In November 2021, the Federal Board of Revenue released a list of 608 major retailers that it had categorized as “Tier-1”. These 608 retailers are expected to integrate with the council’s point-of-sale (POS) system. Otherwise, these retailers would be denied a 60% input tax credit.
At first glance, the penalty may seem severe. A closer look at the figures reveals that the measures have been taken by the FBR to combat the endemic culture of tax avoidance within the retail sector. According to a recent report by Planet Retail, the retail market in Pakistan has exceeded $152 billion, making the sector the country’s third largest contributor to GDP and its second largest employer.
According to the FBR, the retail market represents 18% of GDP. Meanwhile, its contribution to the public treasury is a measly 1%. It has long been understood that the only way to get these retailers into the tax net was to digitize transactions and keep tabs on purchases and sales at these retailers. The latest idea was that under FBR’s new POS system, the details of each transaction would go directly to the council and they would be able to calculate and charge the tax accordingly.
However, the retailers in question have not embraced these guidelines gently and have responded with a host of tactics designed to block, sabotage or frustrate the FBR’s efforts to bring the untamed retail market into the tax net. At the same time, retailers have also raised concerns about the FBR’s new system, saying the details they need expose a lot of sensitive business information and that the FBR hasn’t had the best relationship with breaches. of data.
Even though the FBR was able to onboard a significant number of retailers into the new POS system, most retailers either cited technical difficulties or simply continued to operate primarily cash in an attempt to pass under the transaction radar. The question is, will the FBR succeed in shaking up the market or will it end up giving in to their resistance?
The point of sale system
Most Tier 1 retailers had the ability to pay through POS terminals long before the FBR introduced the new system. The concept of Tier 1 retailer was introduced by the Finance Act 2017. Tier 1 retailers would include large chain stores, all mall stores, most restaurants, etc. A good way to look at things is through grocery stores. Tehzeeb in Islamabad, Imtiaz in Karachi and Jalal Sons in Lahore all come under the category of Tier 1 retailers.
The implementation of this multi-level system only really started at the end of 2021. It was at this time that the Ministry of Finance set itself the objective of wanting to collect Rs 50 billion in additional taxes from of these retailers by launching a campaign to get them to install POS machines that will monitor their sales and report every transaction in real time to the FBR.
How would this tax collection work? The FBR would launch a massive campaign to onboard all Tier 1 retailers and have a total of 500,000 POS machines onboarded within three years. The new system designed by the tax authorities help monitor every integrated sales tax transaction.
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