Pakistan Government Introduces KYC System for Importers and Manufacturers

The government of Pakistan is set to introduce significant changes to its tax laws through a new presidential ordinance. This initiative will require importers and manufacturers to adhere to a 'Know Your Customer' (KYC) system, which mandates that they only sell to registered buyers. The primary goal of this move is to encourage more traders to enter the formal tax system by linking their transactions to tax compliance.

According to reports, the proposed amendments have already been drafted and submitted to the Prime Minister’s Office for approval. Once the cabinet gives its clearance, the ordinance will be forwarded to the President for promulgation. The implementation of the KYC system is expected to empower the Federal Board of Revenue (FBR) to track sales records effectively and identify buyers who are not compliant with tax regulations.

This initiative is closely associated with the FBR’s Tajir Dost Scheme (TDS), which aims to provide incentives for traders to register as regular taxpayers. The focus of this initiative is primarily on larger retailers, as opposed to small shopkeepers, in an effort to mitigate resistance from traders’ associations that have historically opposed enforcement measures.

By linking purchases to tax return filings, the government hopes to eliminate the category of non-filers and ensure that all traders comply with the standard tax regime. Recent data from the FBR indicates a notable improvement in tax compliance within the retail sector during the first four months of the fiscal year 2024. From July to October, the FBR collected Rs25.961 billion from retailers, marking an impressive 84.3% increase compared to Rs14.087 billion collected during the same period last year.

Moreover, the number of retailers filing income tax returns has surged, with over 600,000 filings recorded in the first four months of FY24, compared to around 200,000 in the same timeframe last year. This represents a staggering nearly 200% increase, largely attributed to the stricter measures, including the anticipated KYC compliance rules.

While the TDS, introduced in April, aims to maximize trader participation through tailored incentives, participation remains limited. Currently, shopkeepers in only 42 cities are covered under the scheme. Many traders have voiced their dissatisfaction with certain clauses, which has hindered full compliance.

The government's push for a KYC system represents a crucial step towards enhancing tax compliance in Pakistan. By ensuring that all transactions are linked to registered buyers, the FBR aims to create a more transparent and accountable tax system. As the government continues to implement these changes, it is essential for traders to adapt and embrace the new regulations, as they ultimately contribute to the economic stability and growth of the country.