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Dealing with traders—II  

Huzaima Bukhari & Dr. Ikramul Haq

This second concluding part of previous article discusses outcome of meeting between Prime Minister and the business community on January 20, 2020, history of tax defiance by the powerful wholesale/retail sector and what should be done in the future. Details of the meeting were published widely in print media on January 21, 2020 but largely ignored in electronic media as on the said day wheat shortage crisis was the hottest subject on every TV talk-show.

The crux of the meeting as expected was just clichés like “facilitation”, “concessions” and “waivers” etc. Prime Minister as usual reiterated: “taxation is a key to revive national economy” and openlyadmitted that traders are excellent philanthropists but “do not contribute to the revenue generation” with the same spirit because of the “complex taxation system and the government’s inability to spend the tax money on public welfare”. This is highlighted time and again in these columns—surely none of our economic and tax managers ever bothered to read what was suggested in Comprehensive tax reforms, Political Economy, The News on Sunday, September 9, 2018. Although the Prime Minister admits that State is not spending taxes for public welfare, yet till today has taken no practical steps as suggested in Taxes for welfare, Political Economy, The News on Sunday, April 22, 2018.   

According to a report, in a closed-door meeting with leaders of various chambers of commerce and industries, Prime Minister conveyed “his government’s inability to provide any relief to the business persons and plainly said that his government was not in a position to immediately cut interest rates and reduce energy prices….could not give concrete assurances to the businessmen about timely payment of their sales tax refunds withheld by the Federal Board of Revenue (FBR). He instructed FBR Chairman Shabbar Zaidi to hold a meeting with the business community to resolve their issues”.

The above was the real outcome of government-traders parleys and the rest is nothing but routine sloganeering for betterment through establishment of useless committees, with no concrete study, research, plan and roadmap about how to move forward for reducing cost of doing business, settlement of long-overdue issues e.g. unpaid refunds and simplification of tax codes/procedure for business growth that alone can ensure substantial rise in revenues and prosperity for all that the Prime Minister is obsessed with these days.

The FBR, without any doubt, is almost dysfunctional—the official admission was before the Standing Committee on Senate on Commerce & Textile on October 22, 2019 that not more than 41000 persons filed sales tax statements paying any tax! FBR alleges that “out of over 3.5 million traders only 312,361 have been filing tax returns” and that “only 104,219 traders filed income tax returns in five major markets of Karachi, Lahore, Islamabad, Rawalpindi and Faisalabad”. According to a report, during the last fiscal year, traders paid just Rs. 35 billion under the head income tax”. In Karachi, the main economic hub of the country, only 85,020 traders of six main markets are tax filers—58,106 of Saddar market, 14,780 in Defence Housing Authority and 9,446 traders in Clifton. Traders of four major markets of Lahore paid total tax of just Rs.567.7 million with only 2,096 filers in famous Anarkali bazaar, 563 from the Mall Road, 480 of Hafeez Center and 786 of Liberty Market. In whole of Rawalpindi only 6,580 traders filed returns paying Rs.1.09 billion. In Islamabad, 6,428 traders filed returns and paid tax of Rs. 1.934 billion. 2,266 traders filed returns in five markets of Faisalabad paying Rs.141.7 million as per FBR.

According to a report, the above data was contested by Chairman of Businessmen Group, Siraj Kassam Teli and President of Karachi Chamber of Commerce & Industry (KCCI), Agha Shahab Ahmed Khan. They urged the Prime Minister, Abdul Hafeez Shaikh, Advisor to the Prime Minister on Finance, Revenue and Economic Affairs and FBR Chairman Shabbar Zaidi “to publicize the city-wise data of all other taxes including Income Tax, Sales Tax, Custom Duty and Federal Excise Duty in detail so that the ground realities could be revealed”. They added:

 “We believe that the actual contribution of Karachi, which is the economic hub of the country contributing 70 percent revenue to the national exchequer, has to be publicized without any excuse of being the port city with a precise breakup of tax collection from the ports and dry ports along with details of the imported items belonging to which city and the consignee, besides carrying detailed fragmented tax collection from the head offices of corporate entities and their branches located in all parts of the country which would surely present the actual city-wise contribution“.

They further said, “We agree that many individuals and corporate entities from different areas of the country may not be paying their taxes to the level they should but that doesn’t mean that nobody was paying taxes. It is highly unfair to give such statement as it creates a false impression. Realistically, there are millions of individuals and corporate entities who are paying all their taxes. The FBR and Ministry of Finance should be told to get those individuals first who are paying zero tax instead of further squeezing the existing tax payers.”

While the FBR and traders are at draggers drawn even on the accuracy of numbers, it is advisable to establish an independent Fact Finding Commission under Federal Tax Ombudsman so that true state of affairs is presented to the Parliament and nation.

According to a study [Industry Profile: “Wholesale and Retail Trade Sector in Pakistan] conducted in 2012, the contribution of traders in income tax was just 0.5% and in sales tax about 1%. According to FBR it has not improved much in the last seven years. This is an open admission of its own failure as well as the acknowledgement of a reality that like mighty absentee landlords who pay no or meagre agricultural income tax, traders are also not paying taxes on actual income, they conceal sales and evade sales tax collected—a classic case of illegal enrichment!

Little has been written about power of Bazaar that represents traders occupying big markets. These markets, represented through traders’ bodies, though contribute marginally in total tax collection, but are highly influential—financing all political parties. In the beginning of 2000, National Tax Survey [shop-to-shop] was conducted by a powerful military dictator to bring all traders into tax net, but soon it proved to be yet another illusion. After a long-drawn battle, marred by bitterness, hostility and closure of businesses, Musharraf finally concluded an agreement with traders on August 22, 2000 allowing retailers and shopkeepers to opt for a slab of 1% turnover tax without being registered under the sales tax regime. It was really shocking that military regime having no electoral obligations succumbed to power of Bazaar. The same was done by PMLN Government in 1999 surrendering before mighty power of Bazaar and giving up the documentation drive.

The same happened with the Government of Pakistan Tehreek-i-Insaf (PTI). Despite tall claims by Imran Khan of not surrendering before them, he gave them sweeping concessions on October 30, 2019 including relaxation in registration conditions, reduction of income tax rates by 66% and postponement of the CNIC condition etc. Even the law passed by the Parliament that any shopkeeper having annual electricity bill of above Rs. 600,000 would be treated as a class-I trader and subjected to 17% sales tax was modified by enhancing the threshold to Rs. 1.2 million excluding majority traders from this scope.

Pakistan at the moment is struggling hard to overcome monstrous fiscal deficit (expected to exceed Rs. three trillion) and come out of unsustainable debt burden (that crossed Rs. 32 trillion mark by November 2019). In these circumstances, the PTI Government instead of further succumbing to pressures from Bazaar must ensure proper compliance of taxes from all. Firmness and fairness is required. Incentivising traders to pay taxes honestly with simplified model suggested in Towards Flat, Low-rate, Broad and Predictable Taxes, [PRIME Institute, April 2016] with surety that taxes will be spent for the welfare of masses and not for the benefit of elites is the need of the hour. A national consensus on fair and just tax policy is the only hope for overcoming monstrous fiscal deficit, breaking free of debt enslavement and putting Pakistan back on the road to progress.


The writers, lawyers and authors, are Adjunct Faculty at the Lahore University of management Sciences (LUMS).

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