ISLAMABAD: The government is set to amend tax law through a presidential ordinance to make it mandatory for all importers and manufacturers to sell their products to known customers to bring more traders into the formal tax regime.

The proposed amendments relate to the ‘Know Your Customer’ (KYC) digital invoice system, designed to encourage traders to register as regular taxpayers or benefit from the Federal Board of Revenue’s Tajir Dost Scheme (TDS).

“We have drafted the ordinance and sent it to the Prime Minister’s Office,” a senior tax official told Dawn on Thursday. After cabinet approval, the ordinance will be forwarded to the Presidency for promulgation.

The KYC conditions will allow the tax department to trace sales records and assess the tax compliance of purchasers. “This will help us identify buyers who are not on the tax roll and are not paying taxes,” the official said.

Tax ordinance draft sent to PM Office for approval

The KYC scheme aims to focus on larger retailers, rather than individual shopkeepers, encouraging them to register under the TDS. The tax authorities have struggled to take action against non-compliant shopkeepers due to strong opposition from traders’ associations.

The FBR believes the new measures will help eliminate the category of non-filers and tie purchases to tax return filings, pushing merchants to file returns under the standard tax regime. According to the FBR, the first quarter of the current fiscal year saw a significant rise in trade return submissions and tax payments.

As part of its ongoing efforts to ensure tax compliance, the FBR has already collected Rs25.961 billion in taxes from retailers during the first four months (July-October) of the current financial year. This represents an increase of Rs11.874 billion, or 84.3 per cent, compared to Rs14.087 billion collected in the same period last year.

Additionally, the number of retailers filing income tax returns has surged dramatically in 4MFY24. More than 0.6 million retailers filed returns during the first four months, compared to around 0.2m during the same period in FY23 — an increase of nearly 200pc. This spike in return filings is largely attributed to the FBR’s proposed measures to tighten compliance, expected to be enforced through the upcoming presidential ordinance.

The tax collected with traders’ returns has also increased from Rs5.3 billion in 4MFY23 to Rs9.376bn in 4MFY24, a rise of Rs4.076bn, or 76.9pc.

On the other hand, tax collection from wholesalers and retailers under Section 236G (advance tax on sales to distributors, dealers, and wholesalers) reached Rs6.786bn in 4MFY25, compared to Rs3.184bn in 4MFY24. Similarly, tax collected from retailers under Section 236H (advance tax on sales to retailers) grew to Rs9.799bn in 4MFY25, from Rs5.603bn in the same period last year. This represents an increase of Rs7.798bn, or 139pc, compared to the previous year.

The TDS, launched on April 1, was designed to encourage maximum trader participation, offering incentives for compliant traders. However, compliance has been limited, with traders expressing dissatisfaction over some clauses of the scheme. The scheme currently covers shopkeepers in 42 cities, but participation has been low.

Despite contributing 20pc to the gross domestic product (GDP), the retail and wholesale sectors contribute only 4pc to the tax revenue. Recognising this disparity, the government has been striving for years to incorporate this vital sector into the tax net.

Since 2019, three different schemes have been proposed for registering traders, but none have been fully implemented due to political challenges and continued opposition from the trading community.

Published in Dawn, November 15th, 2024