KARACHI: Federal Board of Revenue (FBR) has not allowed the distributors of Fast Moving Consumer Goods (FMCGs) to avail the same tax relief, provided to the dealers, sub-dealer, wholesaler and retailers under the latest spate of changes in the Income Tax laws.
Zafar Ahmad, tax expert at Moore Shekha Mufti, Chartered Accountants said the board had extended tax relief to the dealers, sub-dealers, wholesalers and the retailers of FMCG except the distributors.
He said the withholding rate had been reduced from 4.5 percent to 0.25 percent along with reduction minimum tax rate on turnover from 1.5 percent to 0.25 percent and added that these changes were in demand for quite some time, especially after manifolds increase in the number of withholding agents in the last two years.
However, the distributors of these FMCGs have not been granted the aforesaid tax concessions and they remain kept outside the club of the dealers, sub-dealer, wholesaler and retailers with no rationale, he added.
Zafar said the distributor of the same FMCGs would continue to suffer the burden of 2 and 2.5 percent of withholding while its allies would pay only 0.25 percent and termed the provisions under Section 153 of Income Tax Ordinance, 2001 as one of the biggest hurdles in bringing the undocumented supply chain of FMCG sector into the tax net.
“Under Section 153 of the IT Ordinance, a buyer from organized sector withholds tax at the rate of 2% to 4.5% depending upon the nature of goods supplied, which is considered as minimum tax liability of the supplier. The provisions are unrealistic, considering the thin margins of businesses operating in supply chain of FMCG sector.”
Accordingly, through recently issued Ordinance, tax rate for FMCG sector supply chain has been rationalized by reducing it to 0.25 percent subject to the condition that such person gets themselves registered with the FBR under the Sales Tax Act, 1990. This is to ensure documentation of the said sector.
Zafar said the plain text of the provision mentions that only dealers, sub-dealers, wholesalers and retailers dealing in FMCG sector may avail the benefit. The term ‘dealer’ has not been defined under the Ordinance. Under the Sales Tax Act 1990, the term ‘wholesaler’ has been defined to include ‘dealer’ and most of business models including ‘agency’ relationship adopted by the trading sector have been expressly covered under the aforesaid term.
However, the term ‘distributor’ has been separately defined as “person appointed by manufacturer, importer, or any other person for specified area to purchase goods from him for further supply and includes a person to in addition to being a distributor is also engaged in supply of goods as wholesaler or retailer”.
Most of the manufacturers in FMCG sector have appointed territory specific ‘distributors’; therefore, tax authorities taking benefit of plain language of law and common understanding of term “distributor” and in distinction to the term ‘dealer,’ may proceed to assess the tax on the basis that such distributors are not entitled to avail the benefit provided through the Ordinance, he maintained.
Therefore, in order to avoid unnecessary litigation and hassle, he suggested that FBR should issue a clarification elaborating the scope of provision providing the concessional rate to the whole supply chain of FMCGs.
Copyright Business Recorder, 2021
