In what could be considered a major budget proposal, the government is considering slapping a 2.5% income tax on the entire trading chain, from manufacturers to retailers, to capture the real revenue potential of the non-filers doing trading business.

If approved by Prime Minister Shehbaz Sharif and subsequently by the National Assembly without succumbing to the pressure from traders, this proposal has the potential to add hundreds of billions of rupees to tax receipts.

According to two other proposals, the tax authorities have recommended an increase in withholding tax by at least 1% on all imports except by commercial importers. It has recommended a further increase in the income tax rate on contractors, professional service providers and sportspersons.

During the current fiscal year, the tax on professionals and contractors is the highest revenue generating source while imports constitute the third highest source of withholding tax. The fourth highest taxpayer is the salaried class.

A 2.5% withholding tax is proposed to be imposed on supplies made by all manufacturers to the wholesalers, distributors and retailers, who are non-filers, in the 2024-25 budget, according to sources. These people are currently taxed under Section 236-G, which deals with distributors, at the rate of just 0.7% and the non-filer retailers are currently taxed at the rate of 1% under Section 236-H.

The budget proposal calls for merging both these sections and slapping a single tax rate of 2.5% on all sales from manufacturers to retailers.

The wholesale and retail sector contributes nearly one-fifth to the economy but these two sectors paid a mere Rs24 billion in taxes, or 0.001% of the total income tax, during the July-May period.

The proposal of taxing supplies of non-filers had originally been made by Ashfaq Tola-led Reform and Revenue Mobilisation Commission (RRMC) in May last year but the previous government ignored it.

According to the RRMC’s recommendation, if 1% tax is imposed on all wholesalers, distributors and retailers on the gross value of their supplies, whether based on imports or local manufacturing, at least Rs400 billion can be collected annually.

However, the FBR has not so far included imports in its taxation proposal. If imports are also included, the 2.5% income tax alone can fetch around Rs1 trillion.

The existing Section 236-G is applicable to only 21 sectors which include pharmaceuticals, poultry and animal feed, edible oil and ghee, auto parts, tyres, varnishes, chemicals, cosmetics, IT equipment, electronics, sugar, cement, iron and steel products, fertiliser, motorcycles, pesticides, cigarettes, glass, textile, beverages and paints or foam.

Due to its extremely narrow scope, the total collection under Section 236-G was mere Rs9 billion during the first 11 months of the outgoing fiscal year. Retailers also paid a paltry sum of Rs15.5 billion under Section 236-H.

According to the FBR’s data, about Rs3.1 trillion worth of sales were made to 46,000 registered wholesalers during the first nine months of the current fiscal year. Compared to this, the manufacturers made Rs800 billion sales to 97,000 unregistered distributors and wholesalers.

Sources said that it would be one of the most politically sensitive budget proposals due to the influence and clout enjoyed by the trading class. They said that the FBR would like to have an explicit and clear decision to tax the retailers by nabbing their sales through 2.5% withholding tax.

The FBR does not want to repeat the two-year-old episode where it taxed the retailers through electricity bills and subsequently they had to face inquiry after retailers-favouring tweet by the then senior PML-N leader and now Punjab Chief Minister Maryam Nawaz Sharif. The government plans to set next fiscal year’s tax collection target at Rs13 trillion, requiring nearly 40% increase over this year. This would require Rs2 trillion in new taxes in the budget.

More tax on imports

Sources said that there was a proposal to increase the withholding tax on all categories of imports barring commercial imports. The existing rates are in the range of 1% to 4% for filers that would go up to 2% to 5%. Non-filer rates are double than the filers’ rates.

At the existing rates, the government collected Rs349 billion from imports during the first 11 months of the current fiscal year, up Rs82 billion, or 31%. This is the third highest revenue generation source on the income tax side.

Contractors, cricketers to pay more

Sources said that the FBR was also proposing to further increase the income tax under Section 153 that deals with the withholding tax on sales of rice, edible oil, cotton seed, electronics and print media advertising services, professionals and sports persons. The existing rates for filers are in the range of 1.5% to 11%, which may go up by another 1% to 2%, said the sources.

Section 153 is the top revenue generator for the government. During the July-May period, the government collected Rs432 billion from the contractors, higher by Rs100 billion, or 30%, over the past year.

Published in The Express Tribune, June 8^th, 2024.

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