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Tax on Retailers: Retail Sector’s Defiance Threatens Economic Stability

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The recent attempt by the authorities to bring the unregistered retail sector into the tax net has been met with persistent resistance, underscoring the blatant disregard for fiscal compliance within a significant portion of the economy. The government’s decision to impose a 2.5 percent advance income tax (AIT) on non-filer retailers and a 0.5 percent AIT on filers, with manufacturers tasked with collecting this tax, has triggered a virtual rebellion among unregistered entities. This urgent situation demands immediate attention and action.

Since the implementation of this measure on July 1, approximately 60 percent of the goods supplied to unregistered entities have been returned by them to manufacturers. Major cities like Karachi and Lahore have witnessed return rates of around 30-40 percent. The rationale behind this move is to compel retailers to file their income tax returns to avoid the higher AIT rate and to claim credit on it. Additionally, their entry into the tax net would make them liable to pay their due share of sales tax, thereby boosting the government’s tax revenue. These measures, if successful, could significantly improve the nation’s fiscal health.

The retail sector’s historical non-compliance has resulted in a situation where despite contributing 18 percent of the GDP, its contribution to tax revenue is only four percent. With the economy in crisis and mounting pressure to expand the tax base, the current state of affairs is unsustainable.

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While this specific measure may increase compliance costs for manufacturers, the government faces a dire situation and may need to take drastic measures. Previous efforts, such as the Tajir Dost Scheme, failed to make the desired impact due to strong opposition from retailers and a lack of political will to address the issue.

Despite facing resistance, the government should stand firm in implementing the current measure and support manufacturers in dealing with the repercussions. If manufacturers continue to face high return rates, supply chains could be disrupted, leading to reduced procurement and potential layoffs.

It is crucial for the government to convey to the retail sector that its resistance to tax compliance poses a severe threat to the nation’s economic stability. While calls for broader structural reforms to bring retailers into the tax net are valid, it is evident that the sector will resist such changes as strongly, if not more so, than the current measures.

While comprehensive tax reforms are necessary, the government must not yield to resistance, as doing so could undermine its ability to shore up fiscal stability. Staying committed to these measures sends a strong message that the government will not be coerced into abandoning essential reforms, ultimately safeguarding the nation’s economic future. This steadfast commitment should reassure the public and stakeholders of the government’s determination to address this issue.

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