In a significant budget proposal, the government is considering imposing a 2.5% income tax across the entire trading chain, from manufacturers to retailers, to capture the true revenue potential from non-filers engaged in trading business.
If approved by Prime Minister Shehbaz Sharif and passed by the National Assembly without yielding to trader pressure, this proposal could potentially add hundreds of billions of rupees to tax receipts.
According to two other proposals, tax authorities have recommended increasing the withholding tax by at least 1% on all imports, except those by commercial importers. They also suggest raising the income tax rate on contractors, professional service providers, and sportspersons.
During the current fiscal year, taxes on professionals and contractors have been the highest revenue-generating source, while imports represent the third-highest source of withholding tax, with the salaried class being the fourth.
A 2.5% withholding tax is proposed on supplies made by all manufacturers to wholesalers, distributors, and retailers who are non-filers in the 2024-25 budget, according to sources. Currently, these groups are taxed under Section 236-G at 0.7%, and non-filer retailers are taxed at 1% under Section 236-H.
The budget proposal calls for merging these sections and imposing 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 paid a mere Rs24 billion in taxes, or 0.001% of the total income tax, during the July-May period.
This proposal was originally made by the Ashfaq Tola-led Reform and Revenue Mobilisation Commission (RRMC) in May last year, but the previous government ignored it.
According to the RRMC, a 1% tax on all wholesalers, distributors, and retailers based on the gross value of their supplies could generate at least Rs400 billion annually. If imports are included in the taxation proposal, a 2.5% income tax could potentially bring in around Rs1 trillion.
Currently, Section 236-G applies to only 21 sectors, including pharmaceuticals, poultry and animal feed, edible oil and ghee, auto parts, tyres, varnishes, chemicals, cosmetics, IT equipment, electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textile, beverages, and paints or foam.
Due to its narrow scope, the total collection under Section 236-G was just Rs9 billion during the first 11 months of the outgoing fiscal year, with retailers paying Rs15.5 billion under Section 236-H.
FBR data indicates that Rs3.1 trillion worth of sales were made to 46,000 registered wholesalers during the first nine months of the current fiscal year. In contrast, manufacturers made Rs800 billion in sales to 97,000 unregistered distributors and wholesalers.
Sources noted that this would be one of the most politically sensitive budget proposals due to the influence and clout of the trading class. They emphasized that the FBR seeks a clear decision to tax retailers by capturing their sales through a 2.5% withholding tax, avoiding a repeat of the controversy two years ago when retailers were taxed through electricity bills.
The government plans to set next fiscal year’s tax collection target at Rs13 trillion, requiring nearly a 40% increase over this year. This necessitates Rs2 trillion in new taxes in the budget.
More Tax on Imports
Sources indicated there is a proposal to increase the withholding tax on all categories of imports except commercial imports. The existing rates for filers, ranging from 1% to 4%, would rise to 2% to 5%, with non-filer rates being double those of filers.
At the current rates, the government collected Rs349 billion from imports during the first 11 months of the fiscal year, up Rs82 billion, or 31%, making it the third-highest revenue generation source on the income tax side.
Contractors, Cricketers to Pay More
The FBR is also proposing further increases in income tax under Section 153, which deals with withholding tax on sales of rice, edible oil, cotton seed, electronics, and print media advertising services, professionals, and sportspersons. Existing rates for filers, ranging from 1.5% to 11%, may increase by another 1% to 2%.
Section 153 is the top revenue generator for the government, with Rs432 billion collected from contractors during the July-May period, a 30% increase over the past year.
