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Fake invoicing scuttles plan to propel drugstores into tax net

medicine prices rise, tax collections misappropriated

SAMAA | - Posted: Aug 25, 2021 | Last Updated: 5 months ago
Posted: Aug 25, 2021 | Last Updated: 5 months ago

A Federal Board of Revenue (FBR) plan to propel drugstores (commonly known as medical stores) into the tax net has nosedived after fake invoicing and undocumented sales subverted the government design, SAMAA Digital has learnt.

The FBR policy has also led to an increase in the prices of medicine.

Additionally, tax collected from retailers is not being deposited into the government kitty, according to the insiders.

Tax collection from drugstores

At the beginning of the current fiscal year, the federal government came up with a novel idea to propel drugstores into the tax net.  It required manufacturers, importers, and distributors of medicines to collect advance income tax from retailers, that is, drugstore owners.

The FBR believed the policy would expand the tax net to not only tens of thousands of drugstores but also thousands of dealers, sub-dealers, and wholesalers. The policy was designed as a documentation measure and nominal withholding tax collection at the rates of 0.1% and 0.5% on sales to distributors and retailers respectively was required to be collected by the sellers under the provisions of sections 236G and 236H of the Income Tax Ordinance, 2001, according to an FBR statement.

Fake Invoicing and tax evasion

Medicine supply chain insiders say most of the drugstore owners were hesitant to register with the FBR. They did not want to share the purchase details or other business information with the government. The situation led to some distributors/sellers using fake invoices and other tricks to elude documentation. To facilitate a hesitant retailer they would either create the invoice in the name of other reputable retailers who were already part of the tax net or they would backdate the invoice, selecting any date before June 2021 when the new policy had not been reinforced. Some of the retailers were sold medicines without an invoice, insiders told SAMAA Digital.

The malpractice did not end there. Although sellers ‘facilitated’ the hesitant retailers through fake or zero invoicing, they still collected 1pc advance income tax, which they never deposited with the FBR. “They have put this money in their own pocket,” a source says.

Ostensibly, FBR’s vague policies and lack of a well-elaborated collection mechanism has enabled sellers and distributors to siphon off the tax money.

The confusion over the tax collection mechanism has also caused trouble for genuine players. Wholesale Chemist Council of Pakistan President Atif Blue said the government had required wholesalers to submit the entire sale/purchase record once every fortnight, and it is a mammoth task, which would force wholesalers to hire additional staff that needs to be paid salary. The situation would increase the cost of doing business, he said speaking to SAMAA Digital.

Blue confirmed that some of the distributors were selling medicine without collecting the required data, such as CNIC information, from retailers.  He said others were following the government policy and this division had disrupted the market in a negative way, opening new venues for corrupt practices.

“It’s the FBR which is responsible for tax collection. Requiring wholesalers to perform the role of tax agent would only complicate things,” he said.

Medicine Prices and Shortage

The FBR policy to collect 1pc advance income tax at the sale of medicine to retailers has caused an uptick in medicine prices. When the price hike was reported, the FBR responded by issuing a press statement to clarify that the advance income tax was adjustable.

“This is not a tax on the medicines but on the income of traders involved in the supply chain.  This tax is adjustable against the final tax liability. This rate of tax is much below than the tax liability of the traders involved in whole sale and retail of medicines. The supply chain of medicines below the manufacturers and importers carries profit margin of 25% to 40%. The major part of the supply chain is out of tax net, therefore, this documentation measure has been taken,” the FBR said.

Speaking to SAMAA Digital Senior Vice Chairman Pakistan Chemist and Druggist Association Sindh Zone Abdulsamad Budhani said many retailers refused to provide their CNICs when they made the purchase and the sellers had to cancel the order. He said the association had pleaded with the FBR officials to postpone the tax collection until a workable tax collection mechanism was put in place.

The present mechanism to collect advance income was doing more harm than good, he said.

Budhani proposed a more effective method to widen the tax net. He said if the government links drugstore licenses with NTN certificates, all of the retailers will become part of the tax net.

The new tax on drugstores and pharmacies has irked the owners. They closed drugstores and pharmacies for a day on July 15 as part of a one-day strike to protest the advance income tax.

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