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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

Comments

Comments are closed.

Realist Jul 09, 2024 08:00am
And then further tighten the noose around the already taxed sectors and everything shall continue as normal again, till it is time for the next cycle of taxing the 'holy cows', and so forth.
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KU Jul 09, 2024 12:05pm
Shameful n embarrassing writ as well as will of the partners in crime.
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M. Zahid Iftikhar Jul 09, 2024 12:54pm
If the present govt manages to bring retailers (& traders) into the tax net, it would be a huge achievement. PML-N is rightly criticized for pandering to traders. It is time to act to remove the cause
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Az_Iz Jul 09, 2024 09:11pm
Stay the course. Don't give in.
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Az_Iz Jul 09, 2024 09:12pm
Let these guys do whatever they want. How long will they not do bussiness.
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EQ Jul 09, 2024 11:09pm
Allow the customers to claim 5% of the sales tax back as a credit (not refund).This will cause the customers to prefer retailers who give an invoice with a QR code. salaried class will also be happy.
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Willow Jul 10, 2024 06:13am
What are we doing with the tax thats collected ? Waste most of it. Collwct more tax and waste that money too, in Govt expenditure and lavish living.
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Hamza Saeed Jul 10, 2024 11:02am
Government's profligacy is the chief reason of the public's unwillingness to submit. From a certain perspective, the retailers' contumacious behavior is almost excusable and some would say laudable.
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T Jul 10, 2024 02:25pm
create fiscal deficits, collect more taxes, waste more money, raise more taxes and the cycle continues, yet the idiots havent learned.
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Aam Aadmi Jul 10, 2024 03:36pm
Government's writ was, is, and will always be restricted to the salaried class. None can break this jinx, not in our life times. The holy cows will continue to grow holier and holier.
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Faiz Jul 11, 2024 01:16am
If people get the services against which tax is collected - schools, hospitals, security, electricity, water, gas .... people will gladly pay. Significant chunk is wasted on non existent security.
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Numair Jul 12, 2024 07:07pm
Round them up. Beat Them up.
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Asif Jul 14, 2024 01:00am
Today I saw in a shop that the items the shop wanted were not available for non filers. Shahid yeh Naya measure hai FBR ki taraf say.
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Naseem Jul 14, 2024 12:38pm
These non tax paying entities should be shut down and not allowed to be opened till they agree to pay the tax
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Naseem Jul 14, 2024 12:40pm
@Willow, No excuse not to pay taxes
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