Govt rolls out new tax scheme for retailers

FinMin Aurangzeb approves scheme to raise Rs50 billion

ISLAMABAD:

The government on Monday implemented a new income tax scheme to bring the largely untaxed retailers in the net but excluded a significant number of traders from the ambit after prolonged negotiations with influential class.

Finance Minister Muhammad Aurangzeb gave approval to the new scheme, which would be enforced from this month. The Federal Board of Revenue (FBR) notified the scheme, which aimed at collecting Rs50 billion from this fiscal year 2024-25.

However, certain exclusions would make it challenging for the FBR to collect Rs50 billion in additional income tax from retailers.

Bringing retailers, agriculturists and exporters in the normal tax regime is part of the new $7 billion International Monetary Fund (IMF) programme. To begin with, the government has taken a small step by notifying a special income tax regime for the traders.

All the retailers having shops in the residential areas, measuring up to 100 square feet and those who are already registered filers, have been excluded from the payment of any amount of tax under the new scheme, according to the notification.

Any person who is already enjoying exemption from the income tax under the Income Tax Ordinance 2001 has also been excluded from the ambit of the new scheme. Similarly, the shops of up to 50 square feet in a commercial area, makeshift shops, kiosks or small shops measuring not more than 5x3 square feet would pay a fixed Rs100 per month tax instead of paying normal income tax.

In the wholesale markets, the traders are doing business of millions of rupees in small shops daily. This has significantly reduced the scope of the new scheme, as the retailers had refused to accept the draft scheme announced in March this year.

The new scheme has been finalised after numerous rounds of negotiations with the traders. The retailers are not even near to the tax that the salaried class pays. The salaried class is the fourth highest contributor in Pakistan after the banks, importers and the contractors.

The government has also given another relaxation to the retailers by expanding the scope of the definition of the indicative income. Earlier, the tax liability of the retailer was planned to be calculated on the basis of rental value of their shops. Now, other criteria – the locations and the fair market values – have also been included, which would benefit the traders based in the large cities of the country.

The government has also made the penalty regime stringent for those traders who would still opt to remain outside the net.

Where any person being a trader or a shopkeeper, who is required to apply for registration under this law but fails to register or fails to pay advance tax, the shop of such person shall be sealed for seven days for first default and for 21 days for each subsequent default, according to the new scheme. Similarly, any trader who is required to apply for registration but fails to do so can be put behind the bars for a term of six months.

The scheme will be applicable to dealers, distributors, retailers, manufacturer-cum-retailers, importer-cum-retailers, or any person involved in the supply chain of goods. The government has implemented the scheme in 42 cities of Pakistan -- 25 of Punjab, seven of Sindh, six of Khyber-Pakhtunkhwa, three of Baluchistan and Islamabad.

These cities are Abbottabad, Attock, Bahawalnagar, Bahawalpur, Chakwal, Dera Ismail Khan, Dera Ghazi Khan, Faisalabad, Ghotki, Gujranwala, Gujrat, Gwadar, Hafizabad, Haripur, Hyderabad, Islamabad, Jhang, Jhelum, Karachi, Kasur, Khushab, Lahore, Larkana, Lasbela, Lodhran, Mandi Bahauddin, Mansehra, Mardan, Mirpurkhas, Multan, Nankana, Narowal, Peshawar, Quetta, Rahim Yar Khan, Rawalpindi, Sahiwal, Sarghoda, Sheikhupura, Sialkot, Sukkur and Toba Tek Singh.

Previous attempts to bring traders into the tax net have been unsuccessful, including compulsory door-to-door registration during Gen Pervez Musharraf’s martial law period. Even the Pakistan Muslim League-Nawaz (PML-N) too holds a soft corner for traders and has backed off from similar attempts, including one in 2015.

According to the FBR notification, the scheme will apply to traders and shopkeepers operating through a fixed place of business, including stores, shops, warehouses, offices, or similar physical locations within the territorial civil limits, including cantonments, in the six cities.

Finance Minister Aurangzeb told Fitch rating agency on Monday that about 150,000 traders have so far registered with the FBR under the new scheme. A central repository database of traders and shopkeepers would be accessible through a Tajir Dost module tax application or the FBR’s portal for registration and advance income tax payment.

Under the new scheme, the traders would pay first advance income tax by July 31st. They would be charged at indicative fixed income rates but for small shops of 50 square feet and kiosk, only Rs100 per month will be charged.

Those traders who would pay tax of the new month in advance would be entitled to 25% tax incentive. A person who had earlier not filed the income tax returns for the tax year 2023 but now files under the new scheme would also be entitled to one-fourth rebate in tax payment.

Tax returns for the tax year 2023 remained low at 5.2 million, compared to 6.1 million in the preceding year. According to FBR statistics, over 80% of bank accounts are not visible to FBR authorities, many of which are operated by these traders.

The traders have been given an option to file for a review with the FBR against the indicative income and the tax. The FBR cannot reject the review application without giving an opportunity to be heard.