Pharma, consumer goods: Dealers want exemption from 0.5% withholding tax

Say the tax should be collected from unregistered distributors only.

KARACHI: Unhappy with indiscriminate imposition of 0.5% income tax – withholding tax (WHT) to be more precise, dealers and distributors of pharmaceutical and consumer goods lobbied for exemption from the newly imposed federal levy, saying WHT should be collected from unregistered distributors and dealers only.

The government’s policy was to bring the undocumented section of the economy to the tax net, however, the government’s budget move will target the documented businesses as well, Tahir Khaliq, Chairman of All Pakistan Consumer and Pharmaceutical Products Distributors Association, said at a press conference held to discuss the federal budget 2012-13 impact on their business here on Monday.

Calling the imposition of WHT unfair, Khaliq, who is also Karachi Chamber of Commerce & Industry’s former president, said the government is treating both the registered and unregistered distributors alike. There is a difference between what the government announced, taxing the undocumented businesses and what it is doing, imposing 0.5% WHT even on registered (documented) businesses, who already pay taxes, he said.

This tax, according to a notification, will be collected from the distributors, dealers and wholesalers on every sale regardless of whether the person taxed is already registered or not, Khaliq said.

The government, in its ongoing effort to broaden the national tax network and document the unregistered businesses, announced that it would collect 1% WHT, which was later reduced to 0.5%. This will be deducted by manufacturers, the government’s WHT agents, while selling goods to distributors, wholesalers and dealers.

No data was given on how big the undocumented segment is. However, the number of registered dealers, distributors and wholesalers dealing in pharma and consumer goods is about 8,000 to 10,000, according to Ashraf Zeb, Chairman of Distribution Committee, All Pakistan Chemists and Druggists Association.

The number of unregistered distributors and wholesalers is at least 10 times higher than this number, Zeb said while responding to a question.

Agreeing with the government’s policy to tax the unregistered distributors, the panelists – distributors and dealers of pharma and consumer goods – explained they work on very thin profit margins of 1% to 5%.

The collection of 0.5% levy from gross amount of invoices will mean higher tax deduction than the tax liability, which will result in huge refunds and cripple the cash flow and overall business, Khaliq said.

All the operational costs have to be met through the same gross margin. In most cases, the net taxable profit is in fraction of a percentage. For the very reasons, the rate of minimum tax on turnover for this sector was reduced by 80% of the basic rate, he said.

Giving an example of his own (cigarette) distribution business, he said his company is given 1.5% profit margin by the manufacturer. The company has about 125 salesmen, who visit hundreds of wholesalers and retailers several times in a week and all of this cost is borne out of the gross margin, leaving them with 1.2%, on which they are already paying tax. If the government imposes another 0.5% tax, it will have adverse impact on the business, he said.

Khaliq backed the government’s rationale but was of the view that registered distributors should be exempt for they are already in the tax net. He asked the Federal Board of Revenue and finance ministry to exempt those distributors who have valid National Tax Number (NTN). “Failing to do so would result in crippling and in most cases closure of the business,” he added.

Published in The Express Tribune, June 19^th, 2012.