The government has decided to introduce a two percent fixed tax on a turnover basis on traders having an electricity bill of over Rs0.6 million per annum and possessing shops in luxury shopping malls and plazas, in order to bring millions of retailers into the tax net, according to reports.
“With this new fixed tax regime, the Federal Board of Revenue (FBR) has estimated it would generate Rs6 to Rs10 billion in the coming budget 2016-17,” the media reported.
So far, the retailers had paid less than Rs1 billion to the national kitty during the outgoing financial year. After the failure of the Voluntary Tax Compliance Scheme (VTCS) to lure traders into the tax net, the government held hectic negotiations with retailers and finally both sides agreed to introduce a fixed rate tax system from the next budget. The retailers demanded the government to restore the old rate of 0.75 percent fixed tax on their turnover, but the government decided to impose a two percent fixed rate in the coming budget.
The FBR conducted a study showing that well-known chains used to pay over 1.5 percent tax on their turnover, so the tax collection could go up in the range of over Rs6 billion in the case of an agreement with retailers at two percent. The Tax Reforms Commission had also asked the government to impose a flat tax rate on retailers having an annual turnover of up to Rs5 million.
The commission has also asked the government to charge a flat tax even from those retailers who are operating in the rural areas of Pakistan. The government had failed to bring retailers into the tax net despite offering various schemes in the last 25 to 30 years, and it is yet to be seen whether the government has the political will to impose such a tax.
The scheme is proposed only for those retailers who have annual turnover up to Rs5 million. For the medium-sized and big retailers, the commission has proposed normal income tax rates. It has also recommended that the FBR should charge tax in the range of Rs2, 500 to Rs20,000 from retailers doing business in rural areas.
The rate will be worked out on the basis of the size of the shop. For urban areas, three income brackets, starting from Rs5,000 to Rs25,000 for low-income traders; Rs10,000 to Rs35,000 for medium income retailers and Rs15,000 to Rs50,000 for high-income category of small retailers have been proposed. The taxpayer under this schedule will be given a distinctive tax certificate to be displayed distinctively at their business. The commission has suggested inserting a new schedule, the Ninth Schedule, in the Income Tax Ordinance of 2001 to give legal cover to the proposal.
The TRC has proposed that the taxpayer falling under this schedule will be required to file the return of total income, along with the tax payment on the due date, which will be conclusive evidence in respect of income under this schedule. The incentive is that if the retailer pays his due tax for a period of three consecutive years, he will be granted amnesty with regard to his undisclosed wealth up to an amount equal to 30 times of the tax he paid during such periods.
The suggestion has come at a time when the government has failed to bring millions of these retailers into the tax net despite announcing special incentive packages.