Special treatment: TRC proposes flat rate of income tax for retailers

Amount nominal; move meant to include people in the tax net

KARACHI: Something is better than nothing.

In a bid to include more individuals in the tax net, the Tax Reforms Commission (TRC) has proposed charging a flat rate of income tax from millions of small retailers. This would include the ones conducting business operations in rural areas — a recommendation that could face resistance from official quarters.

The TRC seems to have worked out a proposal based on the carrot-and-stick policy, offering retailers to pay a flat income tax rate for three years and legalise the money equivalent to 30 times the tax paid during the three-year period.

The scheme has been proposed for only those retailers who have an annual turnover of up to Rs5 million. For medium-sized and big retailers, the commission has proposed to charge normal income tax rates. The proposal is aimed at millions of small retailers doing business across the country but not contributing anything to the national kitty.

The TRC has recommended that the Federal Board of Revenue (FBR) should charge tax ranging from Rs2,500 to Rs20,000 from retailers doing business in rural areas. The rate will be worked out on the basis of the shop’s size. For urban areas, it has proposed three income brackets, starting from Rs5,000 to Rs25,000 for low income traders, Rs10,000 to Rs35,000 for medium-income retailers and Rs15,000 to Rs50,000 for high-income category of small retailers.

The taxpayer under this schedule will be given a distinctive tax certificate to be displayed at their place of business. If implemented, the scheme would fetch revenues, which will be several times more than what the government is getting at the moment, said members of the TRC. It also seems a plausible solution for a sector that is generating almost 18% of the national output but its contribution in tax revenues is less than 1%, they added. So far, the focus has remained on the untaxed agriculture income and the retail sector largely remains off the radar despite having potential, the experts said.

The Commission has suggested inserting a new schedule, the Ninth Schedule, in the Income Tax Ordinance of 2001 aimed at giving legal cover to the proposal. The TRC has proposed that the taxpayer falling under this schedule will be required to file the return of total income along with the tax payment on the due date, which will be conclusive evidence in respect of the income under this schedule.

The incentive is that if the retailer pays his due tax for a period of three consecutive years, he will be granted amnesty with regard to his undisclosed wealth up to an amount equal to 30 times of the tax he paid during such periods. The retailers are afraid that if they start paying taxes, taxmen would harass them to disclose the source of their capital investment, said one of the architects of the proposal. He said the proposed scheme would give comfort to retailers that will also help broaden the net.

The suggestion has come at a time when the government has failed to bring millions of these retailers in the tax net despite announcing the special sales tax registration scheme. In June 2014, Finance Minister Ishaq Dar had announced that the government would be levying the standard 17% sales tax on what were defined as ‘first tier’ retailers and 5% to 7.5% on ‘second tier’ retailers. Under pressure from the retailers, the government has already withdrawn the condition to have the ability to accept debit and credit cards.

The two-tier scheme was implemented through Statutory Regulatory Order 608. However, the results of SRO 608 are appalling, as the FBR could not implement it due to strong clout enjoyed by the retailers. The FBR has yet another special treatment for the retailers – pay tax at the value of 0.75% of annual turnover. This is applicable for those having annual sales over Rs5 million.

 

Published in The Express Tribune, May 8^th, 2015.

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