ISLAMABAD              -         The top Tier-1 retailers of the country have held the FBR responsible for not honouring a signed agreement where the tax machinery committed to slash down minimum tax from 1.5 to 0.5 percent and withholding tax on all supplies from 4.5 percent to 1 percent in the budget 2020-21. This mutual agreement was signed with FBR in January 2020 to make organized retail businesses/chainstore viable by correcting tax distortions in the Income Tax laws in the Federal Budget/Finance Bill 2020. However, the Tier-1 retailers were shocked to learn that FBR did not put forward these changes in the law despite written commitment.

This is a sector which contributes Rs. 100-150 billion in sales and income tax and contributes to 16 % of national employment.

The Chainstore Association of Pakistan (CAP) has written a letter to the Adviser to PM on Commerce & Investment Abdul Razak Dawood and reminded him that it is imperative to bring to his attention that, after lengthy discussions, an agreement was executed between the Federal Board of Revenue (FBR) and the Chainstore Association of Pakistan dated January 23 with the purpose to facilitate documentation of organised retailers, classified as ‘Tier-1 Retailers’ by the FBR. It stated that the key points stated in the agreement were to be incorporated in the Finance Act, 2020, in order to encourage voluntary compliance of the undocumented segment of the retail sector in line with the initiative to successfully document the sales through integration of POS (Point of Sale) systems of all Tier-1 Retailers.

These key points are summarised including “FBR shall consider the rationalisation of rates of turnover tax and withholding taxes at the time of finalising proposals for the year 2020-21 in consultation with the Association in order to remove unnecessary burden of taxes which do not reflect tax on income.”

The rate of turnover tax/minimum tax is to be fixed at 0.5 percent (instead of 1.5 percent) for all Tier-1 Retailers. It was also decided that withholding tax rate on all supplies will be a maximum of 1 percent (instead of 4.5 percent) and in cases where the minimum tax is lower, the withholding tax will match that rate, e.g. 0.25 percent for distributors of FMCG, etc.

“The FBR agrees that restriction on certain transactions as imposed by section 21(l) of the Income Tax Ordinance, 2001(herein after referred to as ‘the Ordinance’) on purchases and simultaneous application of 21(c) and section 161 of the Ordinance are there to check the adverse consequences of non-documentation. The persons integrated in POS may not be subjected to 21(l) on purchases of goods and action under section 21(c) may not be taken where tax is fully recovered under section 161/205 of the ordinance and necessary legal changes shall be made in this regards in the Finance Act, 2020.”

The letter said the legitimate sales tax and income tax constraints of Tier-1 Retailers of all segments, including super-stores and international brands, must be urgently addressed in order for them to remain in business and sustain their semi-skilled and skilled workforce.

“Due to the COVID-19 crisis, the ‘great lockdown’ has severely impacted both citizens and businesses alike resulting in a drop in disposable incomes and financial shocks respectively. Tier-1 Retailers, especially those who have already integrated their POS-systems or are in the process of doing so, are in dire situation and require urgent support,” it said.

The letter said it is appreciable that the federal government has granted a 2 percent reduction in the general sales tax (GST) rate for selected Tier-1 Retailers solely involved in the trade of locally manufactured textile, leather and associated products. However, it said, this nominal incentive for a specific segment of Tier-1 Retailers will not serve the purpose of encouraging voluntarily compliance of the entire retail sector.

At this critical juncture, the letter said, a bold decision to bring the GST rate for all integrated Tier-1 Retailers to a single-digit rate will surely boost consumer demand, revive the local economy and allow a level playing-field where the effective sales tax rate for the undocumented sector is currently almost zero. “A low GST rate, along with removal of income tax distortions, will play a key role in widening the tax base and ultimately enhance tax revenue from the retail sector,” it said. “We, therefore, are compelled to request the urgent assistance and intervention from your good self. For this purpose, we urgently request that a joint meeting be scheduled within the next few days so that the implementation of our agreement with the FBR is ensured,” said the letter.

“The organised retail sector/chainstores (Tier 1 Retailers) was overtaxed last year in Federal Budget 2019 which caused an economic slowdown. This year’s COVID-19 crisis has hit everyone but retail sector is one of the hardest hit as per Government studies (PIDE). After waiting 6 months for commitments to be fulfilled to keep businesses alive and keep people in this jobs despite the multiple crises, the organised retail is being forced to close or go out of the tax net to serve customers. Smuggled goods will continue to be sold in markets but businesses that operate legally and pay tax will not survive,” says Rana Tariq, Chairman Chainstore Association of Pakistan.

“Sales tax reduction of 2% is only for small segment of customers and is being presented as a big relief. It only applies sale of locally manufactured textile and leather products and does not apply to over 80% of products that a person needs. Packaged food, juices/soft drinks, soap, shampoo, hygiene products, washing powder, FMCG, etc. will not become cheaper through this reduction.” Tariq further clarifies.