Malik Zohaib Nawaz
In pre-modern era, manufacturer used to produce goods which were directly bought by the consumers. Such business transactions did not have multiple supply chain players. However, with the growing business dynamics and industrialization, it became difficult for manufacturers to sell the goods directly to end-consumers and therefore, trading business emerged. Scattered and growing population needed the consumable goods in near vicinity due to which the business of small traders evolved. Such small traders used to sell the goods in small quantities to end-consumers for day-to-day consumption. This segment of trading chain is generally referred to as ‘Retail’ and persons engaged in this sector are called ‘Retailers’. In the modern economy, this segment is very huge all over the world.
In Pakistan, the term ‘shopkeepers’is generally used for small traders who are technically ‘Retailers’. Unlike other segments of economy, retail business is largely undocumented.It is for the reason thatactual volume and transactions carried out by retailers are merely rough estimates and no department has the accurate data of retail business. Although, Pakistan Bureau of Statistics (PBS) and Federal Board of Revenue (FBR) have certain estimates of retail business in Pakistan, but these estimates are also dubious. Since the volume and quantum are not accurate, the taxation system cannot be implemented and enforced. In the past, various schemes were formulated by legislators; but unfortunately, all such schemes miserably failed for one reason or the other. The onus of failure however is not on FBR only; because if legislatorscould not legislate the concrete andcomprehensive taxation scheme for this segment, then enforcement officers cannot be blamed for failing to meet the desired objectives.
Historically, various fixed tax schemes were introduced in Pakistan under which the retailers were required to pay very minimal sales tax. In the recent past, only large retailers were subjectedto sales tax under normal VAT regime. All other small retailers were subjected to fixed tax through their monthly electricity bills. Such tax was chargeable at the rate of 5% if electricity bill did not exceed Rs.20,000 per month and at the rate of 7.5% if the amount of bill exceeded Rs. 20,000 per month. This category of retailers was not required to charge and pay any sales tax except for the sales tax paid through electricity bills. Such retailers were also exempted from the requirements to obtain sales tax registration and to file sales tax return.
Through Finance Act, 2022; the scheme of sales tax for such retailers was changed and monetary slabs wereintroduced to levy fixed amount of sales tax instead of percentage of electricity bills. Under these slabs, sales tax ranging from Rs. 3,000 to Rs.10,000 was chargeable based on the threshold of monthly electricity bills. Such retailers paying the fixed amount of sales tax,were not subject to income tax under the special provision of section 99A of the Income Tax Ordinance, 2001.This scheme incentivized the small retailers / shopkeepers to maximum extent. Another supplementary condition was introduced that if retailers were not on Active Taxpayers List (ATL) under the Income Tax Ordinance, 2001; the fix sales tax would be doubled. The scheme (although was still not based on the actual income / sales of the retailers), resulted in an additional deterrence through doubling the amount of sales tax on not appearing at ATL. This amendment was at least a small step towards documentation but again pressure groups started to agitate and propagate. Finally, government surrendered and announced that such amendments would be reversed, and immediate relief would be provided to retailers. In that context, the sales tax regime for retailers has now again been changed through recent promulgation of the Tax Laws (Second Amendment) Ordinance, 2022. The government has reverted to previous scheme and again taken the escaped route. The retailers are so called ‘small’ but their demands are ‘huge’ which government has accepted. Although, a provision has been created through amending section 99A as per which a special income tax scheme would be formulated but revenue collection hopes should be kept low as it is evident from history that every special regime for retailers has failed.
If retailers consider that they do not have sufficient margins or profits in their business, then they should not resist the taxation scheme based on their actual income / sales. They should even encourage and appreciate the policy steps towards the implementation of taxation scheme based on their income / sales. However, if they are not encouraging and accepting the documentation and income-based taxation; it means that they have fishy business operations.
It was a brilliant chance for the government to document the economy after Finance Act, 2019 when the condition of CNIC was introduced in the Sales Tax Act, 1990. Unfortunately, no one was interested to take any practical step for documentation. The pressure groups and ‘shutter down mafia’ used the power to force the policy makers to revert on fixed tax regimes and abolition of CNIC condition.
If retailers do not want to be registered and documented; the economic environment would never be prosperous for their generations. If they are not ready to document their names, their generations would also forget their names.Evading due share of taxes is not only moral crime but also shows the weak writ of the government. This sector has not only become habitual to pressurize any government but also not ready to cooperate with government to formulate energy conservation policy. Shops are kept open till late night consuming the expensive electricity which ultimately increases our Current Account Deficit (CAD). If energy conservation policy would not be formulated soon and shops would not be closed by sunset; Pakistan CAD can never be reduced, and even most intelligent economist would fail to control the economic affairs of this country.
Bangladesh has forex reserves of more than $ 40 billion but introduced energy conservation policy. Still, it had to approached IMF for assistance. Any prudent mind can easily assess and evaluate the devastating economic situation of Pakistan. Even in such worst condition, we are not ready to take austere measures. Policy makersare ready to surrender in front of any pressure group and ‘shutter down mafia’. Now it is proved that no consumer in Pakistan has shopping capabilities and negotiation skills except for shopkeepers who have best shopping capabilities and negotiation skills. They have the bargaining powers and can shop the best scheme for them. Therefore, since ‘Q-Block’ has blocked the taxation of retailers; FBR should not be blamedalone if it fails to implement any tax regime for such retailers.