Last week, social media was abuzz about FBR charging Re1 per invoice on Tier 1 retailers. Some confused this Re1 as 1 percent while others believed it to be another tax. Clarification is warranted explaining that this is only a service charge, of Re1 per invoice irrespective of invoice size to develop FBR IT assets (including cyber security) and processing cost to handle larger quantum of data. What follows is an attempt to explain what Tier 1 retailing is and how to expand it, and why integrated system is imperative for documentation and why FBR is charging the token amount.
Tier 1 retailing concept was introduced under FBR during PML-N last regime to bring the textile and leather sector’s big retailers – such as Khadi and Jaferjees etc., into the integrated system by offering them lower GST rates. Later, under incumbent setup, Shabbar Zaidi tried to expand the Tier-I definition by creating a position of DG retail in FBR. But beyond that appointment, nothing happened. Now the team under new FM Shaukat Tarin is attempting to bring this integrated supply chain system to its true potential which is huge. Pakistan’s retail market is estimated at $125 billion and digitizing it promises huge economic and taxation benefits. For economic benefits, read ‘Digitizing Supply chain transactions’ published on 16th September 2020.
According to the definition, any international or national chain retailer, those operating in air-conditioned malls; retailers having annual electricity bill of over Rs1.2 million, having shop size of over 1,000 square feet; and any other person as prescribed by the board are Tier-I retailers.
When Shaukat Tarin assumed the position of FM before budget, DG retail made a presentation that had sparked enthusiasm about the promise of Tier-I documentation. He gave the project political patronage and involved private sector players in its designing. The idea is to increase the scale of this retail integration by universalizing the supply chain integration – from manufacturers/importers to suppliers, wholesalers and retailers – beyond the so called Tier-1 definition. The team came up with the idea of offering lottery scheme to consumers on invoices. Private sector players stressed to bring integrators into the equation as FBR by itself could not achieve the same. Then to build deterrence and incentive structures – by lowering taxes for integrated and penalize those who are not.
Now every month 300-400 new retailers are integrating into the system while current number is hovering around 800-1,000 stores, and FBR is handling around 25-30 million invoices per month on real time basis by integrating retailing back-end POS machine to the FBR system. At this pace, 300-350 million transactions may be handled on yearly basis, and the number shall grow as the potential runs in tens of billions.
All these invoices shall be integrated on real time basis. For these, backend servers and all other IT infrastructure is needed. This cannot happen on the outdated PRAL servers. Then cyber security is imperative and recent cyber attack on FBR shows how vulnerable the system is. FBR must spend on the same. There is no big budget within FBR as whatever tax it collects, it must be submitted to government treasury account.
There is no donor funding for it, and such systems should not be developed on donor funding as data security is a national issue – that is why FBR is charging the Re1 fee on invoicing to develop these systems. With the growth in number of integrated invoices, the need to charge from consumers may reduce to even less than Re1 per invoice and eventually may even fizzle out.
The GST on goods collection potential may not be as huge seeing the scope of the integration. The key objective is to document the economy and to assess the incomes of retailers, wholesalers, suppliers, and manufacturers based on the registered and integrated sales. For example, there is no sales tax on pharma, but its integration will be able to assess the income of pharma producers and suppliers. The tax collection in Pakistan is skewed toward indirect taxes and within direct taxes focus is on collection in the indirect mode. With proper income tax assessment using sales data, the collection can increase substantially.
The plan is to slowly bring all the supply chain into the system. There are incentives for those who are registered and integrated in terms of lower withholding tax and better input output adjustment versus those who are registered and not integrated. Those who are not registered and not integrated, there will be penalties and if they still don’t, criminal proceedings may be the next step. The message for retailers, wholesalers, and suppliers is that with the tool of technology and zest of the leadership, times for tax-free earnings are ending, better to sync in with a new reality or else face the music.
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