In the federal budget for fiscal year (FY) 2024-25, expected to be announced on June 7, 2024, no effort will be made to tap the real tax potential of the retail sector, which according to conservative estimates in 2025, will not be less than US$15 billion, even if we impose just a four percent sales tax and one percent income tax on the gross value of retail sales.
In the wake of the utter failure of voluntary registration under Tajir Dost (trader friendly) scheme promulgated through SRO 457(I)/2024 of March 30, 2024 with deadline of April 30, 2024 for six cities (Karachi, Lahore, Islamabad, Rawalpindi, Quetta & Peshawar), the Federal Board of Revenue (FBR) is left with no option but to compulsory register all those using commercial and industrial electricity or gas connection and forcefully implement section 181, 181AA, 181C, 181D and 181E of the Income Tax Ordinance, 2001.
The outcome of a recent meeting between FBR officers at its headquarters at Islamabad with representatives from various trade unions of Pakistan, which was also attended by Chief Coordinator of the Tajir Dost Scheme, as expected, ended with just clichés like “facilitation”, “clarifications” and “waivers” etc. According to a Press report: “The Chief Coordinator of Tajir Dost Scheme-2024… categorically conveyed to the FBR that the scheme is not practicable and cannot attract any trader, retailer, or shopkeeper in the present form.”
It is tragic that when state needs funds to run the affairs and help the needy, as poverty is going to hit millions of Pakistanis due to negative or negligible growth in real terms and stagflation, the FBR appears to be totally helpless before the mighty trading class—the real power of the bazaar merchants in Pakistan was discussed in these columns on March 11, 2023.
The FBR had made repeated admissions before the Standing Committee on Senate on Commerce on many occasions that not more than 41,000 persons filing sales tax statements actually pay any tax! The FBR keeps on alleging that “out of over 3.5 million traders, only four hundred thousand file tax returns” and that “only less than, 150,000 traders filed income tax returns in five major markets of Karachi, Lahore, Islamabad, Rawalpindi and Faisalabad.” According to a report, in 2019, traders just paid Rs. 35 billion under the head income tax.” This figure since then has hardly registered a growth of even five percent per annum, which confirms the ineffectiveness of FBR and political clout of bazaarwalas.
The political reach of the bazaarwalas has always been formidable, and military dictators as well as political parties have never sought to contest the traders' political capital, what to speak of dismantling it, except perhaps the Pakistan Tehreek-e-Insaf (PTI). Before coming to power, the PTI made tall claims of not surrendering before the mighty traders, but ultimately gave them sweeping and unprecedented concessions.
According to a study titled Industry Profile: Wholesale and Retail Trade Sector in Pakistan, conducted way back in 2012 by the FBR, the contribution of traders in income tax collection was just 0.5%, and in sales tax about 1%. According to FBR, this has slightly improved in the last twelve years, but is still less than 5% cumulatively. This is an acknowledgement of a bitter and painful reality - that like the mighty absentee landowners, who pay no or meagre agricultural income tax under provincial legislations, retailers are also not paying taxes on actual income. They allegedly conceal sales and evade sales tax collected—a classic case of illicit enrichment.
The political reach of the bazaarwalas has always been formidable, and military dictators as well as political parties have never sought to contest the traders' political capital, what to speak of dismantling it, except perhaps the Pakistan Tehreek-e-Insaf (PTI). Before coming to power, the PTI made tall claims of not surrendering before the mighty traders, but ultimately gave them sweeping and unprecedented concessions, in a deal concluded on October 30, 2019, when Syed Shabbar Zaidi was heading the FBR, including relaxation in registration conditions, reduction of income tax rates by 66% etc.
Pakistan is struggling hard to overcome a monstrous fiscal deficit, which may reach record high at over 9% of GDP in this fiscal year. In these circumstances, the federal government in Finance Bill 2024 must introduce fair and simple, low-rate tax incentivizing traders to pay taxes honestly as per model suggested in Towards Flat, Low-rate, Broad and Predictable Taxes.
According to a report published in 2018, it is estimated “Pakistan’s current retail market size is $152 billion.” It forecasted “to expand 8.2% a year through 2016-2021 as average disposable income has doubled since 2010,” according to research group Euromonitor International, as reported by Bloomberg News.
In 2017, a study of retail business conducted by Punjab Board of Investment and Trade noted that “Pakistan’s current retail market is estimated at USD 42 billion, with sales in excess of USD 105 billion.”
According to a 2019 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 in that year were tax filers—58,106 in Saddar market, 14,780 in Defence Housing Authority and 9,446 traders in Clifton.
The traders in four major markets of Lahore paid total tax of just Rs 567.7 million with only 2,096 filers in the 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 the FBR Year Book 2018-19, a 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 till today not made public any study to determine the real potential of income and sales tax from retail sectors. According to a study conducted in 2012 by the 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 was still 2.3%.
Traders contest FBR’s figures on the ground that commercial importers at import stage pay advance income tax of billions, where total collection was Rs. 290.23 billion in FY 2022-23 that included all categories. They say that determining 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 6 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 a minimum liability—no claim to a refund even if there is a loss!
The representative of traders claim that that all retailers are paying advance income tax with electricity and mobile bills, though the 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.
By applying a sales tax of 4% and an income tax of 1% on gross turnover, total collection from retail sector alone comes to US$15 billion. To keep that in perspective, the FBR collected total net sales tax on goods of Rs. 2,591 billion in 2022-23 and managed a total tax collection of Rs. 7,164 billion.
Alleging that the returns are adjudged erroneous without any evidence and huge demands are created to meet revenue targets or for self-aggrandizement, traders claim that highhandedness, even if later proved in appeals to Tribunal and higher courts, the officers get no punishment or disciplinary action, but the taxpayers have to incur heavy cost of litigation without any compensation.
In none of its publications, FBR has 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 filer status - appearing on Active Taxpayers List (ATL) or not. Another section is 236HA, requiring suppliers to withhold tax on the 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 the retail sector. According to estimates, Pakistan’s retail market size in 2023 was $300 billion. By applying a sales tax of 4% and an income tax of 1% on gross turnover, total collection from retail sector alone comes to US$15 billion. To keep that in perspective, the FBR collected total net sales tax on goods of Rs. 2,591 billion in 2022-23 and managed a total tax collection of Rs. 7,164 billion.
For harnessing the real tax potential of the retail sector that as per prevalent rate of dollar is Rs. 4.17 trillion, 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 1% 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 profits 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, with or without, a fine of Rs. 10 million up to 5 years.
As evident from above, the income tax rate will be 1% of turnover for retailers opting and complying with the proposed scheme and consumers will pay only a 4% sales tax. Those who decide not to opt for this concessional scheme will become uncompetitive, as they will remain subjected to withholding taxes, 18% sales tax, advance tax, if applicable, audits and a higher rate of income tax. The consumer will obviously flock to those retail outlets charging just 4% sales tax. It will boost the economy and revenues, as well as lower the prices of commodities.