It's hindering legitimate businesses and giving unregistered competitors an edge
It’s no secret that traders with small 8×8 shops with tiny washrooms in Karachi’s Jodia Bazaar and adjacent markets such as Chanti Lane, Densol, and surgical and medicine market, make a lot of money.
They live in big houses in posh areas. They have luxurious cars but prefer to come to work on motorcycles and scooters–partially because motorcycles are easier to park and maneuver through narrow crowded streets but also to avoid attention.
Pakistan has struggled to match its tax revenue to how much it spends. In the budget 2020-21, the government plans to spend Rs7.136 trillion and expects to earn Rs4.96 trillion, which mostly comes from taxes. The gap between these two figures is called a fiscal deficit, which will be Rs2.176 billion. Despite this large expected deficit, experts believe the government’s revenue targets are ambitious.
The government has tried different approaches to increase it tax collection, such as imposing a condition in which purchasers have to share CNIC copies with wholesalers or shopkeepers on large purchases. Initially, the condition was on purchases of Rs50,000. But it was unsuccessful and faced with heavy backlash.
The Rs50,000 condition seemed to be too low but would have helped the FBR find a lot of tax evaders. The government has now increased the limit to Rs100,000 in the new budget.
This means fewer buyers will have to provide CNIC copies to traders, wholesalers or retailers and many more people will be able to slip out of the FBR’s tax net.
The manufacturers are supposed to collect the CNIC details of distributors, distributors will collect details from wholesalers, wholesalers from retailers and retailers from consumers on sales above Rs100,000 under the new tax rule.
However, according to traders, the tainted past of FBR officials has made it difficult for them to trust the new rule so they are forced to reject the new condition.
They also aren’t willing to help the FBR bring small businesses into the tax net. If the wholesaler or retailer asks the purchaser to share their CNIC, then in most cases the purchaser finds another seller who will not ask for their CNIC, they say.
Trade bodies say it will only hurt legitimate businesses more while the undocumented wholesalers and retailers will benefit as purchasers will move to them to avoid the FBR’s notice.
The trade bodies say that many small businesses are not well versed in writing and recordkeeping and cannot afford them. Meanwhile, the FBR keeps them entangled in trivial things, which makes small businesses want to stay as far away from the FBR as possible.
Businesses registered with the FBR are the biggest losers. Muzaffar Keen works for a wholesale cloth company that has been registered with the FBR for many years. The company supplies to retailers all over Pakistan but has recently faced difficulties because of the new FBR condition.
“After the new condition was introduced and came into effect after January 31, 2020, wholesalers like us asked retailers for CNICs or NTN numbers for invoicing purposes, which they were unwilling to share. Many of them stopped doing business with us as they have other traders who are also not registered.
“On the other hand, the FBR has put a penalty on registered companies for not providing CNIC or NTN information at the time of filing monthly sales tax returns,” Keen explained.
He said this has been affecting their tax-paying business and it must be the same with nearly all businesses registered with the FBR.
“I think we, the tax paying businesses, are the worst off while unregistered businesses are thriving. It is highly counterproductive,” he added.
Zeeshan Merchant, the former vice-president of the Karachi Tax Bar Association, agreed with Keen and said there is a debate on whether the FBR is burdening taxpayers in order to do their job. “It is the work of the FBR to collect taxes and bring businesses under the tax net,” he said.
However, he said that undocumented businesspersons have a competitive edge since they don’t have to collect sales tax from their clients or customers on behalf of the government.
This means buyers can get cheaper rates if they buy from undocumented shops and businesses since they will not be charged sales tax. Meanwhile, such unregistered businesses can increase their profit margins by not passing on all the benefit to customers of evading sales tax.
There are about 381,000 trading units that should be paying sales tax but only 47,000 of them are registered. Worse still, of the registered trading businesses, only 17,000 pay sales tax to the government.
Merchant is critical of the FBR for taking an easy route by burdening already struggling taxpayer businesses to collect data but he added that those who are protesting against this CNIC condition are mostly tax evaders.
All Karachi Tajir Ittehad Chairman Atiq Mir said small and medium businesses need to be facilitated and this condition will affect their already struggling businesses. He added that people see taxpayers regularly harassed by FBR officials, so they try to avoid being entangled with the FBR.
Karachi Electronics Dealers Association President Muhammad Rizwan, who is also a dealer of imported mobile phones, said that businesspersons will also reject the Rs100,000 purchase condition.
It has yet to be seen how this initiative pans out and whether this new condition will further burden taxpayers and give tax evaders and illegal businesses a greater edge over their legitimate competitors. Or will the FBR be able to increase its tax net and provide an even ground to businesses to compete and also collect more tax.