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September 27, 2019

CNIC condition: A hot potato with a huge potential to beef up revenues


September 27, 2019

LAHORE: Federal Board of Revenue, industry, and traders are locked in battle of nerves on CNIC (computerized national identity card) condition on transactions above Rs50,000 with latter asking for its withdrawal, while the former stubbornly defending it. Let us see who blinks first.

The FBR has, in fact, given a reason to the industry and trade for this hope by postponing this condition regularly for the last three months. It is interesting to note the traders are opposing this condition to stay off the FBR radar as transactions against CNIC would reveal their major turnover to the revenue collector.

The industry that is mostly documented is opposing it because majority of their buyers refuse to provide their CNIC for business transactions. This has slowed down their sales in the domestic market.

They claim lower sales mean lower sales tax revenues for the government. But two months’ revenue collection reveals the sales tax collection from imports has declined due to import compression, while domestic sales tax collection has increased substantially.

The FBR is not pushed on this count because what they lost on lower domestic sales has over-compensated sales tax collection at retail level. This is because the FBR has increased the sales tax at retail to 17 percent from the last year’s 5 percent and monitored the sales through technology.

The cash counters of all major stores and brands have been linked with FBR portal. Still majority of retailers are outside the sales tax net and they are the ones that do not want their CNIC-based purchase record to land in FBR hands.

Then there is a question of broken value chain in textiles. All the spinners are fully documented, the larger weaving mills are also documented, but the power looms are not and they are in hundreds of thousands. They get the yarn treated through small sizing units also not registered in tax net. The government has allowed the documented sectors to supply their products to these units by charging 3 percent additional sales tax above the routine 17 percent.

However the CNIC condition has not been waived for anyone. The non-documented buyers do not provide their CNICs, which has reduced the local sales of yarn by 30-40 percent. The rest of the yarn is either exported or disposed of to the documented weavers.

The yarn for the non-documented sector is bought by sales tax registered dealers from the spinners. They then sell it to the small (power loom) weavers in small lot. Even a small lot of yarn costs higher than threshold price of Rs50,000. These power loom owners do not provide their CNICs. So the documented yarn dealers are stuck with huge stocks and so are spinners.

Another problem for the documented suppliers is even if they pursue the non-documented buyers to provide the CNIC numbers at the time of purchase they are not sure if the right CNIC has been used. Though, the FBR has assured the suppliers would not be questioned once they provided CNIC number of the buyer. But there is a fair condition that the seller should know its customer on the same pattern as the banks operate.

Logically speaking the seller in most of the cases knows its regular customer and his/her consumption pattern. It is possible that the buyer may provide the CNIC number of a person who would be difficult to trace. The CNIC exercise would completely fail if forged or wrong CNIC numbers are provided at the time of purchase.

There is a possibility that the non-documented buyer may provide the CNIC number of a dead person. And when the FBR, after evaluating annual purchases, goes after the buyer, the trail will only end up in the graveyard, that too, a year late. Experts would have to find out a technology-based solution to this problem. Evaders would do anything in their power to avoid taxes.

There may be some loopholes in the CNIC condition but those could be sorted out. The FBR should not give any waiver on CNIC condition. This will slow down the sales for a while before things start improving at a very rapid pace.

We are already experiencing a slowdown. A deeper slowdown would not hurt as much now. But if we defer this reform the slowdown could turn into a standstill.

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