Pakistan’s efforts to reform its sales tax regime are encountering significant hurdles, with the International Monetary Fund (IMF) reportedly linking the abolition of the additional 4% sales tax (levied on supplies to unregistered persons) to a substantial increase in the sales tax base. This condition highlights a pervasive issue where businesses seemingly prefer paying the punitive extra tax rather than registering with the FBR, effectively remaining outside the formal tax net.
During a meeting of the Senate Standing Committee on Finance, FBR Member Inland Revenue Operations Dr. Hamid Ateeq Sarwar stated that the IMF has rejected Pakistan’s proposal to immediately abolish the 4% sales tax. Instead, the Fund has demanded that Pakistan first register 50,000 more persons in the sales tax regime.
Senator Saleem Mandviwalla, who chaired the meeting, expressed support for efforts to broaden the tax base. Dr. Sarwar revealed the stark reality: out of approximately 200,000 sales tax registered persons, only a mere 60,000 actually pay any tax. He noted that the 4% additional tax, initially introduced to compel businesses into the tax net, has been absorbed by businesses and passed on to consumers, effectively failing its primary objective.
Heated Debate Over FBR’s Punitive Powers
The meeting saw heated discussions between FBR officials and business leaders over new punitive powers introduced in the budget. This comes after widespread protests and strikes observed by traders in major cities like Lahore and Karachi. The military establishment, through the Special Investment Facilitation Council (SIFC), has now intervened to address issues related to the FBR’s controversial arrest powers and the disallowance of expenses for cash transactions exceeding Rs200,000. Following this intervention, the FBR appears more willing to address the genuine concerns of the business community.
Faisalabad Chamber of Commerce and Industry President Rehan Bharara questioned the FBR’s past use of punitive powers, including the disconnection of electricity and gas supply. Dr. Sarwar admitted that only 5% of 380,000 industrial connections and 5 million commercial connections were in the name of current allottees, making disconnections largely ineffective.
Ambiguous Retail Tax Claims and Legal Loopholes
The FBR made a surprising claim before Prime Minister Shehbaz Sharif on Wednesday, stating it had secured an additional Rs455 billion from the retail sector in the last fiscal year. This claim, however, requires independent verification, as concerns exist that some corporate sector firms might have been loosely categorized under “retail.” FBR officials claimed that total income tax payments from the retail sector in FY 2024-25 were Rs617 billion, with the additional income tax being Rs455 billion. They mentioned that Rs316 billion of this came from quarterly advances by wholesalers, retailers, and traders. Sources within the FBR anonymously expressed skepticism regarding the Rs316 billion in quarterly advances from the highly informal retail sector, attributing the inflated figure to a “loose definition” that included corporate firms.
Representatives of the Karachi Chamber of Commerce and Industry (KCCI) reiterated their concerns over FBR’s arrest powers and the Rs200,000 cash transaction penalty. PML-N Senator Anusha Rahman highlighted loopholes in the newly approved tax laws that could be exploited by taxmen against businesses. She specifically criticized the law for empowering arrests based on “suspicion” and “reasons to believe,” recommending that no person should be arrested without concrete evidence of sales tax fraud.
Minister of State for Finance Bilal Azhar Kayani assured that the prime minister has instructed against taxpayer harassment and pledged government action against misuse of arrest powers.
Dr. Sarwar indicated that while the law might not be amended before the next budget, concerns could be addressed through subordinate legislation, such as explanatory circulars. However, PTI Senator Mohsin Aziz argued that subordinate legislation cannot supersede the law itself. Senator Saleem Mandviwalla added that immediate amendments would reflect poorly on the parliamentary committees and the government that approved the laws.
Dr. Sarwar concluded by stating that despite the backlash, the FBR registered FIRs against individuals involved in Rs2.2 trillion worth of sales tax fraud attempts over the past two years, offering to arrange meetings with those currently in jail to validate the necessity of strong enforcement. The ongoing friction highlights a critical juncture in Pakistan’s tax reform efforts, balancing revenue generation with fostering a business-friendly environment.
