Budget 2014-15: Broadening the tax net

FBR tax revenue projected at Rs2,810b.

The finance ministry has proposed to bring the retail sector under the tax net by linking their utility bills with their national tax number, reveals the Finance Bill, a copy of which has been obtained by Express News.

Large retail stores, like Karachi-based Imtiaz Super Market, Naheed Supermarket and multinationals of the likes of Hyperstar have been paying their taxes.

The government, however, has long been struggling to bring the small retailers – spread across Pakistan – under the tax net for the first time.

The finance ministry, according to the document, proposed to link the utility bills of retailers with their National Tax Number (NTN), which will help the government in tracing the tax record of retailers. Likewise, any new entrant or entrepreneur will have to obtain an NTN for paying his utility bills so that the government can trace bring him in the tax net.

Given the size and potential of Pakistan’s retail sector, the national exchequer can raise significant amount from this segment – if the proposals are materialised.

According to a 2006 study by Small and Medium Enterprise Development Authority, Pakistan’s wholesale and retail market is worth over $42 billion a year – the study is quite old now and the retail sector has grown significantly since then.

If taxed at standard corporate income tax rate of 34%, this segment – which comprises of thousands of small and medium size retail stores – could add billions to the national kitty.

Optimistic outlook

Optimism seems to be the order of the day for the government and Finance Minister Ishaq Dar, with the tax revenue target being set at a whopping Rs2.8 trillion for 2014-15.

The proposed target of Rs2,810 billion for the Federal Board of Revenue (FBR) is up from the target of  Rs2,475 billion - which the government revised down to Rs2,275 - a shortfall of Rs200 billion.

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Furthermore, according to Dar, the FBR revenue rose from 3% in 2013-13 to a record 16.4% presently, thereby increasing to Rs1,955 billion from Rs1,679 billion in the first 11 months of the present fiscal year.

The document also states that the tax to GDP ratio will be increased 13% by the year 2016-17, Dar said during his speech.

But the optimism may not be misplaced. During the year 2013-14 from July-April, the FBR tax collection stood at Rs1,742 billion, whereas last year during the same period, the tax collection was Rs1,516.2 billion. This constitutes to a growth of 15.9%.

The tax collection for this year amounts to 74.3% of the revised budget target for the full year.

According to the government, the direct and indirect taxes of the FBR tax revenue have also shown growth. Direct taxes stand at 18.9% and indirect taxes stand at 14.1%.



Tax as a percentage of Gross Domestic Product (GDP) regionally is amongst the lowest, wherein economic powerhouse India stood at only 10.6% in 2012.



Telecom's tax woes

The telecommunication industry is one of the most heavily taxed sectors in Pakistan, and in the past few months major telecoms have been lobbying for a reduction in the federal excise duty (FED), requesting that it be reduced from 19.5% to 17%.

They have also requested that the SIM activation tax of Rs250 be removed and instead be imposed on sellers of mobile phone handsets.

Speaking at a special ceremony in Islamabad in May, Prime Minister Nawaz Sharif had claimed that Rs260 billion would be collected in the treasury every year thanks to the introduction of 3G-4G technology.

Announcements in regard to 3G-4G services are therefore highly anticipated.

Note: The story will be updated as more analyses come in.