Tuesday September 26, 2023

Proper documentation needed

June 07, 2023

LAHORE: Almost 50 percent of Pakistan’s economy is not documented, and the way things are moving, the informal economy faces no threat from the tax authorities. A nominal percentage of 2.2 million retailers in Pakistan pay taxes. Most of the economic transactions are conducted through these retailers. Since most of these retailers maintain no documents, they are a conduit for all products that come into the market without paying any taxes. They sell under-invoiced products, at full price. Many or at times most of these items flow into the market via smuggling. However, they still claim that they pay their due taxes.

Most of them just pay an annual turnover tax. However, they are not required to provide documented proof of their transactions and income in order to determine the appropriate tax liability. Most other countries where the turnover regime is in vogue, retailers are required to maintain proper documentation of their transactions, such as invoices, receipts, or sales records. These documents serve as evidence of sales and purchases, and they are often necessary for various purposes, including tax compliance, auditing, financial reporting, and dispute resolution. Proper documentation helps ensure transparency, accuracy, and accountability in business transactions.

Without proper documentation, it is impossible for tax authorities to verify the accuracy of reported sales and assess the correct amount of tax owed. If the traders want to continue with the turnover tax regime, the least government could do in this budget is to make it compulsory for the retailers to maintain detailed records of their transactions and keep supporting documents as required by the relevant tax laws and regulations. Failure to provide documented proof when requested by tax authorities must lead to penalties, fines, or other legal consequences. In India, retailers are required to register for GST if their annual turnover exceeds a certain threshold. GST is a comprehensive indirect tax levied on the supply of goods and services. Registered retailers collect GST from their customers on sales and are eligible to claim input tax credits for GST.

After filing the GST returns, retailers need to pay the tax liability online through the designated GST portal. The payment can be made using internet banking, debit cards, or other approved payment methods. In Pakistan, retailers are required to register for sales tax if their annual turnover exceeds a specific threshold. Sales tax is levied on the supply of goods and certain services. Payment can be made through online banking, electronic funds transfer, or other approved payment methods. It is the same in Bangladesh, but majority of retailers in India and Bangladesh are registered under sales tax regime (that determines their annual turnover and income tax after deducting expenses).

The informal economy in India and Bangladesh is much lower and diminishing with every passing year. On the other hand informality in Pakistan is increasing with the passage of time. The menace of smuggling and under-invoicing would be eliminated if the retailers are forced to fully document their purchases and sales. It would then be impossible for retailers to sell a smuggled item as they would have to bear the sales tax on the purchased amount. They could then charge GST from the customer on the profit they made on the purchased amount. In the same way, anyone who imported under-invoiced goods would have to provide a receipt at which he sold the goods to the retailer. The retailer in turn would charge GST from the customer on profit made on purchased price. The importer would be forced to pay high income tax if he charges actual price from the retailer.