High taxes, reduced business hours threaten economic growth: PRBC

The Pakistan Retail Business Council (PRBC) — a representative body of numerous well-known retail establishments across the country — has expressed serious concerns over the proposed changes in taxes and restrictions on retail timings.

The council, in a letter addressed to the various authorities, highlighted the potential negative impact of such restrictions on the country's economy, employment rates, and tax collection.

The proposed increase of the fixed retail tax from 12 percent to 15 percent coupled with the suggested reduction in retail timings puts severe pressure on the organised retail sector which will result in mass store closures and a reduction in customers’ purchasing power, eventually driving many documented retailers out of business and forcing them to shut down.

The documented and integrated retail sector already pays numerous taxes, duties and levies amounting to over a 40 percent difference over the undocumented non-tax paying sector. These include, but are not limited to, income tax, sales tax, customs duties, Sindh Employees' Social Security Institution (SESSI)/Punjab Employees Social Security Institution (PESSI), Workers' Profit Participation Fund (WPPF), World Wildlife Fund (WWF), salary tax and advertising tax to name a few.

This huge difference scares people from entering the tax net and instead incentivises them to stay out of the net. Ultimately it is counterproductive in broadening the tax net and does not lead to increased revenue collection.

With retail accounting for a substantial 18 percent of Pakistan's GDP, equivalent to $62 billion out of $360 billion, any reduction in demand for local textile products will have severe consequences. The proposed restriction to close retail establishments at 8pm could lead to a 25 percent to 30 percent decline in revenue, resulting in a sales loss of $15 billion (Rs3.5 trillion).

Moreover, the retail sector is a major employer, directly and indirectly providing jobs to over 10 million people, which accounts for 14 percent of the total workforce. Restricting operating hours would eventually leave three-four million people unemployed.

The PRBC also highlighted several key concerns that need to be addressed. Firstly, the government has not engaged with tax-paying integrated stakeholders to seek a mutually agreeable way forward.

Secondly, the decision to restrict retail timings disproportionately affects organised and tax-compliant retailers who have already faced challenges due to rising costs resulting from rupee devaluation and inflation.

Thirdly, the hours 8pm onwards are crucial for sales as local consumers typically return home from work during this time and then take their families to visit retail stores as there is normally one shared vehicle in the house.

Closing stores at 8pm will negatively impact sales by at least 30 percent but at the same time maintain all costs, causing the documented sector irreparable losses.

During global recessions, local retail plays a crucial role in supporting the textile and associated industries. Curtailing retail hours will further decrease demand and lead to more closures in the supply chain as well, affecting other sectors such as packaging and embellishments.

The council has put forward the following suggestions to the government. Firstly, the tax rate should remain at 12 percent as undocumented retailers pay 0 percent in taxes and registered retail entities are already paying 12 percent in taxes.

Increasing the tax rate to 15 percent will result in a further decrease in new retailers registering under the taxable category and moreover incentivise those who are already registered to become undocumented. The government should instead focus on broadening the tax net and improving enforcement against retailers evading taxes to increase its revenue.

Furthermore, the council suggested allowing retailers to adopt a wheeling strategy based on off-site solar power generation, which would reduce costs and benefit both retailers and the government by switching to renewables and thereby lowering the oil import bill.

Until the execution of this strategy, PRBC recommended allowing integrated tax-paying retailers to operate regular working hours without restrictions. "This would encourage more retailers to integrate and register with the tax authorities in order to operate their stores," it said.

Utility companies should enforce closures on non-integrated and non-registered retailers to further push the non-tax paying retailers to get integrated and become fully tax compliant.

Additionally, the government should encourage people to pay digitally through credit/debit cards which they are already doing in Islamabad in restaurants by giving a preferential tax rate of 5 percent instead of the standard tax rate. A similar mechanism should also be introduced for documenting the retail sector.