ISLAMABAD: The Federal Board of Revenue (FBR) has evolved a simplified scheme for taxing the indicative incomes of traders, retailers and specified persons as part of the documentation to reduce the size of the informal economy.

The tax department projects that the newly proposed scheme could potentially generate an income tax revenue ranging from Rs400 billion to Rs500bn.

The details of the new taxation scheme were presented to the federal cabinet on Tuesday for endorsement. This scheme is designed to calculate the estimated income of traders and retailers, a senior tax official to Dawn on Wednesday.

Despite contributing 18 per cent to the gross domestic product, the tax contribution of the retail and wholesale sector stands at a mere 4pc. Recognising this disparity, the government has been striving for years to effectively incorporate this sector into the tax network. However, these attempts have yet to yield the desired results.

Bringing traders under its radar may raise up to Rs500bn

As per the proposal, the criteria for estimating indicative incomes will encompass factors such as the location, value, and rent of the shops. To facilitate this process, a specialised mobile application named ‘Tajir Dost’ has been developed to compute the income and tax. This app is expected to streamline the income calculation process.

According to details, the indicative income will be determined based on a rate that is three times the rental value based on the general ratio of rent expenses to income. The tax will be payable in 12 monthly instalments.

Additionally, a 50pc discount will be offered to those proactive individuals who file their tax returns before the first monthly instalment.

Furthermore, the minimum tax can be adjusted based on the self-declaration in the annual return. This provision offers flexibility and encourages timely tax filing.

In the year 2019, the National Assembly passed the Finance Supplementary (Second Amendment) Act 2019, in which the government introduced a special clause in the Income Tax Ordinance 2001 empowering the federal government to prescribe special procedures for the scope and payment of tax, filing of return and assessment in respect of such small traders and shopkeepers in such cities or territories as may be specified.

Since that time, three distinct schemes have been proposed. However, none have been implemented due to a combination of insufficient political resolve and opposition from the trading community.

At present, only 300,000 out of an estimated 3.5 million retailers are actively filing tax returns. The newly proposed scheme aims to bring the remaining 3.2 million retailers, primarily located in the country’s major cities into the tax net. This initiative represents a significant step towards expanding the tax base and enhancing revenue collection.

Withholding tax regime

The FBR is finalising the digitisation of withholding tax collection through a new system of Synchronised Withholding Adm­inistration and Payment System (SWAPS). This is one of the disbursement link indicators of the Asian Development Bank.

Currently, withholding agents are failing to withhold actual tax, evading to deposit of the actual tax amount, delaying deposits, and occasionally applying incorrect rates to the tax department. Similarly, these agents do not provide details of the person from whom tax is deducted making lump sum payments resulting in difficulty in verifying tax credits for withholdees.

As per the details of SWAPS, it is designed to establish a connection between the payer, payee, bank, and FBR through the SWAPS portal. This system will facilitate simultaneous payments to both the vendor(s) and the government (tax). It will ensure comprehensive verification of the withholdee — CNIC, NTN, IBAN.

The system is equipped to perform real-time checks of the withholding rate, non-filer status, and exemptions. Furt­hermore, the need for filing withholding statements will be eliminated, audits will be minimised, and returns will be auto-populated.

Published in Dawn, January 25th, 2024