The government is likely to amend Finance Bill 2007 to make it mandatory for retailers to declare their last year's sales in the income tax returns they will file in September 2007, says a Recorder Report. The amendment has been necessitated to incorporate in the relevant income tax law a specific clause that was inadvertently omitted.
(The retailers and CBR had mutually agreed to the filing of tax returns at a pre-budget meeting in Islamabad.) The amendment, which has since been submitted to the National Assembly for necessary legislation, when enacted, will legally bind the retailers to declare their sales of 2006-07 in the income tax returns they file this year.
Under the agreement, the retailers whose turnover is more than Rs 5 million but does not exceed Rs 10 million will be required to pay Rs 25,000 plus 0.5 percent of the turnover exceeding Rs 5 million. However, where the turnover is in excess of Rs 10 million, they will be required to pay retail tax of 0.75 percent of the turnover exceeding Rs 10 million.
Further, the retailers will not be entitled to claim any adjustment of withholding tax collected or deducted from them under any head during the year. The amendment is clearly designed to address the problem of sales tax evasion in its myriad forms that continues to vitiate the tax collection system in the country, causing massive loss to the national exchequer.
With the help of collectorates of sales tax, the CBR has been able to identify the items on which the consumers pay sales tax, but this amount is not being deposited in the treasury. It has also been found that some manufacturers are concealing the production data of their goods, and are under-declaring sales tax at the manufacturing stage.
While consumers are paying sales tax on all products, many manufacturers and others involved in the supply chain do not deposit the amount thus collected in the national exchequer. CBR has devised methodologies from time to time to plug the chinks that lead to sales tax evasion. A method adopted last year to rectify the situation, ie compulsory filing of special monthly returns, at best yielded only mixed results.
The operating principle was that field formations would compare the data provided in the "special returns" with the actual market information, in order to detect cases of sales tax evasion. Meanwhile, despite introduction of business-friendly universal self-assessment scheme and other measures initiated by CBR to broaden the tax base, the problem of non-filing and under-filing of returns has not been fully solved.
The revelation made by the CBR chairman last year that only 700,000 traders out of a total of about three million in the country file tax return shows the pervasiveness of the problem. Seen in the broader perspective, the abysmally low ratio is reflective of failure on the part of tax authorities to promote tax culture in the country.
Incidentally, the share of retailers and wholesalers in the overall GDP growth stands at 16 percent, but their tax ratio is less than three percent, which is a clear indicator of the presence of widespread tax evasion and under-filing.
Although the initiatives launched by CBR to restructure the taxation system have yielded some positive results, the total number of tax return filers last year had stood at only 1.106 million out of a population of nearly 160 million. According to one estimate, tax evasion and under-filing of returns is causing a loss of about Rs 180 billion per annum (2000 figures).
Incidentally, sales tax has evolved into one of Pakistan's key revenue generators. Starting with a negligible contribution of 1.7 percent of GDP in 1990-91, sales tax had by 1999-2000 grown to nearly 4 percent of GDP. And it must have quadrupled since then.
The recovery of sales tax at retail level is clearly not going to be an easy task, as most retailers are known to employ various subterfuges, including maintenance of duplicate receipt books, to conceal the actual quantum of turnover. CBR will, therefore, have to put into operation various cross-checking methodologies as well. Lastly, CBR's focus should be on expanding the tax base by registering more and more retailers.