Taxation: A not-so simplified sales tax regime
Retail sector points out flaws in new proposal to collect taxes.
The first tier comprises of retailers who operate as part of national and international chain stores; operate in air-conditioned shopping plazas; have [point-of-sale] machines for credit or debit cards. PHOTO: FILE
KARACHI:
“Most of the retailers are willing to pay their due share of taxes, but they want a simple and easy method of doing so,” Finance Minister Ishaq Dar said in his budget speech on June 3. The minister then introduced what he called ‘a two-tier Simplified Sales Tax Regime for Retailers’.
Dar acknowledged that retailers wanted an easy way for paying their taxes. His Simplified Sales Tax Regime, however, is not as simple, according to sources in the retail sector.
“Under the current budget proposal, it is not clear how this regime will be implemented for the collection of taxes from small retailers,” said Fareed Qureshi, a representative of the Karachi Retail Grocers Group – an umbrella organisation for 250 small grocery stores.
There are many businesses, including big factories, that evade taxes but they were not targeted, Qureshi said. “We are already in the tax net and file our tax returns, this new system will only make things worse and evaders will remain at large,” he said.
In the federal budget for fiscal year (FY) 2014-2015, the finance ministry proposed to bring the largely undocumented retail sector under the tax net by linking their volumes and eventually sales tax to their electricity usage.
Operating the system
To implement this new system, the finance ministry divided the retailers into two categories.
The first tier comprises of retailers who operate as part of national and international chain stores; operate in air-conditioned shopping plazas; have [point-of-sale] machines for credit or debit cards and have monthly electricity bills in excess of Rs50,000 – all remaining retailers will fall in the second tier.
For tier II retailers, the ministry would introduce a mechanism for the payment of sales tax through the retailers’ electricity bills, the minister said. “Thus, retailers with an electricity bill of less than Rs20,000 in a month shall be charged only 5% of the bill as sales tax on retail sales while those with higher bills shall be charged 7.5%.”
“I don’t think this will be sustainable,” said an official from the retail sector while commenting about the aforesaid proposal. “In a country where people don’t pay electricity bills and steal power through illegal connections, linking sales tax with electricity usage is not a wise idea,” he said.
Citing an example, the official said a similar idea was once tried in Sargodha to bring the makers of appliances, such as ceiling fans, under the tax net. When the government linked their sales volumes to their power usage, many had switched to alternate energy sources to hide their sales volumes, the official said – some switched to LPG while others used petrol generators.
The retail sources are sceptical about the transparency and implementation of the said regime and say the government should instead charge a fixed amount of tax from small retailers. By charging a fixed amount, the government can first bring them under the tax net, according to an official, and then increase the tax rate according to their sales.
Giving an example, Karachi Retail Grocers Group’s Qureshi said the government could check his tax returns for the last three years to determine the amount of tax. This can be done for every retailer who is filing taxes.
“Since we buy our stocks from distributors, our sales could be matched with our distributors’ records for inaccuracies,” Qureshi said.
Published in The Express Tribune, June 13th, 2014.
“Most of the retailers are willing to pay their due share of taxes, but they want a simple and easy method of doing so,” Finance Minister Ishaq Dar said in his budget speech on June 3. The minister then introduced what he called ‘a two-tier Simplified Sales Tax Regime for Retailers’.
Dar acknowledged that retailers wanted an easy way for paying their taxes. His Simplified Sales Tax Regime, however, is not as simple, according to sources in the retail sector.
“Under the current budget proposal, it is not clear how this regime will be implemented for the collection of taxes from small retailers,” said Fareed Qureshi, a representative of the Karachi Retail Grocers Group – an umbrella organisation for 250 small grocery stores.
There are many businesses, including big factories, that evade taxes but they were not targeted, Qureshi said. “We are already in the tax net and file our tax returns, this new system will only make things worse and evaders will remain at large,” he said.
In the federal budget for fiscal year (FY) 2014-2015, the finance ministry proposed to bring the largely undocumented retail sector under the tax net by linking their volumes and eventually sales tax to their electricity usage.
Operating the system
To implement this new system, the finance ministry divided the retailers into two categories.
The first tier comprises of retailers who operate as part of national and international chain stores; operate in air-conditioned shopping plazas; have [point-of-sale] machines for credit or debit cards and have monthly electricity bills in excess of Rs50,000 – all remaining retailers will fall in the second tier.
For tier II retailers, the ministry would introduce a mechanism for the payment of sales tax through the retailers’ electricity bills, the minister said. “Thus, retailers with an electricity bill of less than Rs20,000 in a month shall be charged only 5% of the bill as sales tax on retail sales while those with higher bills shall be charged 7.5%.”
“I don’t think this will be sustainable,” said an official from the retail sector while commenting about the aforesaid proposal. “In a country where people don’t pay electricity bills and steal power through illegal connections, linking sales tax with electricity usage is not a wise idea,” he said.
Citing an example, the official said a similar idea was once tried in Sargodha to bring the makers of appliances, such as ceiling fans, under the tax net. When the government linked their sales volumes to their power usage, many had switched to alternate energy sources to hide their sales volumes, the official said – some switched to LPG while others used petrol generators.
The retail sources are sceptical about the transparency and implementation of the said regime and say the government should instead charge a fixed amount of tax from small retailers. By charging a fixed amount, the government can first bring them under the tax net, according to an official, and then increase the tax rate according to their sales.
Giving an example, Karachi Retail Grocers Group’s Qureshi said the government could check his tax returns for the last three years to determine the amount of tax. This can be done for every retailer who is filing taxes.
“Since we buy our stocks from distributors, our sales could be matched with our distributors’ records for inaccuracies,” Qureshi said.
“Even if they fix the tax to Rs5,000 per retailer, they can raise Rs125 million from 25,000 general stores in Karachi alone,” Qureshi said.
Published in The Express Tribune, June 13th, 2014.