FBR focuses on retailers to expand tax base
The value-added tax is a successful model to realise the sales tax collection on the entire supply chain; however, this model requires a comprehensive documentation on all stages from manufacturing to distribution and sales to end consumers through retailers.
The economy in Pakistan is not fully documented in the presence of an underground economy. People involved in black economy always thwart any such attempts to bring the supply chain under the documented economy.
For the past many decades, the tax authorities have been endeavouring to bring supply chains into the tax net but every attempt resulted in a failure due to strong lobbies. Most of the attempts to generate revenue from retailers through application of income tax laws. But now the tax authorities have changed the move and they are targeting such segments of the economy through enforcing sales tax laws.
Through the Finance Act, 2017, a new definition of “Tier-1 retailers” was introduced to the Sales Tax Act, 1990. These retailers are required to install Point of Sale (POS) for real-time reporting of sales made through their outlets. Although the definition “Tier-1 retailers” does not cover all the retailers, most of the supplies made through manufacturers and importers are being sold through these retailers.
The purpose of POS is to identify the movement of goods from registered manufacturers and commercial importers. The tax authorities assumed that the manufacturers are under-reporting the sales, similarly the commercial importers are not declaring the true value of imported goods to evade tax on subsequent supplies to distributors and the remaining supply chain.
In a statement the Federal Board of Revenue (FBR) had said: “Major supply chains below manufacturers and distributors are out of [the] tax net. This chain consists of distributors, dealers, sub-dealers, wholesalers and retailers.”
Although the law was enforced in 2017 to bring retailers in the sales tax net; however, implementation of the law was delayed due to the formulation of rules and streamlining the installation of the Point of Sale.
The Sales Tax Act, 1990 has defined Tier-1 retailers as a retailer operating as a unit of a national or international chain of stores; a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks; a retailer whose cumulative electricity bill during the immediately preceding 12 consecutive months exceeds Rs1,200,000; a wholesaler-cum-retailer, engaged in bulk import and supply of consumer goods on wholesale basis to the retailers, as well as on retail basis to the general body of the consumers; a retailer, whose shop measures 1,000 square-feet in area or more or 2,000 square-feet in area or more in the case of retailer of furniture; a retailer who has acquired point of sale for accepting payment through debit or credit cards from the banking companies or any other digital payment service provider authorised by the State Bank of Pakistan.
The FBR announced certain incentives for Tier-1 retailers for mandatory integration, which included sales tax exemption on supply of milk, rice, wheat flour, pulses, fruits and vegetables, uncooked meat, poultry, eggs, stationary items, medicines, laptops and personal computers, etc; reduced rate of sales tax on various items falling under Eighth Schedule of the Sales Tax Act, 1990; reduced rate of sales tax at 14 per cent instead of uniform rate of 17 per cent on the supply of locally-manufactured garments, shoes, bags, made-ups etc, of textile leather and artificial leather, etc.
The tax laws also defined certain penalties for non-compliance to mandatory integration. The penalty for non-compliance would be Rs1 million, and in the event of continuing failure may face sealing of his premises and embargo on the sales.
Further, the disadvantage of failure to integrate is that the adjustable input tax of the retailer would be reduced by 60 per cent. Any person who abets or connives with the retailer in suppression of sales or non-reporting of sales may be sentenced to imprisonment for a term, which may extend to one year and also to a fine of up to Rs200,000.
The field offices of the FBR have accelerated efforts to ensure installation of POS at the retail outlets where retailers fall under the definition of the sales tax act. The tax offices have identified thousands of retailers who are required to install POS and have given a timeline to them to integrate their sales, otherwise their 60 per cent input claims would be rejected and a normal tax would be imposed. Besides, the tax authorities will also initiate statutory action as per the law against them.
As activities of the tax offices accelerated their efforts coupled with the enforcement measures introduced through new ordinance, a hue and cry started from the traders across the country.
The Tax Laws (Third Amendment) Ordinance, 2021 was promulgated on September 15, 2021 through a presidential order. Through this new ordinance, a new Section 14A was introduced to the Sales Tax Act, 1990 empowering the authorities to discontinue electricity and gas connections of Tier-1 retailers, who fail to register for the sales tax or notify registered Tier-1 retailers but not integrated with the FBR’s computerised system.
The Finance Ministry has set a target of approximately Rs50 billion in additional taxes to be generated by documenting large number of Tier-1 retailers during the tax year 2021/22, while Finance Minister Shaukat Tarin, in his budget speech, had announced disbursement of Rs250 million worth of prizes every month for the customers of compliant retailers.
The prize scheme is expected to force tens of thousands of retailers to issue genuine sales tax invoices and pay tax to the government. Under the prize scheme procedure, the customers will need to submit their names and computerised national identity card (CNIC) numbers to enter a random computerised draw, entitling them to prizes in respect of their purchases from the integrated Tier-1 retailers.
The concept of a prize scheme is a positive initiative but giving awareness to the customers of the Tier-1 retailers is necessary to make this move a success.
Tax experts have also requested the Federal Board of Revenue chairman to hold consultations with the Tier-1 retailers regarding its implementation so that any possible technical and operational issues are addressed proactively.
However, trade associations have expressed concerns over the enforcement of laws on the retailers because the law is cumbersome and the small traders need to get awareness about the mandatory requirement of the law.
Meanwhile, the tax authorities have started coercive action against the non-compliant Tier-1 retailers, while the traders have started protests against the enforcement of the law.
Despite rigorous efforts by the tax authorities, several small- and medium-sized Tier-1 retailers have yet to integrate their Point of Sale with the Federal Board of Revenue for real-time reporting of sales and mystery shopping in respect of verification of invoices, mainly due to the documentation challenges and complex taxation procedure.
KTBA president Muhammad Zeeshan Merchant said realising the sensitivity of the situation, the Karachi Tax Bar Association (KTBA) has recommended measures for successful implementation of POS requirement.
KTBA president Muhammad Zeeshan Merchant in a meeting with the tax authorities presented the bar’s proposals for integration.
The FBR needs to launch a large-scale campaign for educating Tier-1 retailers and general masses regarding the usefulness of bringing Tier-1 retailers on POS. In this regard, the KTBA president suggested that a committee to the extent of all field offices within Karachi must be constituted to discuss POS issues and solutions at one forum. The discussion on a weekly basis must be encouraged and business representatives may also be invited in this forum. Joint seminars having officers from the FBR, members of the KTBA and representatives of various business organisations must be arranged to address the issues and fears of the business committee being faced in the implementation of the POS system.
This would halt the resistance and pave a long way for POS. ADCR must be kept active to resolve issues like POS. This would be a harbinger of success, provided there is a positive approach all around.
Merchant also said the FBR should take penal actions only to the extent of clear cases falling in the definition of Tier-1 retailers. The retailers are the affected ones for the reason that manufacturers hesitate giving invoices for their purchases, whereas wholesalers and distributors are found nowhere in this chain of POS.
If there is no input tax available to them, then how would they pay the output tax. To implement POS, media campaigns in the form of electronic media, social media, and affixing of flyers at common places must be ensured to create awareness among the masses.
Similarly, a reasonable time of four months must be given for the implementation of POS to the business committee.
One of the fears of the POS liable retailers is that their sales will reach climax due to the implementation of POS and the department would take action against them for the previous five years, as well. The FBR has to take a policy decision in this regard to address their genuine reservations. To implement POS, the government has to look forward and move in the right direction.
The service sector needs to be addressed as the Sindh Revenue Board is also pursuing integration on POS. The retailers and restaurants are; therefore, in confusion about whom to report in this regard, the KTBA president said.
The taxpayers using debit/credit card machines in the past were encouraged to bring the economy under documentation and now the same channel is being used to bring them under Tier-1 retailers. This creates agony among the already documented sector and the businessmen are now trying to stop using this important tool of documentation any more.
The FBR must show grace in granting extension in filing the sales tax returns of those taxpayers who have been integrated with POS and are now facing problems in filing their sales tax returns.
To achieve success in the POS implementation exercise, sector-wise profiling is recommended, including plastic, paper and steel sectors by virtue of which big distributors and wholesalers would come under control; thereby, reducing the burden on other tiers of the economy.
Overseas Investors’ Chamber of Commerce and Industry (OICCI) secretary general Abdul Aleem proposed that initially POS must be enforced with large retailers and for its effectiveness, influx of smuggled goods must be reduced at retail stage.
If the smuggled goods are not stopped by the writ of law by the Customs Department and provincial excise department, retaliation on POS would continue.
The retailers are mostly individual business concerns/sole proprietors. Their issue is the declaration of their business capital, i.e., once the sale jumps high due to POS (no mis-declaration), how would they justify their purchases, particularly when their stocks and inventories are unaccounted for/undeclared.
The retailers maintain huge stocks due to their nature of business and this is their trick of trade. Having linked on POS is one of their major fears of intending action from the Federal Board of Revenue.
The OICCI official also suggested that there should be three months turnover tax fixed for them instead of monthly sales tax returns, as stopgap arrangement to convince them on POS integration or some amnesty may be declared for them vis-a-vis their source of capital/purchases.
If the FBR has a database, it must start implementation of POS as a pilot project from DHA Karachi and likewise spread it across the country.
The OICCI highlighted the problems of traders that the POS reporting system is cumbersome, eg, HS code, etc, is fed in the system that must be simplified. Those who are not Tier 1 retailers have problems in getting them out from that list. The tax authorities are not facilitating the non-Tier-1 retailers entered wrongfully in the Sales Tax General Order (STGO), resultantly their inputs being disallowed.
The system must be so refined that it does not pick cases, which are not liable for POS.
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