Besides their negative effects, pressure from International Finance Institutions lending to Pakistan, has had one positive effect - eventual realisation by the government that Pakistan's tax-to-GDP ratio must improve; because this effort was delayed for too long, it must now be undertaken as quickly, but this 'quick' approach has its pitfalls.
What is being overlooked is the fact that installing tax collection systems that are either seen as unfair or have snags in them could further damage the credibility of the state (especially of the FBR), and create even bigger challenges for the state. The 'Pakistani brand' of democracy is already under fire; it could suffer even more courtesy flawed changes in the taxation systems.
Finding quick solutions is an act of desperation but, sadly, that's what you must resort to courtesy prolonged bad governance. Consequently, bases for recovering income tax eg as a percentage of the power consumption bills, and excessive reliance on collecting taxes via indirect routes - including withholding tax and income tax in power bills will, remain controversial.
That said the Federal Board of Revenue (FBR) has taken a long-delayed initiative - mandated retailers to install Electronic Cash Registers (ECRs) and issue invoices only from these machines and provide FBR real-time access to their Sales Tax (ST) and sales data. The idea is to ensure that every penny of ST collected by retailers is recorded and thus collectible by FBR.
The move, though commendable, exposes a reality pointed out time and again ie that while retailers collect ST, they don't surrender the bulk of it to the FBR. Also, that while ST has been escalating inflation it didn't serve the desired purpose - increase tax revenue. The move, if implemented flawlessly, will also provide correct data on retailers' sales and allow taxing them correctly.
An SRO issued on July 1, imposes this discipline, but applies only to retailers who: (1) form units of national or international chains, (2) operate in air-conditioned shopping malls, excluding kiosks therein, (3) have credit or debit card machines, (4) paid electricity bill exceeding Rs 600,000 during 2013-14, and (5) wholesaler-cum-retailers importing bulk quantities of consumer goods and selling on wholesale as well as retail basis.
The SRO also says that its provisions shall apply to retailers who are not registered as taxpayers. For exemption from the ECR requirement, retailers operating as a unit, a franchise, or under other arrangements with a national or multinational chain store must register as entities distinct from their principals - a requirement that will net retailers who have been using such covers.
In spite of transmitting their sales data online to the FBR to declare taxes collected while acting as collection agents, these retailers shall observe all the rules applicable to provisions prescribed in Chapter II of the ST Rules-2006 including the requirement to file monthly ST returns. This demand is excessive given the fact that ST data would be available with FBR on real-time basis.
A realistic route was to send monthly demands for collection of ST, and require submission of tax returns on quarterly basis for payment of income tax, and thus not overburden retailers with reporting requirements. It is also no surprise that while these retailers are required to install ECRs, the SRO doesn't include an incentive for doing so - offering duty-free import of ECRs.
Besides, for transmitting data to the FBR in real-time, extensive networking is necessary and installation, testing, and de-bugging of data accumulation computer technology at the FBR offices is imperative. Given the track record of state offices on such issues, this whole exercise could prove time-consuming. The SRO doesn't disclose a timeframe for completion of this exercise.
Uninterrupted power supply during working hours is imperative for ECRs to function. Since that cannot be guaranteed, to ensure that they don't keep their customers waiting for being billed until resumption of power supply, retailers must invest in standby power generation arrangements; while many of them already have this arrangement, the rest must now invest in it.
The initiative implies that the first target of the FBR is the 'big' retailer category, which is supposed to be dealing in high value goods. It does make sense, because this category of tax-evaders can provide substantial tax revenue, given their high sales revenues. At the same time it also shows how little importance (unintended or deliberate neglect?) was given to this category in the past.
That said leaving the other categories of retailers to be netted by Discos is an admission of FBR's inability to access them. The question is "are the other retailer categories really inaccessible?" Karachi's retailers deny this; some of them claim that every month an FBR employee collects a certain sum from the medium-sized retailers in exchange for keeping them out of the tax net.
These retailers shall now pay ST as a percentage of their electricity bills and discos supplying them electricity, shall collect it at the rates specified by FBR except in cases where Discos receive written orders from the Commissioner of Inland Revenue stating that these consumers are not engaged in retailing, or are registered with the FBR and paying ST via monthly tax returns.
In the context of requiring banks to recover tax from their customers, similar instructions should have been issued whereby banks could exempt customers already registered with the FBR and paying income tax or withholding tax at source and also filing tax returns and thus falling in the "filer" category. FBR has not yet made a clear public announcement to this effect.
According to the FBR, ST charged to retailers must be shown separately in electricity bills issued by the Discos, and the collecting Discos must pay the ST collected from the retailers in the manner as prescribed in Chapter III. To ensure that the entire ST collected by a Disco is surrendered to FBR and identified retailer-wise, FBR needs to devise a seamless data reporting system for the Discos.
In spite of their questionable bases, all FBR's attempts at sorting out the taxation mess may still succeed but for that the FBR must strive to make them credible ie verifiable by taxpayers so that no entity feels that the tax recovered from it has not been accounted for in a manner where it gets due benefit of paying the tax. Unless this is assured, these attempts could lumber the FBR with lawsuits.
FBR therefore must acquire the services of highly-reputed professionals in designing the reporting systems its tax collecting agents should use and ensure that, besides being user-friendly the computer software it selects has the lowest probability of either collapsing or being fiddled with.
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