Huzaima Bukhari & Dr. Ikramul Haq
The top officials of Federal Board of Revenue (FBR) admitted before the Standing Committee on Senate on Commerce & Textile on October 22, 2019 that not more than 41000 persons filed sales tax statements along with payment of 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 filed income tax returns in five major markets of Karachi, Lahore, Islamabad, Rawalpindi and Faisalabad”.
According to a report, “traders just paid Rs. 35 billion under the head income tax”. In Karachi, the main economic hub of the country, only 85,020 traders of six main markets are tax filers—58,106 of Saddar market, 14,780 in Defence Housing Authority and 9,446 traders in Clifton. Traders of four major markets of Lahore paid total tax of just Rs.567.7 million with only 2,096 filers in famous Anarkali bazaar, 563 from the Mall Road, 480 of Hafeez Center and 786 of Liberty Market. In the whole of Rawalpindi, only 6,580 traders filed returns paying Rs.1.09 billion. In Islamabad, 6,428 traders filed returns and paid tax of Rs. 1.934 billion. 2,266 traders filed returns in five markets of Faisalabad paying Rs.141.7 million.
According to FBR Year Book 2018-19, major contributor in direct taxes is the manufacturing sector, with around 34.5% share, services sector about 24.2% and share of wholesale & retail trade is “2.9% and 2.3%, respectively, 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)”.
FBR has not conducted any study to determine the real potential of income and sales tax from retail sectors. According to a study [Industry Profile: “Wholesale and Retail Trade Sector in Pakistan] conducted in 2012 by FBR, the contribution of retailers in income tax was shown just 0.5% and in sales tax about 1%, which according to the latest publication, FBR Year Book 2018-19, is still 2.3%.
Traders contest FBR’s figures on the ground that commercial importers at import stage pay advance income tax of billions [total collection was Rs. 221.8 billion in 2018-19 that included all categories]. They say working of their contribution merely on the basis of income tax returns filed is misleading, amounting to distorting the facts. They claim that FBR should also acknowledge that 4 million commercial electricity users pay advance income tax under section 235 of the Income Tax Ordinance, 2001. Under this head, tax paid at Rs. 43,200 on consumption of Rs. 360,000 per annum is treated as minimum liability—no claim to a refund if there is loss! They claim that that all retailers are paying advance income tax with electricity and mobiles bills, though majority may not be filing tax returns being afraid of adverse action by FBR field officers for claiming refunds of excess amounts paid and even correct incomes declared are assessed exorbitantly through audits or other arbitrary actions.
Alleging that the returns are adjudged erroneous without any evidence and huge demands are created to meet revenue targets or for self-aggrandisement, traders claim that highhandedness, even if later proved in appeals to Tribunal and higher courts, the officers get no punishment/disciplinary action but the taxpayers have to incur heavy cost of litigation without any compensation.
In any of its publications, FBR has never disclosed the total tax paid by traders under various withholding provisions. For example, under section 236H of the Income Tax Ordinance, 2001. It requires every manufacturer, distributor, dealer, wholesaler or commercial importer of electronics, sugar, cement, iron and steel products, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint or foam sector to withhold tax while making sale to retailers and every distributor or dealer to another wholesaler. Rates vary from 0.5% to 2%, depending upon the product and status [appearing on Active Taxpayers List (ATL) or not]. Another section is 236HA requiring supplier to withhold tax of on sale of petroleum products to a petrol pump operator or distributer where no commission or discount is allowed at the rate of 1% if person is not on ATL, otherwise 0.5%.
The Government needs to present a simple and low-rate tax scheme to tap the real tax potential of retail sector. According to Planet Retail estimates, Pakistan’s current retail market size is $152 billion. Even if we take negative effect of Covid-19 endemic and ignore entire sales for want of enforcement capacity, safe estimate will be $100 billion. By applying sales tax of 4% and income tax of 1% on gross turnover, total collection from retail sector alone comes to $5 billion (FBR collected total sales tax of Rs. 1596 billion in 2019-20 and total tax collection of Rs. 3998 billion). For this, the following Retailers Optional Scheme 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 to the 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, section 99B should be substituted 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 2% 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”.
“In exercise of powers under subsection (9) of section 3 of the Sales Tax Act, 1990 and section 99B of the Income Tax Ordinance, 2001, the Federal Government has prescribed the following procedure for qualifying retailers thereunder:
The retailers shall receive/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: Rs. 10,000,000
Sales Tax on above @ 4% (A) Rs. 400,000
Total amount subject to income tax Rs. 10,400,000
Income tax @ 1% on above (B) Rs. 104,000
Total tax liability to be paid with return (A+B) Rs. 504,000
All retailers, without any distinction, may opt and connect with FBR through Point of Sale (POS) or other prescribed IT-related system. No audit shall be conducted for these retailers.
Retailers shall be allowed to incorporate profit in their books working back the income tax paid applicable to total income (imputable income) if adhering to all the provisions. However, if it is proved on the basis of definite information that tax was not paid as per law 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 up to 5 years.
As evident from above, income tax rate will be 1% of turnover for retailers opting and complying with the proposed scheme and consumers will pay only 4% sales tax. Those who decide not to opt for this concessional scheme will become uncompetitive, as they will remain subjected to withholding taxes, 17% sales tax, advance tax, if applicable, audit and higher rate of income tax. The consumer will obviously flock to those retail outlets charging just 4% sales tax! It will boost economy and revenues as well as lower the prices of commodities.
The writers, lawyers and authors, are Faculty at the Lahore University of management Sciences (LUMS).