FBR versus Traders
Revival of CNIC condition and its effects on tax compliance
Tax revenue plays a significant role in economic growth and development of a nation, which is evident from the fact that countries with higher tax-to-GDP ratios are more developed as compared to countries where these ratios are low. Pakistan is included among developing countries because it collects tax revenue considerably less than expected. Even Pakistan’s tax-to-GDP ratio is lower as compared to that of most of the similar economies.
Tax-to-GDP ratios are low in Pakistan because taxable persons prefer to remain out of the tax net by keeping their turnovers or incomes below taxable limits so as to defraud the national exchequer. Moreover, taxable persons do not adhere to tax return filing obligations. Even those who file tax returns hardly declare true particulars of incomes, expenses, assets and liabilities, etc. Lack of tax compliance culture has forced the government to introduce withholding tax regime, which contributes approximately 90 percent to the total tax collection of the Federal Board of Revenue (FBR). Less than 10 percent tax collection is coming through voluntary tax compliance.
A recent tug of war between the FBR and traders regarding implementation of certain provisions of tax laws provides an ample proof of lack of tax culture in the country so much so that the former had to enter into an agreement with the latter to persuade them to end their country-wide strike.
As per the agreement dated October 30, 2019, the traders with an annual turnover of up to Rs 100 million will be obliged to pay turnover tax at a rate of 0.5% of turnover, instead of 1.5%, and they will also not become withholding agents. Moreover, the electricity bill threshold for sales tax registration by retailers will be increased from Rs 600,000 to Rs 1.2 million. Pursuant to Tax Laws (Second Amendment) Ordinance, 2019, the FBR has incorporated amendments into tax laws concerning implementation of the agreement. Accordingly, the rate of minimum tax for tax year 2020 will be 0.5% for traders with turnover up to Rs 100 million, provided that the tax liability for tax years 2019 and 2020, in the case of traders who filed a tax return for tax year 2018, is not less than the tax paid for tax year 2018. Additionally, individual traders with turnover up to Rs 100 million are not obliged to act as withholding agents in respect of payments for goods, services and contracts under Section 153 of the Income Tax Ordinance, 2001.
The precondition requiring the presentation of the computerized national identity card (CNIC) or national tax number (NTN) for making purchases of Rs 50,000 and above introduced through the Finance Act, 2019, was the most contentious and has been much agitated by the traders. The matter of conditioning CNIC or NTN, which was made mandatory from August 01, 2019, was deferred until January 31, 2020, pursuant to the agreement. Besides, the FBR clarified through a notification dated October 04, 2019, that the CNIC or NTN of the buyer with respect to taxable supplies to an unregistered person will be deemed to have been reported in good faith by the supplier provided that:
(a) the tax invoice complies with the requirements of section 23(b) of the Sales Tax Act, 1990;
(b) payment made by or on behalf of the unregistered purchaser of the amount of the tax invoice, inclusive of sales tax and applicable further tax, is deposited into the supplier’s declared business bank account;
(c) the CNIC provided by the purchaser is found authenticated by the National Data base and Registration Authority (NADRA); and
(d) the CNIC or NTN provided is not of the employee of the seller or of his associates as defined under the Income Tax Ordinance, 2001.
Additionally, it has been made mandatory through notification that the issuance of a show cause notice to a registered person being a seller on account of any matter arising out of the CNIC provided by a purchaser will not be made without the prior approval of the FBR’s Member (IR-Operations), after providing an opportunity to be heard.
Now the condition of CNIC has become applicable from February 01, 2020, onwards on sales by registered persons to unregistered persons. Therefore, every registered person is now required to collect information of buyer making purchases above Rs50,000. However, the condition of CNIC will not apply on ordinary consumer, which means a person who is buying the goods for his own consumption, and not for the purpose of re-sale or processing. This is an important measure for documenting the economy and to address the issue of fake and flying invoices.
Other provisions of the agreement between the FBR and traders reveal that the government will review the rate of turnover tax for wholesalers with low profit ratios in consultation with a committee of traders; the tax issues of jewellers will be resolved on a priority basis and in consultation with their associations; the withholding tax on the renewal of brokers’ licences will be reviewed; the government will establish an exclusive section at the FBR in Islamabad to resolve the issues of traders on an immediate basis; the government will introduce simple forms in Urdu language for the registration of new traders and income tax return filing; the traders’ bodies will offer full cooperation to the FBR in registration of new businesses; the government will consult with the traders’ committee on the decision to grant sales tax exemption to traders with shops measuring 1,000 square feet; and the government will consult with the traders on the decision to include retailers that are also engaged in wholesale business in the sales tax register.
The FBR has constituted committees to resolve disputes related to sales tax registration of shops covering an area of 1,000 square feet. Summarily, the FBR is about to implement other measures promised in the agreement. Now the traders must come forward to ensure registration and fulfil all their obligations under the tax laws, which is essential for improving tax compliance and strengthening the country’s economy.
The writer serves as Additional Director of Intelligence and Investigation (IR), Federal Board of Revenue.