The Federal Board of Revenue (FBR) will face tough resistance for bringing the retail sector into the value-added tax (VAT) regime without an effective monitoring mechanism to determine the turnover of Rs 7.5 million for registration with the tax department.
Tax experts told Business Recorder here on Saturday that the FBR has proposed to enhance the registration threshold from Rs 5 million to Rs 7.5 million to bring retail outlets and business entities into the tax net. However, the FBR has yet not devised any rules and procedure to determine the actual threshold under the VAT. Secondly, most of the big retail outlets have large quantity of smuggled items, without legal import documents, invoices, etc. At the time of VAT enforcement, such retailers would fail to produce the purchase invoices of smuggled goods. Therefore, determination of the actual annual profits of retailers could not be worked out on the basis manually maintained data at the retail outlets.
At present, the entire supply chain is unregistered, except some manufacturers or distributors within the supply chain who pay taxes. The level of non-compliance by the retailers is evident from the fact that only 857 retailers filed sales tax quarterly returns during 2009-10. Out of this, 307 units actually deposited sales tax of Rs 90.86 million, along with the sales tax returns. Total number of retailers who filed quarterly returns during 2009-10, excluding motor cars, motorcycles, auto parts and CNG, stood at 776. Total number of nil filers of sales tax returns during 2009-10 stood at 469. Nearly 5037 retailers are not filing quarterly sales tax returns, showing high level of non-compliance by the retail sector. About 1150 retailers filed monthly sales tax returns in 2009-10, whereas 492 big retailers paid Rs 472.85 million. Once the FBR would make it mandatory for the business units to purchase from registered companies within the supply chain, the documentation of buyers would be a difficult task under existing circumstances.
Thirdly, the board wanted to install electronic cash registers at retail outlets and business units under the VAT regime to simplify the accounting procedure for retailers/wholesalers to keep an update of stock position in electronic format. In this regard, the FBR is planning to offer free of cost electronic cash registers to the retailers. The question arises that how many retailers would allow the tax department to install such registers?
According to sources, the FBR is also facing a serious issue of capacity building of the tax officials, who would have to implement VAT in the field formations. So far, no exclusive training of VAT has been conducted.
Following VAT implementation, the issues of audit, scrutiny of supply chain and physical verification of business units would need proper training of tax officials.
When asked about the inflationary impact of the VAT, analysts were of the view that VAT would be applicable on all basic food items and essential commodities including agri-trading. Interestingly, any processed food item would be subjected to VAT. This means that even bread would be charged to VAT. Except a few food items, all others would be charged to VAT. Under the exemption schedule of the Federal VAT Act, only unprocessed peas, wheat and wheat flour are exempted from VAT. For the purpose of exemption, the term "unprocessed" shall include low value-added activity such as sorting, drying, or bulk packaging, provided the value added does not exceed 5 percent of the total value of the import or the supply. If these items have been processed for manufacturing of some other products, these products would be directly charged to VAT. The processed peas, wheat and wheat flour would be subjected to VAT. The FBR should admit that there would definitely have inflationary impact of the VAT, the analysts said.
Referring to FBR's claim to gain Rs 125 billion in the first year of VAT implementation, experts added that transition phase from sales tax to VAT might result in revenue loss. The FBR must give technical justification for claiming huge gains in the first year of VAT implementation, they said.