Taxing the retailers

Tax collection and reporting mechanisms are complex and decentralized. This has made income tax collection a very challenging job

Taxing the retailers


ne of the main problems Pakistan faces today is the documentation of the economy without which the country cannot achieve economic independence. Unfortunately, most efforts to increase the revenues have missed the point of insisting on proper documentation.

Traders have been filing tax returns under the fixed tax regime on annual turnover basis. Whatever turnover they declared was accepted. This time around the turnover tax is being dropped and a fixed tax regime introduced.

As per the approved scheme, the criteria for estimating indicative incomes will encompass factors such as location, value and rent of the shops. A specialised mobile phone application named Tajir Dost has been developed to compute the income and the tax liability. Authorities believe that this app will help them streamline the income calculation process.

The government aims to collect around Rs 500 billion should the scheme be embraced by the traders. However, leaders and spokespersons of several associations of traders have expressed reservations about this scheme. All past governments in Pakistan have given traders special treatment. Many have owned and operated large businesses without transparent documentation but were accommodated by accepting one percent tax on whatever annual turnover they reported. They were not required to provide any documents in support of their claims.

Those past the Rs 5 million threshold of annual turnover were required to deposit sales tax under the normal regime. The traders enjoyed an upper hand under this regime as whatever annual turnover they declared was accepted by the tax collectors.

A majority of the traders used to report an annual turnover much below the Rs 5 million threshold. Most of them deposited tax on the basis of a turnover of less than Rs 2 million. This looked absurd. Any shopkeeper with daily average sales of over Rs 11,000 crosses this threshold. With such modest daily sales they could hardly live the lavish lives many of them do. Even a 10 percent profit would give them no more than a modest Rs 33,000 per month income.

Yet, no official confronted the traders when a majority of them declared an annual turnover of less than Rs 2 million. Most of them were medium-sized shops employing two to three salesmen; paying monthly electricity bills of Rs 20,000-30,000. Nobody asked them how they managed to pay the salaries of their employees (salesmen) on this turnover and how they could afford the rent of the premises.

This time around the privilege of declaring the annual turnover has been withdrawn. Other conditions remain the same. They will still not be asked to show purchase and sales receipts, but the government will fix their tax liability under a formula based on several factors. The traders will be bound to deposit the fixed tax amount on a monthly basis.

In the first phase, this tax regime will be implemented in big cities. It will later be imposed on smaller cities and towns as well. The traders will not be able to avoid this tax. Currently, out of around three million traders hardly 10,0000 are paying turnover tax. Now there will be no exception. The revenue under this scheme is expected to grow to five times what the traders have been paying so far.

But this scheme has not been approved by the traders’ associations. Will they resist this move by the government? It is important that the government is still not asking for transparent documentation that can be audited.

Countries with similar mechanisms have devised remedies to improve the accuracy of income tax assessments based on Value Added Tax or General Sales Tax. They have integrated tax information systems. 

In 1987, the International Monetary Fund had pointed out that the traders were not paying any taxes. It had recommended introducing the Value Added Tax regime. This is a system in vogue in all countries where tax to GDP ratio is high. Under this regime every economic activity is documented through VAT accounting.

Under the VAT concept a ginner pays sales tax on purchase of cotton. The spinner purchases the ginned cotton and pay GST on the amount of value addition by the ginner. The spinner charges sales tax on the value addition from cotton to yarn from the weaver. The weaver in turn charges GST on value addition from yarn to fabric. The wholesaler was supposed to charge GST on value addition by the wholesaler and the retailer was to charge GST from the consumer on the profit made on sales of the fabric. This way the entire value chain is documented. At each stage of value addition the GST paid at an earlier stage is adjusted.

All the GST was to be deposited with the Federal Board of Revenue on the 15thof every month. The FBR could then find out the turnover of each player in the value chain. This system faced political resistance. Nawaz Sharif, the Punjab chief minister under Juneju regime, was among the first people to oppose it. The government soon withdrew the proposal at the traders’ level.

The PPP government that followed (1988-90) also tried to impose the VAT. Again Nawaz Sharif, leading the Punjab, thwarted the reform. When Nawaz Sharif replaced Benazir (1990-93) his government tried its best to impose the VAT. However, this time it was opposed tooth and nail by the Benazir-led PPP. The Sharif government then introduced the annual turnover scheme which is still in vogue.

Successive governments tried and failed in the following decades to document the traders’ businesses. The last serious attempt to document the trade was made in 2000 under the military rule of Pervez Musharraf. The traders defied the military regime and observed a strike for over a month. In the end the government gave in and agreed to collect revenue from traders on their terms.

In most other countries where a turnover regime is in vogue, retailers are required to maintain proper documentation of their transactions, such as invoices, receipts and sales records. These documents serve as evidence of sales and purchases. These 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. Another issue in Pakistan is that the tax collection and reporting mechanisms are complex and decentralized. This makes income tax collection a very challenging job. The provinces collect the GST on services that is not properly reported to the Federal Board of Revenue.

Other countries with similar mechanisms have devised diverse remedies to improve the accuracy of income tax assessments based on Value Added Tax or General Sales Tax. They have integrated tax information systems that connect the federal and provincial tax authorities and improve the accuracy of tax assessments. Such a system would allow seamless sharing of tax collection data between the federal and provincial governments, providing a more accurate picture of an individual or firm’s tax obligations.

A similar system is in place in Pakistan. However, it is not fully operative. Revenue authorities do use advanced data analytics and automation tools to analyze the data collected from various sources. This can help identify discrepancies and patterns that might indicate underreporting or tax evasion.

Automated systems can flag cases that require further investigation, streamlining the process for tax authorities. Another way is to collaborate with third-party entities such as banks, financial institutions and large service providers to cross-verify reported income and transactions. This approach can provide an additional layer of verification and make it more difficult for individuals or firms to manipulate the reported data.

The writer is a senior economic reporter based in Lahore

Taxing the retailers