FBR eyes big retailers to raise direct tax ratio

KARACHI: The tax authorities have launched initiatives to increase the ratio of direct taxes through surveillance of indirect taxes in the retail sector.
In this regard, the Federal Board of Revenue (FBR) is focusing on big retailers to monitor their sales and purchases. It has prepared a mechanism to check retailers, suppliers and their customers, according to sources. The purpose of monitoring the retail sector is to identify earnings of this sector and suppress sales by their suppliers and importers.
To enforce laws related to the real-time sharing of transactions, the FBR has identified over 6,700 big retailers and asked them to integrate their sales with the tax system by August 15, 2021.
The share of direct taxes in total tax is 41 percent, according to the estimates for the fiscal year 2020-21. This share has improved, compared with the average 35 percent during the last five years; however, concerns are still there as the major portion of direct taxes comes in the shape of indirect taxes, i.e. withholding tax.
The FBR sources said the share of the retail sector to the GDP is over 18 percent but their contribution in the tax is mere one per cent. This shows a huge gap in this sector, they added.
Over the last several years, the FBR took many initiatives to document the transactions of retailers and bring them into the tax net but due to strong business lobbies, the tax authorities failed to get the desired results.
However, from December 1, 2019, the FBR launched a new system under which it categorised the retailers and made it mandatory for the Tier-1 retailers to integrate their sales with the FBR’s portal.
The sources said the revenue board has now adopted a strategy to bring the retailers in the tax net in a phased manner. In this regard, the Tier-1 retailers have been defined under the Sales Tax Act, 1990.
The FBR initially announced to block input tax claims of those retailers who failed to integrate their sales by August 15, 2021. However, as per the law, the failure to integrate with the FBR system is not limited to holding input tax claim, so it seems likely the tax authorities would initiate harsh measures.
These measures will include imposition of a penalty of Rs1 million. In case the retailers remained non-compliant after imposition of the penalty, then their business premises will be sealed till the integration of sales. The tax authorities are ensuring that all the Tier-1 retailers are integrated and their declared annual income and assets are aligned with their businesses.
Through the integration, the revenue board will check the sales trend of the manufacturers and importers to retailers to prevent tax evasion. Further, the buyers who are making purchases above Rs100,000 would also be monitored for their declared income.
Meanwhile, the Federal Board of Revenue (FBR) has issued updated rates of withholding tax on payment of dividend for the fiscal year 2021-22.
The withholding tax shall be collected by every person paying dividend from the recipients of the dividend at the time the dividend actually paid. The FBR collects withholding tax on dividend payment under Section 50 of the Income Tax Ordinance, 2001.
It said that tax shall be deducted on the gross amount of dividend paid: (a) In the case of dividend paid or collected tax from the amount of dividend in specie by independent power purchasers (IPPs) whereas such dividend is a pass-through item under an implementation agreement or power purchase agreement or energy purchase agreement and is required to be reimbursed by Central Power Purchasing Agency (CPPA-G) or its predecessor or successor entity: The tax rate shall be 7.5 per cent.
The applicable tax rate is to be increased by 100 percent under Rule-1 of Tenth Schedule to the Income Tax Ordinance 2001 if persons are not appearing in the Active Taxpayers’ List (ATL).
(b) In mutual funds and real estate investment trust cases other than mentioned at (a) above and (ba) below: The tax rate shall be 15 percent. The applicable tax rate is to be increased by 100 percent under Rule-1 of Tenth Schedule to the Income Tax Ordinance 2001 if persons are not appearing in the Active Taxpayers’ List (ATL).
(ba) In case of a person receiving dividend from a company where no tax is payable by such company, due to exemption of income or carry forward of business losses under Part-VIII of Chapter-III or claim of tax credits under Part-X of Chapter-III. The tax rate shall be 25 percent. The applicable tax rate is to be increased by 100 percent under Rule-1 of Tenth Schedule to the Income Tax Ordinance 2001 if persons are not appearing in the ATL. – TLTP