Pakistan has officially communicated to the International Monetary Fund (IMF) its intention to introduce an indicative income-based tax on retailers, ranging from Rs100 billion to Rs200 billion annually. Government sources reveal that preliminary discussions on the proposal’s framework have taken place with the IMF, and the interim administration aims to implement the plan in January of the upcoming year.
While the IMF has not received a specific collection amount, preliminary analysis suggests that a fixed shop tax could potentially contribute an additional Rs9 billion to Rs20 billion in monthly revenue from merchants.
The Federal Board of Revenue (FBR) proposes a shift in tax collection responsibility, suggesting district tax officers handle the task rather than utilizing electricity bills, which are already high. The intention is to boost the tax contribution of an industry considered seriously undertaxed, rather than responding to a specific IMF demand.
The government plans to assess the tax potential based on the indicative income of retailers, considering factors such as shop location and rental payments. Despite the wholesale and retail sectors constituting approximately 19% of the economy, their contribution to total taxes is currently less than 1%.
No new legislation will be required if the proposal receives approval, as authorities suggest utilizing the legal authority granted by Income Tax Ordinance Section 99B. This section allows the finance minister to impose taxes by publishing a notice in the official gazette and defines special procedures for small traders and shopkeepers.
It remains undecided whether the tax will be implemented nationwide or in major cities during the initial phase, where the FBR has insights into retailers’ income. Currently, the FBR collects withholding taxes from real estate based on locality-wise valuations of properties.
In the past, the Pakistan Democratic Movement (PDM) government imposed a monthly tax of Rs3,000 to Rs10,000 on retailers in the June 2022 budget but withdrew it within two months under pressure from traders. The FBR has a limited window to impose the tax before the general elections on February 8.
If merchants prefer to pay under the regular income tax regime, they can adjust the set monthly tax in their yearly income tax filings. The IMF is yet to provide its final assessment of the retailer tax scheme.
