Sales tax on retailers

When writ of the state becomes weak and its tax collection efforts are thwarted routinely, the government needs to toughen its spine and punish those who challenge its authority. The practice in Pakistan is, however, that of appeasement and yielding to the pressure groups. Speaking to the Senate Standing Committee on Finance on 9th June, Tariq Bajwa, Chairman, FBR said that 2.5 million retailers were operating in the country at present, out of which only 8,000 were registered with the sales tax department. A new scheme had been drafted in consultation with the relevant trade bodies of retailers, under which the tax department would register retailers in chain stores, occupying shops in air-conditioned buildings and those accepting credit and debit cards and having monthly electricity bills in excess of Rs 50,000. These retailers will be required to pay sales tax in the normal regime and keep electronic cash registers of approved specifications to record their transactions. The government has initially set the target of bringing top 10,000 retailers into the sales tax net. The remaining retailers shall fall in the second tier, who will be charged sales tax through their electricity bills. The applicable rates will be 5 percent of monthly electricity bills up to Rs 20,000 and 7.5 percent for retailers having electricity bills of over Rs 20,000.
The introduction of the above scheme is indirectly an admission of failure by the government to collect taxes equitably ie on the basis of the value of sales by the retailers and according to their income. In fact, the new system seems to have been largely delinked from sales and related almost exclusively to the location of business or electricity consumption, which may be irrelevant to the volume of sales. Finance Minister has said that the fresh policy has been put in place after consultation with the retailers who were not willing to come into contact with the tax officials, fearing harassment. Does it mean then that interest groups who could successfully resist tax policy of the government would be allowed to dictate their own terms to the government? In our view, a bad precedent has been set, which could be very costly for fiscal policy of the government in future. Also, there are certain other inherent disadvantages in the new policy. Obviously, retailers, in general, would not like to install the necessary infrastructure to accept credit/debit cards and, as such, the country would be deprived of an important innovation to settle transactions to a large extent. Secondly, there would be a tendency on the part of retailers to keep their electricity bills as low as possible in connivance with the Wapda/KE staff in order to benefit from the lower sales tax slab. This could increase the line losses further. Thirdly, it is definitely a poor strategy on the part of the FBR to pass on the job of tax collection to other organisations. Wapda and KE are already collecting TV fees and certain other levies from the households. To burden them further with the job, which should have been done by the tax collecting machinery of the country itself is certainly unfair. And fourthly, discriminatory treatment between various categories of retailers would definitely discourage foreign investors who like to establish chain stores with proper air-conditioning and do not have the bad habit to evade taxes. It would be difficult for them to compete with retailers who do not operate chain stores and could easily manipulate the new system to their advantage. Keeping all factors in view it would be better for the FBR to re-evaluate the fresh policy and devise a proper and non-discriminatory system for the retailers for sales tax collection as soon as possible. However, for such a system to be successful, the FBR would need tax officials who are absolutely honest, committed to their duty to a fault and would not yield to the pressure of outsiders. Unfortunately, these are the very attributes which are in short supply in Pakistan.