Leading distributors of Karachi and their associations have categorically informed the Federal Board of Revenue (FBR) that imposition of one percent turnover tax on the distributors, which is a high volume low profit business, would result in extraordinary tax burden of 70-200 percent on their net income.
Documents obtained from the FBR revealed that the All Pakistan Consumer and Pharmaceutical Products Distributors Association of Karachi has made a presentation (September 3, 2010) to the FBR on the implications of imposition of one percent turnover tax. The distributors' community has informed the FBR that levy of additional tax on the basis of turnover would have serious implications on the industry as high volume low profit business would keep on increasing with the increase in turnover.
In a presentation to the FBR, distributors said that there is a totally wrong perception that distributors of multinational companies and other companies have been non-compliant with respect to tax laws. As a matter of fact, the distributors of multinational companies and large companies fully record purchases and sales which are routed through the banking channels.
More than 4,000 to 5,000 distributors exist in Pakistan. Most companies (principals) especially in FMCG sector operate with more than 300 distributors each. Distribution is largely non-exclusive and principals keep and exercise their options for appointing multiple distributors.
The statement that distributors have huge turnover of billions but they are not willing to pay one percent turnover tax is very misleading. The distributors have repeatedly argued that using turnover as a basis for tax in case of distributors is inherently flawed since distributors' turnover in real sense is not top-line sales but the difference between our purchasers and sales price both of which are governed by distributors' principals. Distributors operate on fixed margins (since their purchase price and selling price are both dictated by the principals) and this fixed margin typically ranges from 1.4 percent to 7 percent.
After meeting all expenses related to distribution i.e. warehousing, personnel, transport vehicles, IT, security/insurance, utilities and over heads and financial charges, distributors are left with a 'net profit before tax' anywhere between 0.3 percent to 1.0 percent in most of the cases and upto 1.5 percent in some cases. Therefore, this minimum tax of 1.0 percent of sales would, for most of distributors, mean giving money out of their (distributors) pockets or ending up in a net loss after tax deduction.
"The thing to understand is that this is a high volume low profit business where if tax is levied on the basis of turnover the injury would keep on increasing with the increase in turnover. Since this is income tax, it should be taxed on income rather than turnover. As companies, distributors are already paying income tax at the rate of 35 percent and an Association of Person (AOP) and individual the distributors are ready to pay income tax at the rate of 25 percent. Taxing the distributors on turnover would mean the equivalent of taxing at the rate of 70 percent to 200 percent of the net income," it said.
Distributors have also informed the FBR that the distributors are regular payers of not only income tax (including withholding tax in various forms) but huge amount of sales tax.
As far as distribution agreements are concerned, distributors do not understand why they are being termed as "secret documents". During income tax assessments these agreements along with price structure showing margins have been provided to the FBR on August 23 2010 through a letter of a leading Karachi-based chartered accountant company.
"The income tax department has all data of distributors' margins, their expenses and terms of business in the income tax assessment returns and files. From these it can be clearly seen that in general and the majority of cases with respect to distributors of large volume products, the net profit is about half percent of sales and in some cases one to one half percent of sales. Hence in large volume cases 0.1 percent of sales will be equal to normal income tax slabs." It said. Therefore, the distributors association has asked for 0.1 percent of sales as minimum tax, whereas if assessed tax comes to more than this, they will, like always, pay the higher amount.
Keeping in view these facts, it was also agreed in the National Assembly's Standing Committee on Finance that distribution was a hardship case and minimum tax in their case be reduced to 0.1 percent of the turnover, the Association's presentation added.
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