ByExplore the impact of Section 236G and 236H on Pakistan’s tax system, highlighting challenges for distributors, wholesalers, and retailers in compliance.
What Are Section 236G and 236H?
Section 236G/236H of the Income Tax Ordinance has become a focal point of discussion in Pakistan due to its implications on businesses, particularly in the retail, wholesale, and manufacturing sectors. The section primarily deals with withholding taxes, requiring certain entities to deduct tax at the source on sales transactions. Within this framework, subsections 236G and 236H have sparked significant debate.
Section 236G mandates the collection of tax from distributors and wholesale sellers by manufacturers or commercial importers. This tax is levied on sales transactions, unlike the typical practice of deducting tax on payments made for purchases. The purpose is to ensure compliance and widen the tax net by targeting distributors who act as intermediaries between manufacturers and retailers.
Section 236H applies to retailers, requiring entities such as manufacturers, distributors, wholesalers, or importers selling goods to retailers to deduct tax at the point of sale. This tax also hinges on obtaining the retailer’s CNIC or NTN to ensure traceability and compliance.
Both taxes are adjustable against the taxpayer’s annual income tax liability, providing a mechanism for eventual recovery. However, challenges in implementation and resistance from stakeholders have made these provisions contentious.
Challenges in Implementing Section 236G and 236H
Burden of Compliance on Distributors and Wholesalers
Distributors and wholesalers must ensure tax deduction and deposition when conducting sales. This creates an administrative burden, as they are held accountable if taxes are not properly deducted or if the retailer fails to provide identification details.
Low Registration in the Retail Sector
The retail sector remains largely unregistered, with many small shopkeepers lacking NTN or CNIC documentation. This creates hurdles for manufacturers and distributors, who are unable to deduct taxes without these details. Retailers often resist providing their credentials, fearing additional tax liabilities or government scrutiny.
Differential Tax Rates for Filers and Non-Filers
Tax rates for non-filers under these sections are significantly higher. For instance, the tax rate for non-filers has escalated to 2%, making compliance costlier for businesses dealing with unregistered retailers. This disparity adds pressure on distributors to push retailers toward registration.
Resistance from Traders
Efforts to enforce compliance have met with resistance. For example, the government’s Tajir Do Scheme, aimed at registering unregistered shopkeepers, has been met with strikes and protests. Despite multiple initiatives to streamline the retail tax base, compliance remains low due to mistrust and fear of punitive measures.
Integration Challenges with Point of Sale (POS) Systems
Retailers crossing specific sales thresholds must integrate POS systems for tax compliance. However, many resist this integration to avoid sales tax liability, further complicating enforcement.
Government’s Approach and Measures
To address non-compliance, the government has introduced several measures, including:
- Higher Withholding Tax Rates: Increasing tax rates for non-filers to encourage registration.
- Mandatory Filing and Penalties: Imposing conditions like SIM blockage, travel bans, and utility service suspension for non-filers.
- Responsibility Shift: Transferring the onus of tax deduction to distributors, wholesalers, and manufacturers to pressure retailers into compliance.
- Awareness Campaigns: Expanding programs like the Tajir Dost Scheme to encourage voluntary registration.
Despite these efforts, progress has been slow, with many businesses seeking ways to evade these requirements. The unregistered segment of the retail sector remains a significant gap in the tax net.
Implications for Stakeholders
- Distributors and Manufacturers
Distributors and manufacturers face increased compliance costs and administrative responsibilities. Failure to ensure proper tax deduction exposes them to legal notices and penalties. - Retailers
Retailers are under pressure to register and comply with tax regulations. However, resistance stems from fear of increased liabilities and a lack of trust in the government’s tax framework. - Government
The government’s revenue generation efforts are hampered by low compliance. While harsh measures may compel some to register, the overall mistrust and lack of streamlined processes hinder broader success.
Section 236G and 236H represent critical tools for enhancing tax compliance and broadening the tax base in Pakistan. However, the challenges associated with their implementation highlight the need for a balanced approach. While stricter measures can compel compliance, fostering trust and simplifying processes are equally important for sustainable results. Until the government achieves a comprehensive integration of the retail sector into the tax net, these provisions will continue to generate resistance and debate.
