Big retailers refuse to buy new sales tax deduction rules

LAHORE: Big retailers on Friday rang alarms over Federal Board of Revenue’s (FBR) new directives that bind sellers to deduct sales tax on the original price of an item even sold at a discount under a promotion scheme.

Earlier, Sales Tax Act, 1990 has prescribed that in case of trade discounts, "value of supply" shall be the discounted price excluding the amount of tax; provided the tax invoice shows the discounted price and the related tax and the discount allowed is in conformity with the normal business practices.

According to a sample invoice given in the SRO 1006(I/2021), sales tax is chargeable on the price before giving discount i.e. undiscounted price and the "amount of discount" has then been subtracted on the sales tax paid value. Contrary to this new induction in the Sales Tax, the current retail practice is that it is being charged on actual discounted price paid by customer to the sellers. Thus, the sample invoice has caused confusion regarding the application of sales tax.

The retailers at various brands integrated with FBR are confused at which price to charge the sales tax.

Retailers said if they would charge sales tax on original price, while selling the product at discounted price, the consumer would be rightful to complain about the higher sales tax deducted. On other hand if the seller would pay this sales tax from his own pocket then it would further increase the cost of doing business.

To address the issue, Chainstore Association of Pakistan (CAP) has approached the Federal Minister for Finance, Shaukat Tarin.

Tariq Mehboob, the CAP Chairman in a letter addressed to finance minister sought the clarification on the SRO 1006(I/2021).

“The correction is requested in the SRO so that sales tax should be applied on discounted total value as per retail business norms and sales tax law,” the CAP chair said.

“Integrated retailers already face a very uneven playing field, which makes them over 20 percent expensive compared to undocumented retailers.”

Therefore, Mehboob said, the change notified in the new SRO would be the last nail in the coffin for compliant businesses already reeling from prolonged restrictions on the retail sector due to the pandemic.

Further, the CAP chief also pointed out the issue of the tax jurisdictions with Rs1 POS fee.

“As per the SRO, under Heading (C) ‘Transaction details’ it has been notified that Tier-1 retailer shall charge ‘POS service fee’ of Rs1 per invoice.

In the sample invoice, POS service fee of Rs1 has been shown as payable by the customer and for the retailer to act as a service agent, which may also be subject to tax by the Provincial revenue authorities” the letter mentioned.

He said application of any such fee would be counter-productive due to an added compliance and technical burden on only integrated retailers and result in backlash from customers.

“The FBR has laid out the changes in Sales Tax Rules 2006 pertaining to the "prize scheme" for customers of integrated Tier-1 Retailers,” said the CAP chairman highlighting the issues of prize scheme in SRO 1005/(1/2021).

Lauding the prize scheme, Mehboob said the CAP fully supported the prize scheme. “However, there has not yet been any consultation with the integrated retailers, which is crucial for its implementation so that any possible technical and operational issues are addressed proactively.”

The CAP chief in the letter urged the government to resolve the issues as it was still waiting for a response from the FBR due to which the POS integration drive may be affected.