Govt considers 2.5% income tax on entire trading chain

The federal government is mulling imposing a 2.5% income tax on the entire trading chain, from manufacturers to retailers in the upcoming budget for fiscal year 2024-25.

The proposal to tax supplies of non-filers was originally made by the Ashfaq Tola-led Reform and Revenue Mobilisation Commission (RRMC) last year but was ignored by the previous government. 

According to RRMC’s recommendation, a 1% tax on all wholesalers, distributors, and retailers on the gross value of their supplies could collect at least Rs400 billion annually. 

Currently, these entities are taxed under Section 236-G at 0.7% for distributors and under Section 236-H at 1% for non-filer retailers. 

The budget proposal calls for merging these sections and applying 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 only Rs24 billion in taxes during the July-May period. 

The FBR’s data shows that about Rs3.1 trillion worth of sales were made to 46,000 registered wholesalers during the first nine months of the current fiscal year. 

In comparison, manufacturers made Rs800 billion in sales to 97,000 unregistered distributors and wholesalers. 

Two additional proposals suggest increasing the withholding tax by at least 1% on all imports except by commercial importers and raising the income tax rate on contractors, professional service providers, and sportspersons. 

There is a proposal to increase the withholding tax on all categories of imports, except commercial imports. Existing rates, ranging from 1% to 4% for filers, could increase to 2% to 5%. Non-filer rates are double those of filers. 

At current rates, the government collected Rs349 billion from imports during the first 11 months of the current fiscal year, an increase of Rs82 billion or 31%.

The FBR is also proposing to increase the income tax under Section 153, which deals with the withholding tax on sales of rice, edible oil, cotton seed, electronics, print media advertising services, professionals, and sportspersons. Existing rates for filers range from 1.5% to 11%, which may increase by 1% to 2%. 

During the July-May period, the government collected Rs432 billion from contractors, a 30% increase over the past year.

The government plans to set the next fiscal year’s tax collection target at Rs13 trillion, requiring a nearly 40% increase over this year. This would necessitate Rs2 trillion in new taxes in the budget.