The Federal Board of Revenue (FBR) in Pakistan has received a proposal from the Institute of Chartered Accountants of Pakistan (ICAP) suggesting the implementation of a fixed tax regime for small retailers.
The proposal is part of ICAP’s recommendations for the budget of 2023-2024. The retail sector in Pakistan has experienced significant growth, contributing approximately 20% to the national GDP. Recognizing the sector’s importance, ICAP emphasizes the need to introduce a simplified tax system for small retailers.
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Importance of the Retail Sector:
The retail sector in Pakistan is the third largest in the country and serves as the second highest employer, providing jobs to 15% of the labor force. The sector consists of millions of retailers, with a majority involved in fast-moving consumer goods (FMCG) trade and other general trade channels such as kiryanas, general stores, medical stores, supermarkets, and hypermarkets. With a large population and increasing consumerism, the retail market in Pakistan has witnessed significant growth, with sales nearly doubling in the past decade.
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Categorization of Small Retailers:
ICAP proposes categorizing small retailers based on their location and area. The FBR has already initiated efforts to engage tier 1 retailers, and it is further suggested that a fixed income tax regime be introduced for small retailers. To implement this, tax collection can be facilitated through the following methods:
1. Role of Provincial and Development Authorities: The relevant provincial and development authorities can contribute to expanding the tax base by either collecting income taxes on behalf of the FBR or verifying that small retailers, excluding tier 1 retailers, as defined in the Sales Tax Act, make direct tax payments when obtaining or renewing their trade licenses.
2. Simplified Tax Return Form: A simplified tax return form should be made available for small retailers. Individual retailers would be required to file their wealth statement along with the simplified tax returns. During their annual visits for collecting the annual trade license fee, the authorities should ensure compliance with this requirement.
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Implementation Phases:
ICAP suggests that the FBR initiates the implementation of this regime in phases. In the first phase, the FBR can collaborate with the Capital Development Authority (CDA) to bring retailers in the capital city within the tax ambit. Subsequently, the regime can be expanded to other major metropolitan cities in the second phase. Additionally, during this exercise, GPS mapping of these retail shops can be conducted to further enhance the effectiveness of the tax system.
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Conclusion:
Introducing a fixed tax regime for small retailers in Pakistan has the potential to simplify the tax process and bring more businesses within the tax net. By categorizing retailers based on location and area, and leveraging the involvement of provincial and development authorities, the tax base can be expanded.
The FBR should work in collaboration with the CDA and gradually implement the regime in different phases. This proposal aims to promote tax compliance among small retailers and contribute to the overall growth of the retail sector in Pakistan.
