ISLAMABAD: Only 16 per cent of registered sales tax units in the country actually paid any of the tax, with the rest filing either null or nil returns, data from the Federal Board of Revenue (FBR) shows.

The number of registered sales taxpayers on the FBR data portal was 127,268 for 2016-17. But only 20,700 paid any sales tax in the year under review. Data shows not only a narrow sales-tax base in the country, but also a low level of compliance with the sales tax law.

Of total sales taxpayers, only 114,102 units filed returns in 2016-17. This means that 13,166 registered units or 11pc did not even file their returns.

As many as 40,000 registered units or 35pc were nil return filers in the year under review. These units reported no taxable impact of their business activities during the period.

An official source told Dawn it might not be correct that these registered units filed nil returns to evade taxes. However, he said it was the responsibility of the regional tax offices (RTOs) and large taxpayers’ units (LTUs) to pursue these nil filers and determine the reasons for declaring zero sales tax liability.

A thin slice of all filers actually pays any sales tax, FBR data shows

Contrary to this, as many as 55,000 units or 48pc of the total filers were null filers. These units declared that they did not conduct any business. “One of the reasons for null filers might be the closing down of registered units as well,” the official said.

He said that null filers have not contributed any tax to the department. Data shows that broadening of the tax base and increasing tax compliance are the real challenges for the FBR. In other words, it shows poor sales tax enforcement in the country.

The bulk of return filers falls in the category of null and nil filers, leaving behind a meagre number of units actually paying sales tax. The sales-tax base in Pakistan is very narrow, and the bulk of the tax is collected from 10 major commodities.

In 2016-17, the domestic sales tax collection stood at Rs628.63 billion against Rs624.01bn in the preceding year, reflecting a marginal increase of 0.74pc. The tax was mostly collected from the 20,700 registered units, the official said.

At the same time, RTOs and LTUs in three cities — Karachi, Lahore and Rawalpindi — generate the bulk of domestic sales tax revenue.

Data shows that more than 40pc of domestic sales tax was collected from Karachi. The share of Lahore in the domestic sales tax collection was nearly 28pc. The rest of sales tax was collected from 13 cities, including Quetta, Peshawar, Islamabad, Rawalpindi, Faisalabad, Gujranwala, Multan, Abbottabad, Sukkur, Hyderabad and Sialkot.

Sales tax in Pakistan is highly concentrated in a few commodities. About 73pc domestic sales tax comes from 10 commodities: petroleum products (43.8pc), natural gas (8.9pc), fertilisers (4.8pc), cement (2.8pc), electrical energy (2.4pc), cigarettes (3.5pc), aerated water and beverages (2.6pc), sugar (2.1pc), tea (1.3pc) and food products (0.8pc).

Analysts say that an indicator of the performance of the sales tax regime in a country is the net effective tax rate or the net revenue gains. Data shows the net revenue gains from sales tax is around 5pc in Pakistan. A net revenue gain of less than 8pc is considered below the international benchmark. Low revenue gains are the outcome of a defective system as well as malfunctioning administration.

A senior tax official said the ineffective system for the sales tax registration is one of the reasons for the narrow sales tax net. While the process is fully automated, Inland Revenue authorities are unable to create a business-friendly environment for the registration.

Published in Dawn, September 10th, 2017