020), confirmed his attendance at this vital meeting. A day earlier, Chairman FBR, Shabbar Zaidi, tweeted, “Prime Minister will formally announce the concessions given to traders’ community and will seek assistance of trade bodies in complete documentation and tax contribution by trading sector”.

The Prime Minister in a meeting on January 13, 2020 with a delegation of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), according to a report, “showed his inability to immediately ease tight monetary and fiscal policies and withdraw the Computerized National Identity Card condition amid industrialists’ concerns that more industrial units can become sick due to prevailing conditions”. The FPCCI demanded reduction in interest rate, energy prices and withdrawal of condition of Computerised National Identity Card (CNIC) copy on purchase exceeding Rs. 50,000. But the Premier declined all these demands saying wait for ‘stabilisation’, whereas in public addresses he claimed it had already been achieved and 2020 is year of prosperity.

On January 9, 2020, top officials of FBR met traders’ representatives to review progress on the agreement towards implementing the condition of providing copy of Computerised National Identity Card (CNIC) on sale and purchase of goods from February 1, 2020. This meeting took place after “relief package” for traders was announced through Tax Laws (Second Amendment) Ordinance, 2019 wherein the standard rate of minimum turnover tax was reduced from 1.5% to 0.5% in case of traders having turnover up to Rs.100 million for tax year 2020. For traders who filed income tax returns in 2018, the tax liability for 2019 and 2020 should not be less than the tax liability in 2018 to become eligible for the reduced rate of 0.5%. Traders with individual status and having a turnover up to Rs.100 million are not be required to act as withholding agents under section 153 of the Income Tax Ordinance, 2001 [“the Ordinance”]. The condition to qualify for Tier-1 retailer has been amended so as to increase threshold of electricity consumption from Rs. 600,000 to Rs. 1,200,000.

From FBR’s side the meeting was headed by the Acting Chairperson, Nausheen Amjad, Member Inland Revenue Policy, Hamid Ateeq Sarwar, and Director General Retail, Hameed Memon. Traders’ representatives included Kashif Chaudhry, Naeem Mir and Ajmal Baloch.

According to a Press report, traders were reminded about their commitments and they promised to help in three areas: “to help FBR search for new income tax filers, address disputes regarding quantum of declared turnover and identify outlets that are larger than 1,000 square feet to determine whether they are eligible for sales tax registration”.

Opposing point of view is that many traders e.g. wholesalers in iron and steel, grocery items including sugar, lentils, ghee, and fast moving consumer goods as well as cement, tyres, mobile handsets, automobiles, yarn, paper etc. have a very meagre profit margin but whose turnover exceed Rs. 100 million.

The claim by FBR noted that “only 300,000 traders are registered” under the Sales Tax Act, which the traders countered claiming that “the number is as high as 2 million.” In the meeting, FBR and trade representatives agreed on a road-map for the implementation of the agreement reached between them on October 30, 2019. On the point-of-sale (POS) system progress, FBR officials after the meeting revealed: “so far 4,944 big retailers have been registered”. The drive for installation of automated POS at big outlets has been initiated as part of FBR’s drive “to document sales of large retailers who are currently evading tax payment, which runs into billions, it is claimed. FBR has projected bringing 20,000 such retailers under the system by end of June 2020.

Through the Tax Laws (Second Amendment) Ordinance, 2019, traders having turnover up to Rs.100 million have been exempted from deducting tax under section 153 of the Ordinance while making payment against the supply of goods, services, and contracts. FBR has yet to clarify the year with respect to which the turnover would be calculated. The medium-sized traders have been absolved from their liability as withholding agents to improve ease of doing business. The trade associations have committed to get all medium and large-sized retailers registered apart from nominating their representatives to evaluate turnover of the under-declared businesses. They have also joined hands with FBR for dispute resolution in audits.

According to FBR Year Book 2018-19 major contributor in direct taxes is manufacturing sector with around 34.5% share, services sector around 24.2% and share of wholesale & retail trade is “2.9% and 2.3%, which is in fact very low as against the existing potential in the country: wholesale and retail trade sectors together paid Rs. 48.2 billion: Large Retail Trade (7.9 billion), Small Retail Trade (9.7 billion) and Wholesale Trade (25.1 billion)”. Critics contest these figures on the ground that commercial importers at import stage pay advance income tax of Rs. 150 billion [total collection was Rs. 221.8 billion that include all categories] during 2018-19 and mere working contribution on the basis of returns filed is totally wrong and amounts to distorting facts.

According to data released by FBR, out of over 3.5 million traders in the country only 312,361 have been filing tax returns. It is true but FBR should also acknowledge huge number of non-filer traders having commercial electricity connections (the number is 3.2 million) and who are paying advance income tax under section 235 of the Income Tax Ordinance, 2001 where tax paid up to bill amount of Rs. 360,000 per annum till tax year 2019 was treated as minimum tax with no claim to a refund! All traders are thus paying advance income tax [figure for 2018-19 was Rs. 25.5 billion] but only a fraction are filing tax returns!! This proves utter failure of successive governments, military and civilian alike to enforce income tax law. On the contrary, they had been offering unprecedented waivers, amnesties and asset whitening schemes to mighty sections of society, especially to tax-defiant traders. The present government also recently succumbed before the shutter-down powers of traders and compromised on its resolve of getting due taxes from them vis-à-vis documentation of economy. The next episode will discuss outcome of post 20-January 2020 scheduled meeting and contribution of wholesale and retail sector in sales tax and income tax historically and what can be the best model to incentivise them to file returns and penalise defaulters in case of non-compliance even after providing simplified laws and ease of paying taxes.   

To be continued

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The writers, lawyers and authors, are Adjunct Faculty at the Lahore University of management Sciences (LUMS).