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Table of Contents
Introduction................................................................................................................ 1
Logistics Cost............................................................................................................. 1
Training and Development of the Employees.............................................................2
Rent Expense.............................................................................................................. 2
High Credit Rates........................................................................................................ 2
Taxes.......................................................................................................................... 3
Other.......................................................................................................................... 3
Information Technology........................................................................................... 3
Car Parking.............................................................................................................. 3
Maintenance Cost.................................................................................................... 3
Law and Order......................................................................................................... 3
Introduction
Logistics Cost
The increase in logistical cost tends to increase the cost of the retailer. This cost is
at first imposed on the wholesaler or the distributor in the supply chain.
The transportation cost for the wholesaler or distributor is very high because the
cold storage and refrigerated vehicles are subjected to almost 25% import duty and
15% sales tax, according to a report published by the ministry of commerce.
Second reason of the increase in the wholesalers cost is the poor road
infrastructure of Pakistan.
"A source at Metro said that, when the company launched in
Pakistan, its biggest problem was building up its supply chain
infrastructure."
Rent Expense
High rental cost is the second major factor of why the SMEs are not expanding in
the retail sector. Pagri is another system that is followed in the old cities of Pakistan.
In a pagri system the tenant has to pay a premium which is equal to the market
price of the property. The ownership of the property is not transferred and the owner
continues to pay taxes. Also, the tenant has to make periodic payments on monthly
basis in the form of rent, which is very less. The major hurdle that the retailer faces
in the pagri system is the initial premium that is charged.
According to a survey conducted by the ministry of commerce, 38% of the retailers
said that they have considered to do expansion within the city, while 8% of them
considered to expand their business in other cities of the country. Unfortunately the
rest of them (53%) never planned to do expansion.
Lahore
Islamabad
Jhelum
4 Marla
Rs. 25,000
1 sq. fit
Rs. 200
4 Marla
Rs. 25,000
The above rates are current. The prices vary with respect to the location and floors
of the property.
only.
Although the informal sector requires credibility and personal contracts, the nointerest policy makes the borrowing less costly for the SME retailers.
Also, the unavailability of the funds for the retails SME sector has an impact on the
supply chain, as the purchase of the goods depends heavily on the extension of
credit. In the same survey, almost 22% of the retailers said that 50% of their
purchases were made on credit, while 10% said that 10% of their purchases were on
credit. The distributors and the wholesalers face the same problem; hence, they
maintain strict cash basis policies for the retailers.
Taxes
Majority of the retail sector has been out of the tax net in the past years. The
owners voluntarily declare their incomes to be below the taxable income, in order to
reduce their expenses. More than half of the retailers are still unregistered.
So far, the FBR had registered around 300 retailers during first
quarter (July-September) 2014-15 under the new scheme
announced in last budget against 11,000 identified retailers
required to be registered with sales tax department. The FBR's
statement shows that around 300 retailers have been registered so
far. Whereas, there are more than 11,000 retailers who still need to
be registered with sales tax.
Type
Condition
Tax Rate
Large
Medium
Small
GST of 7.5%
GST of 5%
Not registering as an official business does not only gives them an advantage to
stay away from tax, but also becomes a reason for them to avoid expansion, as they
are well aware that this growth would lead to higher taxes.
Yet due to resistance put up by the politically influential retailer
class, coupled with weak enforcement by the FBR, the government
has not been successful in bringing this as yet untaxed sector of the
economy into the tax net, admitted FBR officials.
Other
Information Technology
Under SRO 608 (1), the unregistered retailers are required to get registered in the
Sales Tax Act and are asked to install fiscal electronic cash register (FECR), which
costs around $300.
Car Parking
Car parking area is a necessity in the modern format of the retails; hence, this extra
cost is incurred by the retailers.
Maintenance Cost
Law and Order
One of the primary challenges for retailers in Karachi especially has
been dealing with the law and order situation. Transport in the city
can shut down suddenly when the violence picks up, causing many
retailers, including Naheed Supermarket, to keep high levels of
inventory. I try to maintain stocks for at least two weeks, said
Abrar.