Will the FBR be able to tame the retail sector?

By Ahtasam Ahmad

In November 2021, the Federal Board of Revenue issued a list of 608 big retailers which it had categorised as ‘Tier-1.’ These 608 retailers would have to integrate with the board’s Point of Sale (POS) system. Failing to do so would result in these retailers being denied 60 percent input tax credit. At first glance the penalty may seem harsh. A closer look at the numbers reveals that the measures were taken by the FBR to curb the culture of rampant tax avoidance within the retail industry. According to a recent report by Planet Retail, the retail market in Pakistan has crossed $152 billion, which makes the sector the third largest contributor to the country’s GDP and its second large employer. According to the FBR, the retail market accounts for a whopping 18% of the GDP. Meanwhile it’s contribution to the national exchequer is a meagre 1%. There has long been an understanding that the only way to bring these retailers within the tax net was to digitise transactions and keep an eye on buying and selling at these retailers. The latest idea was that under the FBR’s new POS system, details of each transaction would go directly to the board and they would

be able to calculate and charge tax accordingly.

However, the retailers in question have not taken these directive meekly, and have responded with a slew of tactics meant to either stall, sabotage, or spoil the FBR’s efforts to bring the untamed retail market within the tax net. Even though the FBR has been able to net a significant amount of retailer’s into the new POS system, most retailers have either cited technical difficulties or have simply continued to operate mostly on cash to try and go under the radar on transactions. The question is, will the FBR manage to wrangle the market or will it eventually submit to their resistance?

The POS system

Most of the retailers that fall within the Tier-1 had the option to pay through POS machines well before the FBR introduced the new system. The concept of a Tier-1 retailer was introduced through the finance act 2017. Tier-1 retailers would include large chain stores, any stores in malls, most restaurants etc. A good way of looking at it is through grocery stores. Tehzeeb in Islamabad, Imtiaz in Karachi, and Jalal Sons in Lahore all fall under the category of Tier-1 retailers. The implementation of this tiered system only really kicked off at the tailend of 2021. It was around this time that the finance ministry set a target of wanting to collect Rs 50 billion in addition taxes from these retailers by launching a drive to get them to install Point of Sale machines that will monitor their sales and report every transaction in real time to the FBR..

How would this tax collection work? The FBR would launch a massive drive to integrate all of the Tier-1 retailers and have a total of 500,000 machines installed within three years. The new machines designed by the tax department would directly deposit the sales tax into the national treasury.

The sales tax at retail stores is charged at the time of transaction and is later supposed to be credited by these retailers at the time of filing taxes. Generally, most retailers do not credit this and either charge rates without tax to get more customers or pocket the tax. Since most transactions are done via

What is a Tier-1 retailer?

In November 2021, the FBR announced and released a list of Tier-1 retailers. The definition of the retailer was anyone that met even one of the following criteria:

A retailer operating a unit of an international or national chain of stores Any retailer in an air-conditioned shopping mall except kiosks A retailer whose electricity bill over the past 12 months was more than Rs 1.2 million Any retailer whose shop measures more than 1000 square feet

cash, there is no way to keep a track of this. By mandating POS machines, the FBR was seeking to kill two birds with one stone - encouraging digital payments and ensuring that sales tax is paid directly to the board.

The drive to get this done was initially swift and promising. By December 2021, as many as 15,180 cash counters/POS machines of 2,616 big retailers were integrated with the FBR POS system. In the first phase, the government had committed to integrate the largest 500 retailers followed by the next 500 and so on.The overall goal in the first 6 months was to get to 15,000 retailers and all of their outlets. While the government only initially managed to get to less than 3,000 retailers, a campaign was launched to visit 8000 retailers by the corporate tax office (CTO) in Karachi, and similar efforts in other areas.

However, it soon became apparent that simply integrating the retailers was not going to be enough as there were plenty of loopholes to be exploited. As the federal tax agency started to push for the implementation of the tax, the businesses resisted citing technical issues, impracticability of the system and the age old “ease of doing business” phrase. The problem with many of

Pakistan’s retail sector businesses is that they have grown up outside the tax net and are now so accustomed to living that way that they are severely resisting the change.

How to avoid taxes

The problem of tax evasion stems from the fact that a majority of retailers don’t deduct sales tax from transactions and even if they do, they don’t submit the proceeds to the national treasury. This has continued even after the implementation of Tier-1 POS machines.

Now, the retailers have been conducting this tax fraud in different ways. The first one is by discouraging electronic transactions and insisting

on paying via cash. This trick is used to avoid leaving a digital print of the transactions which the tax regulators can track back to if auditing the retailer’s filings.

To tackle this, FBR has made it mandatory for all Tier-1 retailers to maintain card payment machines at their outlets. As per Rule 150 ZEB(II) of the Sales Tax Rules, 2006, Tier-I retailers “must have the facility of debit and credit card machines installed at each notified outlet and the sales through debit or credit cards shall not be ordinarily refused.”

Customers of high end retail shops are accustomed to making payment by card. As a result most large retailers do not refuse this mode of payment. Instead the more common technique to avoid the tax is by issuing nonFBR invoices.

This can be done in two ways. First is by issuing a simple invoice stating sales tax deduction amount. This way the customer assumes that he or she is paying the sales tax to the government but as the invoice is not generated through FBR’s POS, the regulator has no audit trail for it specially in case of cash transaction and thus, the retailer gets to keep the price as well as the tax amount.

As a result, raising awareness about the integration process and the “FBR invoice” has become critical. An extensive awareness campaign has been launched in digital, print and broadcast media as well as by holding local events like “POS Integration Awareness Walk”.

This in turn has led to the customers specifically demanding FBR POS invoices from retailers. However, to tackle this the retailers have started issuing fake FBR POS invoices. These invoices are laid out in the same format as the FBR invoice but have some critical details missing that can serve as a differentiator.

As you can see in the two invoices above, these are for the same transaction. The left one is a Non-FBR invoice as it does not have a QR code and neither is the FBR invoice number printed on it. (The irony is that you still end up paying Rs1 FBR POS charges on fake invoices).

If you ask the restaurant about the invoice, they will tell you that it was a prepayment bill and will print the bill when you pay. However, if you don’t question such invoices, those “Paid Invoices” will never be printed and the tax collected will never reach the national treasury.

While investigating this matter we got a lot of evidence regarding the techniques used by the retailers to avoid taxes. Some were even printing invoices with fake QR codes and invoice numbers.

As per Sales Tax act, it is an offence which is punishable by a penalty of five hundred thousand rupees or two hundred per cent of the amount of tax involved, whichever is higher. The retailer shall, further be liable, upon conviction by a Special Judge, to simple imprisonment for a term which may extend to two years, or with additional fine which may extend to two million rupees, or with both.

There were also instances where retailers deployed multiple machines, some integrated and some that were not, and at instances the POS integrated machines were non operational due to “Technical Faults”.

However, as per Sales Tax rules, The Tier-I retailer shall — (a) make all payment counters comprising of point of sale at each outlet, available for installation of the systems; (b) be responsible for smooth functioning of point of sales; (c) report to the Board and the concerned Commissioner Inland Revenue within twenty four hours of any operational failure, damage disruptions or tampering of the system; or (d) report any inoperative point of sale to the Commissioner Inland Revenue holding the jurisdiction.

Cases of software manipulation have also been identified that allowed retailers to evade tax by colluding with the software vendor. In one case of software manipulation, a recoverable demand of Rs320 million in sales tax and Rs350 million in the income tax has been created, by CTO Karachi. It is to be noted that if any software vendor is an accomplice in tax evasion, they can be imprisoned for upto one year or slapped with a fine upto Rs 250,000. However, before diving into the measure to curb this tax evasion, it is important to understand what businesses fall under the Tier-1 category.

What does the FBR hope to achieve?

The rationale behind implementing the system is to monitor sales of the retailers in real time which will have two major benefits, first that all the amount of sales tax collected will be deposited to the National Treasury and Secondly, retailers will not be able to suppress their sales in income tax returns and subsequently, will not be able to evade income tax.To ensure compliance with the new scheme, the board has been diligent and has regularly been uploading lists of retailers that haven’t yet integrated into the system.

Under the Sales Tax Act, Tier-1 retailers who don’t integrate themselves with FBR POS, can face a penalty of five hundred thousand rupees for first default; (ii) penalty of one million rupees for second default after fifteen days of order for first default; (iii) penalty of two million rupees for third default after fifteen days of order for second default;

(Invoice number hidden to protect identity)

(iv) penalty of three million rupees for fourth default after fifteen days of order for third default. Furthermore, the business premises of such shall also be liable to be sealed by an officer of Inland Revenue in the manner prescribed.

Has the FBR been any successful?

When the fiscal year started in July, FBR had already 11,000 POS machines integrated with its system and by the end of next 6 months, in December the total was up to 15,000 machines. The pace, in this case, is seriously of concern given that during the latter half of the year FBR had been aggressively campaigning for the integration drive. At the given pace of less than 1000 integrations a month, it would be impossible to achieve the target of 500,000 POS integrations in the near future.

The failure on FBR’s behalf is that its approach has not been a systematic one rather it has been quite disorganised. A simple example is the fact that the board still hasn’t been able to bring all the existing bank enabled POS machines under its integration scheme.

As per State Bank quarterly report March 2021, there were 67,000 POS machines connected to the banking system and retail transactions valued at more than Rs.123 billion took place through these machines. If a straight 17% sales tax is applied only to these transactions, revenues in excess of Rs. 20 billion can be generated.

The fact that the regulator has not yet given any numbers for tax collected under the Tier-1 retailer scheme further emphasises that the response was underwhelming. Part of this blame is on the finance ministry that proposed an unrealistic target of Rs. 50 billion under this scheme, in a desperate attempt to please the IMF.

However, given the size of Pakistan’s retail sector and how most of it isn’t even documented, it is almost impossible for FBR to ensure 100% compliance of its tracking and monitoring system, on its own. The Board acknowledges this fact and has developed portals and mechanisms to ensure that invoices can be verified by the general public and instances of non-compliance can be highlighted.

Even the Rs1 charge on POS invoices (mentioned earlier in the article) is basically used to fund the implementation process. As per FBR, The service charge of Rs1 per invoice (of whatever amount), is t be used to promote integration of all Tier-1 retailers, launch publicity campaign, and finance a special prize scheme for all customers who duly verify their invoices to determine the validity and genuineness of the invoices issued by the integrated Tier-1 retailers.

Therefore, the general public can play its part by insisting on only paying if an FBR invoice is given and can go a step forward by verifying those invoices. There are two ways to verify issued invoices, the first one is by using the Tax Asaan Mobile Application which has a separate section dedicated for verifying sales tax invoices. One can scan the QR code or manually type in the invoice number and fill in the personal details to verify the invoice. On successful verification the following screen will pop-up followed by the transaction details.

The second way is to SMS the invoice number to FBR designated number (9966) and the confirmation will be received whether the invoice is a genuine one or not.

Furthermore, if the invoices are fake, the consumers can raise a complaint on the same portal and if you are thinking what good that can achieve? Then you might be surprised by the fact that a single person registered several hundred complaints that enabled FBR to bring around 225 Businesses to the Tax net and impose around Rs33 Million in Penalties.

It is pivotal to understand that by assisting the regulator to ensure compliance and collect taxes, we are only doing a favour to ourselves. The rampant tax evasion that has taken place in Pakistan over the years has been a key contributor to the country being debt ridden at this point of time. If we are just able to control these tax evasion activities, perhaps there would be no need for these “Mini Budgets” every now and then for which the poorest of the lot bears the burden. n