Accurate assessment of income potential: FBR proposes third-party survey of markets

The Federal Board of Revenue's (FBR) Task Force to register retailers has proposed third party survey of markets on national level for accurate assessment of income potential of each area of a particular region. Sources said on Monday that the Task Force of the FBR proposed measures for successful implementation of the flat tax system (fixed income tax rates) in the country.
The surveys should be conducted by a third party or FBR who can assess the income potential of each area of a particular region and valuation tables based on such income shall be made. Tax liability in flat tax system should increase every year by the rate of inflation. Under the alternative approach-flat tax rate (income tax only), Task Force proposed that an alternative approach to tax collection could be a flat tax on un-registered retailers in Income Tax based on covered area of the shop and geography of a particular region. In such a system, shops and retailers may be divided into categories on the basis of covered area, geography and then taxed at a fixed rate.
The covered area and geography can be used to achieve progressive taxation as well as bringing retailers into tax net. It first makes a category based on a particular geography, then it sub divides a geography into size of the shop. At equivalent covered area, it taxes a shop at higher rate in a more affluent area. And in a particular area, it taxes a bigger shop at a higher rate.
The alternative approach incorporates benefits of guaranteed revenues and little expected hissing/resistance from the taxpayers. The incidence of taxation is evenly distributed according to the categories of taxpayers. It is only useful for income tax; sales tax liability cannot be calculated in this way. It is difficult to work out sales tax liability because a retailer deals in every kind of supplies, ie supplies mentioned in third schedule, exempt supplies and taxable supplies. If the sales tax liability can be worked out and an agreement can be reached over the flat rate system among the stakeholders, then it can prove to be a success and it can be emulated in other undocumented sectors. This system shall guarantee substantial tax revenue and ensure an arm's length transaction between a taxpayer and a tax collector and it will eliminate the scope of 'harassment'- a charge often levelled against tax collectors.
Task Force said that fixed tax regime is regressive in nature as it has an element of perceived injustice because it only takes into consideration the geography and covered area of a shop. Turnover is not taken into account due to the practical difficulty in segregating the shops on the basis of turnover. It does not take into account nature of business as well. If efforts are made to determine the turnover and tax on the basis of nature of business, it may eliminate an arm's length transaction which is an essential element for the success of this system.
Flat Rate/Fixed Tax scheme was introduced in 1991 through insertion of Section 590 in the Repealed Income Tax Ordinance 1979. The scheme envisaged a fixed tax of Rs 600 and Rs 900 for rural and urban areas respectively, payable in two instalments in the Post Offices. However, the response from the traders was far less than expected as in 1991-92, only 10,259 taxpayers opted for the scheme, out of which only 1,955 paid the two instalments. Total tax collection was Rs 9.279 million.