Rebellion by unregistered business entities

EDITORIAL: The stubborn resistance of the country’s unregistered sector to yet another attempt by the authorities to bring it into the tax net demonstrates the continued blatant disregard for fiscal compliance by an important section of the economy.

The government’s move to impose a 2.5 percent advance income tax (AIT) on non-filer retailers and a 0.5 percent AIT on filers while making manufacturers, particularly the country’s fast-moving consumer goods (MCGs) sector, responsible for collecting this tax under the Finance Act 2024, has ignited a virtual rebellion by unregistered entities.

Around 60 percent of the goods supplied to such entities have been returned by them to manufacturers since the imposition of this measure on July 1, with major cities like Karachi and Lahore witnessing a rate of return of around 30-40 percent.

The logic behind the measure, which essentially turns manufacturers into tax collecting agents for the FBR, is to ostensibly encourage retailers to file their income tax returns to avoid paying the higher rate of AIT and to claim credit on it, with their entry into the tax net also simultaneously making them liable to pay their due share of sales tax, in effect increasing the government’s tax revenue.

The long history of the retail sector refusing to contribute its fair share in taxes has led to a situation where despite this segment contributing 18 percent of the GDP, its contribution to tax revenue is a mere four percent. This state of affairs is clearly untenable with the economy in a crisis mode, our fiscal space highly constrained, and there being mounting pressure to expand the tax base.

While this particular measure may not be the ideal way to deal with a recalcitrant retail sector – as it is bound to lead to an increase in cost of compliance for manufacturers as they will have to expend effort and resources in charging the AIT, and then in documenting the amounts they have collected from each retailer – desperate times call for desperate measures.

The much-hyped Tajir Dost Scheme did not have the kind of impact that the authorities had hoped, and multiple other schemes have also bitten the dust in recent years due to strong opposition by retailers as well as lack of political will to take on this segment.

With the government evidently running out of ideas and time to bring the intractable retail sector to heal, it would do well to stay the course as far as this latest measure is concerned and defy the resistance it is facing. It must stay engaged with manufacturers, provide them with the requisite support and help them weather this difficult situation as they are the ones who will be facing the brunt of the backlash. If their consignments continue to be returned, it could mean their supply chains could face considerable disarray, forcing them to lower their procurement and cut down on production, potentially leading to lay-offs.

Despite these dangers, the government must persevere and impress upon the retail sector that its resistance to becoming part of the tax net is contributing to an economic crisis of existential proportions. Its defiance could eventually lead to dire economic repercussions for the entire nation, ultimately leaving the retail sector unable to shield itself from the ensuing fallout.

While experts are now calling on the government to initiate structural reforms to bring retailers into the tax net, the reaction to this latest measure makes it clear that they will be equally, if not more, rebellious towards more comprehensive changes in the tax structure.

While wide-ranging tax reforms are preferable – and the government must get serious about initiating those as well – abandoning this new measure at the first sign of resistance will send out a wrong message that the government can be coerced into capitulation, compromising its ability to do what is needed to shore up fiscal stability.

Copyright Business Recorder, 2024