An alternative of SRO 821(I)/2011: Tax swap for undocumented sectors

I saw the participants started walking out of the seminar hall as soon as a senior tax official took the floor and began to dilate upon ancient and decades old tales of the 'ongoing' tax reforms and never-ending agonies for the low tax-to-GDP ratio, undocumented economy, expansion of tax base, etc. Of course, I could not disagree that we regularly hear such notions at public forums; yet, admittedly the Government has not drawn its medium to long term policy to put in place a fair, equitable and progressive tax policy in the country. So, reluctantly, I followed suit!
We understand collection of due tax is a gigantic task in this country where the parallel economy is considered to be as much as 8-10 times higher than the documented sector. However, a wired truth is that the Government remains the single largest obstacle in promoting the untaxed wealth flow in the economy. A classic example of such 'facilitation' is the existence of tax avoidance provisions in tax laws, eg, Section 111 of the Income Tax Ordinance 2001. Further, all attempts made by the tax machinery to widen the tax net have remained half-hearted and half-baked with a corresponding vacuum being made available to certain sectors/classes of businesses to have an easy exit from such measures.
An example of such an ill-planned and unwilling move was the issuance of SRO 821(I)/2011 dated 6th September 2011 whereby the Federal Board of Revenue (the Board) had made it mandatory for all registered manufacturers, importers and exporters selling taxable or dutiable goods to unregistered persons to an issue invoice containing the "Computerised National Identity Card Number or National Tax Number" of unregistered buyers.
In principle, this scribe backs the government move as it is aimed in tapping the unregistered sectors in tax net. However, again such an effort was not an equitable proposition for all businesses across the board for the reason that the condition for disclosing buyer's CNIC/NTN was not mandatory for distributor, middlemen, wholesaler and retailer - most of whom are classified as tax evaders in terms of both direct and indirect taxes. The SRO 821 was strongly opposed by almost all the sector of the industry who termed the move as completely impractical and unrealistic on the pretext that unregistered buyers either refuse to share their NTN/CNIC or switch to some other unregistered seller who does not ask for such details from his customers. Thus, the above conditionality met with the same fate as that of identical scheme introduced in Year 2009.
Fenced with rampant corruption, inefficiency, incapacity, political interferences and above all - lack of direction, the Board again considered the industry's hue and cry and offered specific exemption to the industry by suspending implementation of the SRO 821(I)/2011 to the most powerful sugar sector. We are mindful that the undocumented middlemen/distributor in the sugar industry has seized millions of rupees from the Government in the form of income tax and sales tax besides causing irreparable loss to the end consumer.
Nevertheless, the former FBR Chairman Salman Siddique defended such a decision before the Senate Standing Committee on Finance by agreeing that such an exemption was a 'temporary arrangement'. According to Board's ruling issued in this regard, the implementation of the SRO 821(I)/2011 was suspended to the sugar sector until the finalisation of the discussion between the Board and Pakistan Sugar Mills Association (PSMA).
Later on, upon agitation by other quarters who felt aggrieved for being singled out from the concessionary list, the Board issued another ruling whereby the operation of the SRO 821(I)/2011 was suspended across the board till 31 December 2011. If we analyse both such directives issued by the Board on the legal touchstone, we understand both of them are in field and appear to be overlapping the implementation of the SRO 821(I)/2011 upon sugar sector.
While on the one hand, w.e.f. 01 January 2012 the Board had made it mandatory for all taxpayers to observe compliance with the requirement of NTN/CNIC; however, on the other hand, the sugar-specific ruling has not been rescinded/superseded by the tax authorities. Due to this, it appears as if the sugar sector will continue to enjoy immunity from disclosing their buyers' NTN/CNIC, while all other business segments will be bound by the requirements of the SRO 821(I)/2011 w.e.f. 1st January 2012.
It has also been given to understand that necessary changes are in the offing in the electronic filing system to restrain non-compliant taxpayers from reporting sales made to the unregistered without disclosing the buyer's NTN or CNIC. The proposed measures suggests that the FBR's electronic system will block sales tax and federal excise returns from January 2012 onwards of all those registered manufacturers, importers and exporters who fail to disclose their computerised national identity card numbers or national tax numbers of the unregistered buyers.
Despite all the planned procedures, this scribe strongly believes that they are likely not to deliver the goods for a few key reasons. Firstly, as long as the law provides refugee to certain classes of businesses from making compliance with the requirements of the SRO 821, the door shall remain open for 'tax planning'. Secondly, the law cannot put the onus of collecting buyer's CNIC/NTN solely upon the seller of the goods. Where on the one place, in the current anti-business climate in the country, most of the buyers would refuse to oblige such a request; on the other hand, it is also unlikely that they would provide their correct particulars to the seller.
Resultantly, this exercise can, at best, end up in the issuance of notices by tax department to such persons who actually did not indulge in any buying but whose CNIC/NTN was misused by unscrupulous elements. At a recent TV talk show, the Member, Inland Revenue FBR agreed with this scribe that chances of misuse of the CNIC/NTN exists if the tax machinery goes ahead with its plan to implement the SRO 821. The government must decide today: is this what we desire out of such a tedious exercise?
The menace of undocumented and benami business is the root cause of our economic ills. Undoubtedly, we need to put a strong barrier against such trend. However, measures akin to the SRO 821 cannot yield the desired results for the Government for the foregoing reasons. As an alternate, it is recommended that the Government should reintroduce the concept of withholding the sales tax, as was introduced on a trial basis, during the Year 2009. To make it acceptable to every segment of taxpayers, the following modifications are also suggested in such scheme.
Through amendments in the Sales Tax Special Procedure (Withholding) Rules 2007 (the rules), the Government may make all registered persons, conducting business with an annual turnover of Rs 10 million and above, liable to deduct withholding tax, say @ 1/5th, of the total tax passed onto them by their customers. In case of purchases of taxable goods from unregistered persons, the withholding of sales tax may be made compulsory @ applicable tax rate, eg, 5%, 16%, 19.5%, 18.5%, 21%, 25% out of the total purchase bill. After deduction, the balance sum may be paid-off to the concerned seller. To promote such a scheme and as a reward of such compliance work, the withholding agent should also be offered the claim tax credit of an equivalent sum as has been deducted by him from payment made to unregistered persons.
The corresponding exemption available in the 6th Schedule of the Act of Rs 5 million to the manufacturer and retailer should be restricted to those manufacturers and retailers who sell to businesses making turnover below Rs 10 million annually. The withholding of the sales tax on purchases may also be made applicable upon taxpayers whose supplies are otherwise exempt or zero-rated under the Act, eg, pharmaceuticals, textiles, etc. This will help document and promote the economy at a faster path.
Sales tax so deducted may be deposited by the withholding agent in the bank under the relevant head of account by the 15th of the month following the tax period during which payment has been made to the supplier. If the withholding agent is also registered under the Act or the Federal Excise Act 2005, he shall file the return and deposit the withheld amount of sales tax in the manner as provided under Chapter II of the Sales Tax Rules 2006 along with other tax liability.
However, if the withholding agent is not registered for sales tax or federal excise duty purposes but holds a National Tax Number assigned under the Income Tax Ordinance 2001, he shall file the return electronically as set out in the Annexure to the SRO and deposit the amount deducted at source in the manner as provided for persons filing returns electronically under Rule 18 of the Sales Tax Rules 2006.
The government must understand: for right or wrong reasons, the trade and industry will not accept the responsibility of acquiring the buyers' CNIC/NTN for onward reporting to the state. However, by swapping such a condition with the withholding tax, the Government will not only increase its revenue but will also compel the unregistered sector to come in the tax net. Of course, 16% is a significant margin. Noone would be able to get his sales bill slashed by 16% on a regular basis. He would follow suit - this time, into the tax net.
(The writer is partner, Shekha & Mufti, Chartered Accountants and Honorary Advisor to Karachi Chamber of Commerce and Industry on Sales Tax)