Taxing retailers

The IMF did propose a fixed tax on shops that could raise between Rs9b and Rs20b

The taxman is zeroing in on retailers, with hopes of raising as much as Rs200 billion per year through the imposition of income-based taxes on the mostly undertaxed sector. An unusual aspect of the move is that, for once, it is the government’s own initiative rather than something forced upon it by international lenders. The IMF did propose a fixed tax on shops that could raise between Rs9 billion and Rs20billion, but this was only a suggestion, and the government was wary of adding the new tax to utility bills, given the rising costs of the actual services.

Instead, the government is planning to rely on “indicative income”, an estimate based on a shop’s location and rental rates. However, such an approach can be extremely problematic as it does not account for the nature of a business — a nanbai, a jewellery shop and a property dealership of equivalent size will have noticeably differing revenue and profit margins, and may or may not already be in the tax net to some extent. This is mainly why successive governments have imposed and quickly withdrawn similar taxes on retailers. Another major reason is that retailers just don’t want to pay, and instead of using punitive punishments, governments regularly reward tax evasion with amnesty schemes. The current tax on retailers is based on their power bills, which is also ludicrous because power consumption and revenue have little, if any, link in most businesses.

Retailers yield such political influence that they can even get laughably low flat taxes withdrawn by threatening to strike, while salaried people are left to pick up the slack. This is why wholesale and retail trade makes up about 19% of the economy but only account for less than 1% of total tax revenue. The government needs to reform tax collection, but such reforms need to be both fair and effective, which would require coordination to ensure that the retailers are forced to show their revenue — primarily through digitisation of the economy — because we have over 75 years of precedent showing that retailers cannot be trusted to self-report their income.

Published in The Express Tribune, November 12^th, 2023.

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