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Pakistan Unveils Retail Tax Reform

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Pakistan has formally communicated to the International Monetary Fund (IMF) its intention to introduce an indicative income-based tax targeting retailers, with the aim of augmenting their annual contribution to the tune of Rs100 billion to Rs200 billion. Government sources reveal that this proposal is slated for implementation in January of the coming year.

Although no specific collection figure has been shared with the IMF, preliminary assessments indicate that an additional Rs9 billion to Rs20 billion per month could potentially be collected from retailers through the proposed fixed tax on shops. The Federal Board of Revenue (FBR) envisions the tax being collected by district tax officers, diverging from the current method involving electricity bills, which are already perceived as prohibitively high.

Crucially, this tax initiative does not stem from any specific IMF demand but is rather aimed at rectifying the notably low tax contribution from one of the historically under-taxed sectors, according to government sources. The government’s strategy involves utilizing the indicative income of retailers, based on factors such as shop location and rental payments, to assess the tax potential. Despite the wholesale and retail sectors constituting approximately 19% of the economy, their contribution to total taxes hovers at less than 1%.

The proposal circumvents the need for new legislation, as the authorities intend to leverage legal powers available under Section 99B of the Income Tax Ordinance. This section outlines special procedures for small traders and shopkeepers, allowing the finance minister to impose tax through a Gazette notification.

However, the government is yet to decide whether the tax will be implemented nationwide or selectively in major cities where the FBR possesses insights into retailers’ income. Notably, the FBR is currently employing a similar strategy for collecting withholding taxes from real estate based on locality-wise valuations of properties.

This initiative follows a previous attempt by the Pakistan Democratic Movement (PDM) government, which imposed a tax on retailers in the June 2022 budget, only to withdraw it within two months due to pressure from traders. The FBR’s window to impose the tax before the February 8 general elections highlights the political sensitivity surrounding taxation measures targeting retailers.

At present, retailers are subject to a 5% tax on monthly electricity bills up to Rs20,000 and 7.5% on bills exceeding Rs20,000. With more than 4 million registered retailers, only a fraction currently pays any tax. The proposed fixed monthly tax could potentially be adjusted in annual income tax returns if retailers opt for the normal income tax regime.

While the IMF has not yet provided a final assessment of the retailer tax scheme, the government remains optimistic about achieving its annual tax target of Rs9.415 trillion, emphasizing that any additional taxation measures would likely result from expenditure overruns rather than IMF demands.

The government’s economic roadmap also includes updates on various fronts, such as the progress on the exchange of information between banks and the FBR regarding public officeholders and civil servants. Additionally, the Special Investment Facilitation Council (SIFC) anticipates briefings from the FBR on the track and trace system’s implementation and expansion into the sugar and fertilizer sectors. Minister of Privatisation Fawad Hasan Fawad has also briefed the IMF on progress in the privatization program, with a focus on initiatives like the potential sale of two LNG-fired power plants.

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