Retail trade: Taxmen suggest withdrawal of sales tax exemption

Proposal unlikely to be accepted on fears of political backlash.

ISLAMABAD: In an attempt to widen the tax net, tax authorities have proposed abolishing the sales tax exemption being enjoyed by retailers having annual sales up to Rs50 million.

The proposal was floated here on Monday in a meeting of the Tax Reforms Coordination Group (TRCG), headed by Finance Minister Dr Abdul Hafeez Shaikh.

According to the plan, which is at its infancy, the government should also reduce sales tax for the retailers to encourage them to file tax returns and pay tax, said the officials.

Although the TRCG could not deliberate on the proposal in detail due to engagements of the finance minister, there were considered views that the government may not be in a position to opt for the scheme just before general elections. Owing to upcoming polls, the officials said, the government would not take a step that annoys the voters.

The backers of the proposal have also failed in the past. Even the military ruler General Pervez Musharraf could not complete a nationwide survey to register the retailers.

The whole sales and retail trade sector comprises 17.2% of the total size of economy, according to the Economic Survey of Pakistan 2011-12.

The ratio of taxes to the size of economy is less than a tenth while expenses are over 20%, showing a huge gap between income and expenditure. The number of sales tax return filers is even less than 100,000, according to FBR statistics.

The Federal Board of Revenue (FBR) is also working on two amnesty schemes in the hope of fetching Rs156 billion to Rs176 billion besides bringing roughly 3.8 million people in the tax net. This proposal is at an advanced stage and the government is considering whether to promulgate an ordinance or table a bill in parliament to give effect to the schemes.

Currently, the retailers whose annual sales are up to Rs50 million are exempt from 16% sales tax. Many big stores are evading taxes by declaring their incomes below the threshold, say the officials.

Not only that, the retailers having annual turnover of Rs50 million pay only 1% income tax.

The proposal to abolish the exemption was floated by FBR’s Member Inland Revenue Policy Asrar Raouf, who also suggested bringing down the sales tax rate – a move that the government is likely to reject due to its implications for the annual collection target.

Fake refunds

The TRCG also discussed the issue of increasing tax theft in the garb of illegal and bogus sales tax refunds. Raouf admitted that due to illegal and bogus refunds, the FBR was losing Rs300 billion to Rs400 billion annually – a sum which is even more than the budget for this year’s federal development programme.

The participants called for carrying out a comprehensive audit before releasing refunds to stop the pilferage.

Former FBR chairman Mumtaz Haider Rizvi is accused of releasing billions of rupees in bogus refunds. During his short stint as chairman, he reportedly gave over Rs4 billion in refunds to three fake companies.

Voicing concern over declining revenues, the finance minister asked the taxmen to redouble their efforts. The minister was told that the FBR has so far collected less than Rs500 billion in taxes, which was only 21% of the annual target of Rs2.381 trillion.

In October, tax collection has increased by 10%, though the FBR needs a growth of over 26% to hit the goalpost. The International Monetary Fund (IMF) has assessed that FBR’s annual collection will remain around Rs2.23 trillion, a shortfall of Rs151 billion.

Published in The Express Tribune, October 23^rd, 2012.