Imposition of CNIC condition: An expected supply side shock

July 11, 2019 (MLN): Among various hard measures taken by the government in budget FY20 to broaden the tax base, a key documentation measure of imposing a condition whereby businesses need to obtain CNIC from buyers Purchasing goods worth more than PKR50,000 has been criticized by the industry at large.

Keeping in view the ground realities, in a highly undocumented economy, it is practically not possible for the businesses to obtain CNIC or other particulars of the customers.

In this regard, several meetings were held between the government and the traders which have been unfruitful. As a result, the implementation of this provision has been deferred till Aug 2019, once executed, this measure is expected to have far reaching impact on the supply chain across different industries, says a research report by BIPL Securities.

The report further highlights that, there is uncertainty regarding sales to unregister persons (non-filers) which include either a tougher taxation regime for them or deterrence for business dealing with unregistered persons.

As CNIC requirement by businesses is already causing a disruption in supply chain of various sectors particularly in cement sector and as per the report, as a consequence of this measure average daily cement sales have dived by 73% to 40k tons from 150k tons.

In addition, this measure would cause a disruption in the dealership network of commodity and consumer goods sectors where significant portion of dealers/retailers/sub-dealers are unregistered.

According to the report, this supply side shock will have ripple effects.

Firstly, the overall GDP growth will take a hit as the economic activity will be hurt as the economy adjusts to the new ways of doing business.

Secondly, this will have negative consequences for the tax collection as well which will go down in tandem with a decline in economic activity, thus increasing fiscal deficit.

On the upside, it will have some positive impact on country’s external account as the economic shock will result in depressed economic activity and therefore decline the import bill.

From investment perspective, the supply chain disruption is likely to hamper the economic activity in the short run as commodity and consumer-based sectors would see contraction in volumes thereby eroding the corporate earnings.

However, over time as dealers become part of the tax net, the impact would smoothen out as businesses adjust to the new norm, says a report.

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