Karachi, May 3, 2024 – The Federal Board of Revenue (FBR) has been urged to intensify its efforts to curb the exploitation of the Point of Sale (POS) system by importers who are reportedly misusing the facility to enjoy unfairly reduced tax rates.
The concern was raised amidst new tax proposals submitted for the upcoming 2024-25 budget, pointing towards a need for stricter compliance measures to safeguard the integrity of Pakistan’s tax system.
The misuse of the POS, according to industry experts, involves importers who register fake retail outlets to benefit from a reduced sales tax rate of 15% available on finished textile products sold through FBR-integrated POS systems at retail outlets. Typically, these entities are found importing substantial amounts of raw materials, which are then processed into finished goods without proper tax remittance at the standard rate of 18% applicable to wholesale transactions.
In a detailed proposal, stakeholders have suggested several mandatory disclosures and practices to be adopted by businesses that import over 70% of their output and use POS facilities. These include the obligation for importers to declare the number of their retail shops, provide specifics such as the square footage, detailed addresses, and Google pin locations for all retail stores. Additionally, it is proposed that these businesses should report sales volume and invoices for each shop monthly, alongside their sales tax returns.
These proposed measures aim not only to prevent malpractices associated with the POS system but also to ensure a level playing field for genuine manufacturers and prevent substantial revenue losses to the government. The FBR’s challenge is further compounded by some importers procuring tolling bills under their names from other manufacturers after importing raw materials, and subsequently selling these as finished products via the POS system.
Such practices, although not new, have been under greater scrutiny since an FBR notification dated January 4, 2022, clarified that bulk supply through POS should be treated as wholesale, thereby attracting the standard sales tax rate of 18% instead of the reduced rate of 15%. Despite this, enforcement and compliance issues persist.
Industry analysts argue that without stringent enforcement of these guidelines, the misuse of POS facilities could significantly undermine the tax base, especially in sectors like textiles which are a major part of Pakistan’s economy. “The POS system was originally introduced to improve tax collection and compliance across retail sales in the country,” explained Muhammad Ilyas, a Karachi-based tax consultant. “However, its potential is being undercut by manipulative practices that not only harm fair competition among businesses but also result in considerable tax revenue losses.”
In response to these concerns, the FBR has acknowledged the need for improved surveillance and compliance mechanisms. An FBR official stated, “We are reviewing the proposals submitted and are committed to implementing measures that will ensure both the effectiveness and integrity of the POS system. Our aim is to foster an environment where businesses can compete fairly and contribute rightfully to the nation’s economy.”
The resolution of this issue is crucial for ensuring the effectiveness of Pakistan’s sales tax system and for restoring faith in regulatory measures aimed at promoting fair business practices. As the budget session approaches, all eyes will be on the FBR’s next moves to address these challenges effectively.