The State Bank of Pakistan (SBP) has said that tax structural reforms introduced by the Federal Board of Revenue (FBR) for documentation of businesses may create liquidity issues and affect overall economic activity in the short-term.
The SBP, in its annual report on "The State of Pakistan's Economy" has discussed the FBR's recent documentation measures in detail and revealed that the persistently high share of unregistered sales results in further expansion of the shadow economy and hurting the revenue potential of the government authorities.
The FBR is actively working on reducing sales of registered businesses to unregistered enterprises/individuals. According to the revenue authority, the share of such transactions in the overall sales of registered enterprises was around 40 percent between July 2014 and March 2019. Furthermore, 50 percent of sales of 17 out of 35 sectors are made to unregistered buyers.
According to the FBR, only 41,484 persons registered for sales tax purposes are actually paying some tax with their returns. The total industrial electricity connections in the country are more than 300,000. This means that an overwhelming majority of the businesses are operating in the informal economy, the report said.
Now the FBR has introduced the CNIC condition for sales over Rs 50,000. According to an amendment to the Sales Tax Act of 1990, which was to become effective from 1st August, 2019 but was later delayed, the registered persons were instructed to record CNIC number or NTN of the recipients unregistered with FBR for sales tax in addition to the details being recorded of the registered recipients.
A relaxation from this clause was granted for sales up to Rs 50,000, provided that the recipient is an ordinary customer, ie, a person who is buying goods for his or her own consumption and not for the purpose of reselling.
The SBP said that this amendment caused significant unrest in the market, with a majority of the businesses taking a stance against it. Protests were arranged by the associations across the country and the government was asked to abolish the CNIC restriction. However, the SBP said that, much of the opposition against the reforms arose because of the misunderstanding about the announced measures.
"Such structural reforms are unpopular in nature and were thus delayed earlier, as these might increase businesses' transaction costs, create liquidity issues, and affect overall economic activity in the short term," the SBP said.
In particular, the introduction of the CNIC condition for sales tax purposes has faced serious resistance including threats of lockdowns and protests from traders across the country.
The FBR has since then issued clarification circulars and engaged with the businesses on various forums to help clarify the matters and take feedback. Therefore, it is important to build capacity within the FBR and to further digitize its functions to streamline procedures, it added.
Moreover, the SBP said that the FBR needs to continue the dialogue with relevant stakeholders for ensuring smooth implementation of policies, and alleviate regulatory and policy mistrust.
The SBP said that regard to CNIC condition the following points are important:
The CNIC/NTN condition only pertains to sales of businesses that are registered with FBR. Those firms which are working informally do not need to ask for CNIC details from their purchasers, as they do not file tax returns. However, if those firms procure raw material from a registered firm, then they would have to provide the requisite CNIC details to the supplier.
The buyer does not have to be a registered person. Registered firms can continue to transact with unregistered buyers; the only addition is that they would have to document the CNIC of the buyer in question.
Sellers only have to record the NTN/CNIC number on the invoice; physical copies of the identity cards are not required. According to news reports, some businesses were fearing that they would have to keep photocopies of the recipients' CNIC for record purposes, stating that such a measure would unjustly increase their operating and storage costs. However, no such provision has been proposed in the Finance Act.
No action will be taken against the business if the CNIC/NTN details are found to be incorrect upon subsequent inspection. It was later clarified that no action would be undertaken without the approval of the Chief Commissioner of the respective jurisdiction. Lastly, even if action against the seller is warranted, it would be taken only after necessary action has been taken against the person who provided the non-genuine CNIC. A further clarification released by the FBR explained that the NIC/NTN of the buyer with respect to taxable supplies to an unregistered person shall be deemed to have been reported in good faith provided that:
(i) The tax invoice complies with the requirements of section 23(b) of the Act;
(ii) Payment made by or on behalf of the unregistered purchaser of the amount of the tax invoice, inclusive of sales tax and applicable further tax, is deposited into the supplier's declared business bank account;
(iii) The NIC provided by the purchaser is found authenticated by Nadra; and
(iv) The NIC/NTN provided is not of the employee of the seller or of his associates as defined under the Income Tax Ordinance, 2001.
The documentation clause would not result in the halt of purchasing by end-consumers. This is because ordinary buyers are exempted from such a condition, provided that the value of their purchases is up to Rs 50,000.
The amendment would not result in any price hike, given that no additional tax measures have been adopted under the Finance Bill 2019.
Sales tax filers feel that registered businesses have been unfairly tasked with the burden of identifying the non-filers. According to the FBR, if the documentation efforts are not expanded to identify those individuals that are not paying any taxes, then the tax burden on existing registered enterprises would continue to remain high.
The condition would not be enforced on small businesses in the cottage industry. According to the revised definition followed by the FBR, a cottage industry player is one that: does not have an industrial gas or electricity connection; is located in a residential area; does not have a total labor force of more than ten workers; and has an annual turnover from all supplies not exceeding Rs 2 million.
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