Fixed tax decision deferment: Only an ordinance can help govt avert revenue loss

ISLAMABAD: The government would suffer a revenue loss of over Rs40 billion after the reversal of the fixed tax regime on electricity bills for traders in case the Federal Board of Revenue (FBR) does not restore the old scheme through the upcoming Presidential Ordinance.

It is learnt that the FBR is exploring other options to generate additional revenue of Rs30-40 billion including increasing the Federal Excise Duty (FED) on cigarettes through the proposed ordinance.

Sources told Business Recorder on Friday that the FBR has estimated revenue of Rs30 billion from the introduction of a new tax slab for small retailers under the Finance Act 2022. This amount would not be collected in 2022-23. Earlier, the government was collecting nearly Rs20 billion from this sector against the projected revenue of Rs40 billion under the old scheme.

Upon strong resentment of the trader’s community, the government has been compelled to withdraw/defer the retail fixed tax regime on electricity bills for this fiscal year. This may hit FBR revenue to the tune of over Rs40 billion in case the old scheme is not restored.

Karachi-based legal expert Arshad Shehzad informed the government that it seems to fail to properly introduce this simplified tax regime. The retail tax payment through electricity bills was in the field since 2014, where under section 3(9) of the Sales Tax Act, 1990 the retailers having electricity bills up to Rs20,000 were liable to pay sales tax at the rate of 5% and bills exceeding Rs20,000 were liable to pay sales tax at the rate of 7.5% through their electricity bills.

The government this year has only substituted earlier tax with the fixed rate of Rs3,000, 5,000 and 10,000 against electricity bills up to Rs30,000, Rs50,000, and over Rs50,000 respectively. Furthermore, in the case of a non-active person, the retailer is liable to charge double the amount of the tax.

Small traders/retailers ‘Fixed tax’ regime will be applicable across country

Shehzad explained that the complexity arises in the absence of capacity of the utility companies to ascertain whether the electricity consumer is a retailer or doing some other commercial activity which is not liable to tax and whether they are an active or non-active taxpayer.

The utility companies have started charging double rate of fixed tax from all their non-active commercial consumers without having an updated database, resulting in all the consumers whether liable to pay or not were heavily been burdened by the utility company.

The number of incidents was circulated on social media where closed shops were charged with heavy taxes. Likewise, professionals such as lawyers, and doctors operating from commercial places were wrongly charged double the levied amount of sales tax and thus a strong protest has started building up all over the country, forcing the government to suspend the enforcement of this law.

He opined that the government shall direct the utility companies to ensure seamless, electronic, and user-friendly means to update their database which should include complete details of all their consumers including landlords and tenants with appropriate CNIC, NTN, etc, to introduce any such simplified tax regime enforced through payment with utility bills. Right now updating the particulars in the utility bills itself is a cumbersome procedure.

Besides the above explained practical problems, Arshad Shehzad claimed that the government has also failed to effectively advertise this simplified regime among the traders. Small traders and retailers over the years were demanding a simplified tax regime. In this fixed tax scheme traders by paying a small contribution of fixed tax were offered legal protection from both their income tax and sales tax liability without going into the hassle of filing complex tax returns, compliances of tax notices, annual audits, and other ancillary tax issues.

The scheme was very attractive for small traders and retailers. Usually, it is tax departments who resist offering such a scheme on the ground that the objective of documentation of the economy could not be achieved though they may get revenue to some extent.

The government needs to review the whole scheme, overcome the teething problem in its implementation, create awareness through seminars, and workshops with the help of trade bodies and chambers to educate the benefit of this regime.

Otherwise, it is apprehended not only the projected revenue target of this fiscal year around Rs40 billion but the revenue collection of Rs20 billion government getting through utility bills before this regime would be compromised. On the other hand, the burden of this tax revenue may be shifted to the existing taxpayer regime in the shape of other levies and taxes to bridge this gap, Shehzad concluded.

Copyright Business Recorder, 2022