Retailers have proposed the government to exclude the shops measuring up to 4,000 square feet from the definition of tier-1 retailers till the time when majority of whole sellers and distributors got registration under Sales Tax Act, 1990. By virtue of such exclusion, they will remain liable to pay sales tax on electricity bills. The recovery of sales tax on electricity bills will be sufficient enough to bridge the sales tax recovery gap.
Also, they have demanded exemption of retailers from withholding tax on payment against supplies from distributors and whole sellers.
The retailing circles are of the view that the government should reduce minimum income tax to 0.5 percent of turnover. It is recalled that minimum tax on distributors fall to 0.25 percent and retailer's gross margins are less than double from those of distributors. Moreover, retailers cost of doing business is high as compared to distributors.
The retailing circles have pointed out that the Finance Bill 2019 has inserted a shop measuring 1,000 square feet or more in the category of tier-1 retailers. The tier-1 retailers are required to pay 17 percent sales tax on goods sold by them to consumers.
According to them, barring big shopping malls like Al Fateh and Hyper Star which are procuring supplies directly from manufacturers, all other stores can only purchase goods from whole sellers and distributors. At present, majority of such suppliers are not registered under Sales Tax Act, 1990. Hence, retailers will unable to obtain sales tax invoices from their suppliers. In the absence of such invoices, these retailers will unable to adjust input tax on supplies from output tax recovered on sales to consumers, precluding the possibility of payment of 17 percent sales tax by these retailers.
Similarly, they added, section 8B of Sales Tax Act, 1990 would be applicable on these retailers whereby they will be allowed to adjust input tax to the tune of 90 percent of output tax in a tax period. Since, the unabsorbed input will be adjusted after one year; the liquidity of retailers will also be blocked, driving them towards financial handicaps.
Majority of supplies to retailers are subject to levy of 17 percent sales tax on retail price while the manufacturers or distributors add 'Further Tax' @3% on VAT Mode Supplies to immediate unregistered persons. Thus, no potential sales tax recovery gap exists from the supply chains.
They said most of the retailers become Withholding agent of income tax by virtue of their annual turnover exceeding Rupees 50 million. Thus, they are under obligation to deduct withholding tax @2.5 percent and 4.5 percent from payments made to distributors and whole sellers respectively against their supplies. Since, sales margin of majority of distributors and whole sellers are thin ranging from 1 percent to 5 percent, hence, it will not be possible for these distributors and whole sellers to supply goods if the retailers deduct withholding tax from relevant payments. Lack of supplies means no business activity causing business closures. Such supplies without withholding tax means payment of relevant withholding tax by retailers from own sources which will also ultimately leads to business closure.
Furthermore, retailer's margin on sales ranges from 1 percent to 5 percent on food supplies and from 5 percent to 15 percent on other items. Average margin on their sales does not exceed 7 percent to 8 percent. Out of these margins, these retailers have to meet huge cost of electricity, rent, salaries and packaging. Left over profit are not substantial enough to warrant the levy minimum tax @1.5 percent of turnover. This percentage needs to be revisited for retailers.
According to these circles, the goal of broadening the tax base cannot be achieved without rationalizing the stringent tax measures which are proving to be major bottlenecks.
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