Seize the moment

LAHORE: Reforms are needed to ensure that businesses do not incorporate direct taxes in their cost and charge the consumers, and the corporate sector does not fix prices based on final after-tax profit as most operate as a cartel.

Importers pay sales tax and custom duty or the excise duty that they could rightly incorporate in cost. But they also part with withholding income tax of 5-7 percent at the time of import. In many cases, this is considered as their final income tax liability unless they file well documented returns to show that their profit margin was lower. Most do not care to challenge the deducted withholding tax because they incorporate the tax as cost and charge profit on that cost.

This way they are officially registered taxpayers but, they pay no tax at all as they recover the withholding tax from the consumers. The Federal Board of Revenue (FBR) lacks the capacity to monitor transactions from import to final disposal in the local market, which if done could have helped ascertain the actual profit of the importer.

Although all transactions can be traced with the help of technology, the FBR was not able order traders to make supplies over Rs50,000 by taking the CNIC copy of the buyer and intimating it to the revenue authority. By not doing so, the FBR lets tax evasion take place from so called tax compliant sectors.

As far as the bigger companies are concerned, they maintain a proper record of their transactions up to their distributor level. After that nothing is clear. The FBR simply asks the companies to charge 2-3 percent higher sales tax on retail price and deposit it in the national exchequer. It has no clue at what price the item is sold at the retail stage.

There are numerous reports and allegations by the Competition Commission of Pakistan that larger sectors like cement, sugar, steel, operate as cartels and manage both production and prices to ensure better returns for all units.

In fact, the NHDR 2020 identifies that from 2007 to 2018, an average of six industries per year were either potential cartels, or practiced deceptive market practices. The most egregious of these were the cement, sugar, and motor industries.

This is the reason that the most efficient and inefficient units in each sector remain commercially viable. Under the principle of free market economy, the inefficient producers should have closed. By guaranteeing viable prices to the most inefficient units, the most efficient units get a high premium on their efficiency.

They base their business plan on high after-tax profit based on this premium. The inefficient units also earn profit to remain commercially viable. The super tax of 10 percent has upset them because it will deprive the efficient (they are largest and call the shots) of a part of the premium.

Some so-called economic Aristotle, who supports this unethical business plan of big corporations thinks that a 10 percent super tax would result in price hike. They are convinced that the corporate sector would not let super tax dilute their net incomes and they will increase the prices.

This is the time for the FBR to seize opportunity and make it impossible for cartels and manipulators to operate. It should make sure that super tax has no impact on prices as it does not add to the cost and is being charged on their net final income.

The FBR should also sharpen its vigilance on monitoring the dispatches from the production units of these sectors, including beverages to make sure that nothing leaves these premises without paying government taxes (sales tax and excise duty).