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October 18, 2019

How ‘unschooled’ traders dodge documentation


October 18, 2019

LAHORE: Traders have been filing their returns under fixed tax regime on an annual turnover basis where whatever turnover they declared was accepted; however this time around under the proposed fixed tax regime they will have to deposit a minimum tax.

All past governments in Pakistan gave traders special treatment. They operated large businesses without documentation but were accommodated by accepting one percent tax on whatever annual turnover they declared. They were not required to provide any documents in this regard. Anyone, who crossed the threshold of Rs5 million, in annual turnover, was required to deposit sales tax under normal regime. But the traders enjoyed upper hand under this regime as whatever annual turnover they declared had to be accepted by the tax collectors. Majority of the traders used to declare the same much less than Rs5 million.

Most of them deposited tax on declared turnover of less than Rs2 million. This is counterintuitive as any shopkeeper with daily average sales of over Rs11,000 crosses this threshold. Even at this daily sale they probably could not earn enough to live a lavish life as most traders do. Even a high average profit of 10 percent would mean that they could earn Rs33,000 per month. No official confronted the traders when majority of them declared an annual turnover of less than two million.

Most of them included medium-sized shops employing two to three salesmen and bearing (in case of no proprietorship) rental expenditures and monthly electricity charges of Rs10,000-15,000. With declared monthly income of less than Rs160,000 (on annual turnover of Rs2 million) he covered the rent of the premises, salaries amounting Rs18,000 (for three employees as shopkeepers pay much less than the minimum wage fixed by the state). These expenses were much higher than the entire income the trader could earn from his declared yearly turnover.

This time around the Federal Board of Revenue (FBR) has discontinued the annual turnover regime and instead proposed a fixed tax scheme for different categories of shops starting with Rs30,000 for small-sized shops and going up progressively on the basis of size and location. This means every shopkeeper will have to pay a minimum tax determined by the FBR and not by traders themselves. The traders above the minimum threshold would have to come under normal sales tax regime.

Moreover all traders will have to provide the CNIC (Computerised National Identity Card) number of any buyer purchasing goods or services above Rs50,000. The small traders will still not be fully documented but when they buy goods for their shops above Rs50,000 threshold, the entire purchase record would be available with FBR through their CNIC.

This is not acceptable to the traders as tax evasion in Pakistan is rampant it is the highest among the traders. Look at the lifestyle of majority of the traders that most of employed persons drawing Rs100,000/month cannot afford. The entire system of collecting one percent turnover tax is farce and is implemented against all principles of accounting practices. And so is the fixed tax regime but at least it is based on some parameters.

The traders justify one percent turnover on the ground that most of the shopkeepers are illiterate and cannot maintain the cumbersome bookkeeping procedures.

This is a lie which most governments had accepted because of the “shutter power” of the traders. It is a well-known fact that even at small neighborhood grocery stores the shopkeepers sell at least 100 different products ranging from all varieties of pulses and spices to rice, toothpastes, different brands of toilet and washing soaps, 10-15 types of toffees, sweets, biscuits. Soft drinks, shampoos, matchboxes, rice, wheat flour, pickles, jams, jellies, etc are among numerous of other items stocked by a small-scale grocery store in the country.

Shopkeepers buy these products from the market and keep account of the sales of these items. They buy some products on credit and keep complete account despite claims of illiteracy. This illiterate shopkeeper often sells grocery to the customers in the neighborhood on credit and maintains their account.

He/she buys and sells property without being literate. How come he/she can pay 100 suppliers for items purchased and even seeks credit but cannot maintain accounts because of no education? This hypocrisy should now be stopped and shopkeepers should be forced to operate with full documentation.

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