Balancing the book

KARACHI: The Federal Board of Revenue (FBR) has launched a flagship initiative, Point of Sale, to bring Rs16 trillion worth of undocumented retail sales into the tax net.

Pakistan’s total retail sales are estimated at Rs20 trillion annually. The FBR’s integration of POS will also help the tax authorities implement a full-fledged value-added tax (VAT) system in the country.

This is a successful regime to bring the entire supply chain into the tax net. In the past, several attempts have been made to bring the retailers into the tax net but owing to strong lobbies, including manufacturers and importers, such efforts failed to yield desired results.

POS integration is also important in the wake of gauging the entire supply chain from manufacturers and importers to the retailers end. Initially, it has been made mandatory for big retailers or the Tier-1 retailers, which is specified under the Sales Tax Act, 1990.

An estimate shows majority of the sales to consumers have been made through the Tier-1 retailers. The POS will provide a glut of information regarding persons having taxable income, who are making purchases through such outlets of Tier-1 retailers.

To motivate the consumers make purchases from Tier-1 retailers, the apex tax body has also announced a prize scheme. Such actions point towards monitoring of the retail sales and keeping a check on the income to generate revenue through identifying tax potential.

To get an insight on the POS integration, BOL News talked to Dr Aftab Imam, chief commissioner, Inland Revenue, Corporate Tax Office (CTO), Karachi.

What is a point of sale and why is it mandatory?

A point of sale, purchase or payment is the specific point in time when a financial transaction takes place through a POS system. For example, if you decide to buy two products and take them to the checkout counter, the staff there would scan the products and create a receipt.

The Federal Board of Revenue (FBR) has moved towards digitalisation to facilitate citizens and has also introduced a new Electronic Device System that will allow the Tier-I retailers to report their sales in real-time for taxation purposes.

To ensure the tax amount paid by the customers at the cash counter is actually deposited in the FBR, the board has asked businesses to integrate their points of sale with the POS Invoicing System in Pakistan. The Federal Board of Revenue has amended the Sales Tax Rules 2006 to make the installation of POS Invoicing System in Pakistan mandatory for all Tier-1 retailers.

Are all retailers required to integrate?

No. POS integration is only mandatory for Tier-1 retailers irrespective of the items they are dealing in. All Tier-1 retailers, whether dealing in textiles and leather items or any other item, are required by the law to integrate their POS with the FBR system. Only Tier-I retailers defined in Section 2 (43A) of the Sales Tax Act, 1990 are required to integrate their retail outlets for real-time reporting of sales.

The sales tax law defines 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 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 digital payment service provider authorised by the State Bank of Pakistan.

What benefits do the retailers get by integrating with the FBR system?

One of the key advantages of the FBR and the POS system integration is that it will help Pakistani retailers upload their sale invoices and credit notes automatically to the FBR servers, which will reduce the expenditure cost of the taxation services by automatic preparation of the STR for local Tier-1 retailers.

The tax rate has been reduced to 10 per cent against the retail sales of finished fabric, and locally-manufactured finished articles of textiles and textile made-ups and leather and artificial leather if made through POS integrated counter. The Tier-I retailer by integration escaped penalties and a reduction in input tax up to 6 per cent.

Why do customers require slip from registered retailers?

The customers can ensure that the sales tax collected from them is deposited in the government treasury. The Revenue board has announced a prize scheme to facilitate the customers of Tier-I retailers and all the customers can participate in the scheme.

The balloting for the prize scheme will be held on 15th of every month. Initially, the denomination of prizes has been set as Rs1,000,000 (1st Prize), two prizes of Rs500,000 each, four prizes of Rs250,000 and 1,000 prizes of Rs50,000 each. A total prize amount of Rs53 million will be distributed among the 1,007 lucky winners.

What is the outcome of actions recently taken by the CTO Karachi?

Recently, various enforcement actions have been taken against Tier-I retailers who have failed to integrate their business premises with the FBR and one who are involved in manipulation of POS software.

The actions bore fruits, as seven Tier-I retailers were sealed for non-integration, which resulted in integration of 36 branches and recovery of Rs13 million. In one case of software manipulation, a recoverable demand of Rs320 million in sales tax and Rs350 million in the income tax has been created, which will be recovered.

The CTO, Karachi has also conducted survey of various air-conditioned malls in Karachi for education, technical support and broadening of the Tier-I retailers.

What penal actions can a retailer face for failure to get registered?

It will result in imposition of penalty; sealing of business premises; and a reduction in input tax up to 60 per cent. As per the sales tax laws, any person, who is required to integrate his business for monitoring, tracking, reporting or recording of sales, production and similar business transactions with the board or its computerised system, fails to get himself registered under the Sales Tax Act 1990, and if registered, fails to integrate in the manner as required under the law, such a person would be liable to pay a penalty of up to Rs1 million, and if continues to commit the same offence after a period of two months after imposition of the penalty as aforesaid, his business premises would be sealed till such time he integrates his business.

How POS will bring the entire retail chain under VAT system?

The VAT, is a general, broadly-based consumption tax assessed on the value-added to goods and services. Pakistan introduced its federal sales tax on goods in November 1990. The four provinces of Pakistan also have the right to levy sales tax on services. The sale transactions that are carried out by several entrepreneurs on the same item and the goods pass directly from the first supplier to the last purchaser during the transport or dispatch are called chain transactions.

The value-added tax is collected by all sellers in each stage of the supply chain. The suppliers, manufacturers, distributors, and retailers all collect VAT on taxable sales. Similarly, the suppliers, manufacturers, distributors, retailers and end-consumers all pay VAT on their purchases.

The businesses must track and document the VAT they pay on purchases to receive a credit for the paid amount on their tax return. Under a VAT regime, the tax jurisdictions receive revenue throughout the entire supply chain, not just at the point of sale to the final consumer.

As the final sale/supply of any item supplied by the retailer is documented through POS system, the entire chain of the particular item becomes traceable. Moreover, POS will reduce the tax evasion and minimise the concealment of sales data.

How retailers get POS software?

The list of registered POS vendors has been made available at the official FBR website. The POS machines and software provided by these vendors are compatible with the FBR’s integration software. The Tier-I retailers have to approach any vendor on his convenience and acquire his services for installation of POS machine and integration.

It is of utmost importance to do not use service of any unregistered or substandard vendor for integration, as it may result in improper reporting and concealment of taxes, which may end in any legal action against the Tier-I retailer, including criminal proceedings.

Are bakeries or sweetmeat shops are also required to link POS?

All those establishments, whether manufacturers or not, who sell their goods to the general public for consumption are retailers, as defined under the Sales Tax Act, 1990. Therefore, bakeries and sweetmeat shops, selling goods to general public are also retailers and these bakeries and sweetmeat shops, whether or not manufacturers also, would be treated as the Tier-1 retailer.

Should all restaurants integrate their POS with the FBR?

Yes. It is mandatory for all the restaurants to integrate their POS. the rules have been notified regarding restaurants, snack bars, cafes, etc. All such establishments, whether or not falling in the category of the Tier-1 retailers, are required to integrate their POS under the said chapter.

What will be the penalty on an integrated retailer who tries to bypass the system?

The retailer would face a penalty up to Rs500,000 or 200 per cent of the tax amount involved, whichever is higher. Such a retailer may also be sentenced to imprisonment, which may be extended to two years.

Is there a penalty for a fraud software vendor?

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.

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