Huzaima Bukhari & Dr. Ikramul Haq
“I will not give in to unreasonable pressure of the business community as it would be traitorous to my countrymen…I will not step back after countrywide strikes by the business and trading fraternity….”—PM vows not to bow to traders’ pressure, July 17, 2019.
“…although there are gaps in the taxation system but that cannot be made the reason to call all the countrymen tax thieves hence, the Prime Minister Imran Khan should amend his statement—Business leaders condemn PM Imran Khan for calling everyone tax thieves, November 11, 2018
“My government is still facing resistance from the status quo elements in implementation of reforms in different sectors but I vow to stand out against the corrupt mafia”—PM Imran Khan vows not to bow to pressure over reforms, December 28, 2019.
On January 20, 2020, Prime Minister Imran Khan held a meeting with the All Pakistan Traders Association (APTA). In this article, the outcome of the said meeting and other developments before the same vis-à-vis issues faced by the manufacturers, wholesalers, traders, industrialists etc and Federal Board of Revenue (FBR) are discussed in detail. It also provides historic perspective of government-traders tussles and disagreements.
On January 12, 2020, the spokesman of Federal Board of Revenue (FBR), while strongly refuting all rumours of rift between the Chairman FBR (who went on two-weeks leave till January 20, 2020), confirmed his attendance at the vital meeting on January 20, 2020 that he attended. On January 13, 2020, Chairman FBR, Shabbar Zaidi, tweeted, “Prime Minister will formally announce the concessions given to traders’ community and will seek assistance of trade bodies in complete documentation and tax contribution by trading sector”.
Prime Minister in a meeting with a delegation of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI on January 13, 2020, according to a report, “showed his inability to immediately ease tight monetary and fiscal policies and withdraw the Computerized National Identity Card condition amid industrialists concerns that more industrial units can become sick due to prevailing conditions”. The industrialists placed three main demands before the prime minister—cut peak high interest rate, reduce energy prices and withdraw the CNIC condition on purchase of over Rs50,000. But the Premier declined these demands.
Prime Minster was obviously toeing the stance of the State Bank of Pakistan (SBP) that last week in its quarterly report emphasised upon continuation of adjustment process despite admitting weakening economic activities. “It is important to continue with the adjustment process despite weakening economic activity, as well as the visible stability gains in terms of the falling twin deficits,” noted the SBP’s first quarter report. The policy continuation was warranted given the lingering vulnerabilities in the economy and the chronic nature of the structural weaknesses, it added.
After the meeting, the new President of the FPCCI, Mian Anjum Nisar said: “We did not get positive response from the government and the message was that at this stage no relief can be provided due to ongoing economic stabilisation policies”. He added: “If the government does not immediately remove these irritants, the industrial units, which are already running at 40% of their capacity, may start falling sick”.
As part of programme of the International Monetary Fund (IMF), the Pakistan Tehreek-e-Insaf (PTI) government has slowed the economic wheel to restore macroeconomic stability whose initial signs have started appearing in this fiscal year. But the refusal of Prime Minister to accept the demands of cutting the interest rates and reducing energy prices for industries was not going in line with his public statement regarding declaring 2020 as a year of economic revival. The industry’s demand of withdrawing the CNIC condition was unjustified.
“We have requested the prime minister to abolish the condition of CNIC, as the industry was already paying 3% additional sales tax on sales being made to the non-registered persons,” said Nisar. “The CNIC condition was a hanging sword and our concern is that the FBR’s auditors can exploit it.” Introduced in July 2019 by the Federal Board of Revenue (FBR), the CNIC condition remains suspended till January 31 due to traders’ refusal to accept it. The FPCCI president said that the FBR refused to withdraw the condition and instead said that if the industry did not provide the CNIC the tax authorities would not allow input sales tax adjustment.
On the demand of reducing the interest rates, the government replied that reducing interest rates at this stage may fuel inflation, said Nisar. The central bank has currently kept the interest rates high at 13.25%, which according to almost all independent economists, is done to attract hot foreign money. So far, the foreign banks have bought over $1.6 billion worth of government debt at very lucrative interest rate of around 13.5%. The core inflation is currently around 7.5% and the banks are making windfall gains due to high interest rates.
The double-digit interest rates have adversely affected the industries, which the central bank has also admitted in its quarterly report. “On the whole, a number of industries within the large-scale manufacturing (LSM) struggled with inventory build-ups amid rising input costs during the quarter. With gross margins squeezed and financing costs rising, firms scaled back their operations to save their bottom lines from dropping further,” according to the SBP report. The SBP said that the private sector credit, as a result of general slowdown in the manufacturing and commercial activities remained negative in the first quarter.
The government also refused to reduce energy prices and said that line and technical losses were very high and the government was currently recovering these losses through increasing electricity prices, said the FPCCI president.
Nisar said that electricity prices in Pakistan were almost double than India and the exporters were unable to compete with regional peers.
On January 9, 2020, top officials of FBR met traders’ representatives to review progress on the agreement towards implementing the condition of providing copy of Computerised National Identity Card (CNIC) on sale and purchase of goods from February 1, 2020. This meeting took place after “relief package” for traders was announced through Tax Laws (Second Amendment) Ordinance, 2019 wherein the standard rate of minimum turnover tax was reduced from 1.5% to 0.5% in case of traders having turnover up to Rs.100 million for tax year 2020. For traders who filed income tax returns in 2018, the tax liability for 2019 and 2020 should not be less than the tax liability in 2018 to become eligible for the reduced rate of 0.5%. Traders with individual status and having a turnover up to Rs.100 million are not be required to act as withholding agents under section 153 of the Income Tax Ordinance, 2001 [“the Ordinance”]. The condition to qualify for Tier-1 retailer has been amended so as to increase threshold of electricity consumption from Rs. 600,000 to Rs. 1,200,000.
From FBR’s side the meeting was headed by the Acting Chairperson, Nausheen Amjad, Member Inland Revenue Policy, Hamid Ateeq Sarwar, and Director General Retail, Hameed Memon. Traders’ representatives included Kashif Chaudhry, Naeem Mir and Ajmal Baloch.
According to a Press report, traders were reminded about their commitments and they promised to help in three areas: “to help FBR search for new income tax filers, address disputes regarding quantum of declared turnover and identify outlets that are larger than 1,000 square feet to determine whether they are eligible for sales tax registration”.
Opposing point of view is that many traders e.g. wholesalers in iron and steel, grocery items including sugar, lentils, ghee, and fast moving consumer goods as well as cement, tyres, mobile handsets, automobiles, yarn, paper etc. have a very meagre profit margin but whose turnover exceed Rs. 100 million.
The claim by FBR noted that “only 300,000 traders are registered” under the Sales Tax Act, which the traders countered claiming that “the number is as high as 2 million.” In the meeting, FBR and trade representatives agreed on a road-map for the implementation of the agreement reached between them on October 30, 2019. On the point-of-sale (POS) system progress, FBR officials after the meeting revealed: “so far 4,944 big retailers have been registered”. The drive for installation of automated POS at big outlets has been initiated as part of FBR’s drive “to document sales of large retailers who are currently evading tax payment, which runs into billions, it is claimed. FBR has projected bringing 20,000 such retailers under the system by end of June 2020.
Through the Tax Laws (Second Amendment) Ordinance, 2019, traders having turnover up to Rs.100 million have been exempted from deducting tax under section 153 of the Ordinance while making payment against the supply of goods, services, and contracts. FBR has yet to clarify the year with respect to which the turnover would be calculated. The medium-sized traders have been absolved from their liability as withholding agents to improve ease of doing business. The trade associations have committed to get all medium and large-sized retailers registered apart from nominating their representatives to evaluate turnover of the under-declared businesses. They have also joined hands with FBR for dispute resolution in audits.
The details of meeting between Prime Minister and the business community held on January 20, 2020 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 stance of Prime Minister is highlighted time and again and many proposals were presented in our earlier articles in Surkhyian and elsewhere—surely none of our economic and tax managers ever bothered to read what was suggested—see at https://surkhiyan.pk/author/huzaima-bukhari-dr-ikramul-haq/ and also https://surkhiyan.pk/author/dr-ikramul-haq/.
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 FBR Year Book 2018-19 major contributor in direct taxes is manufacturing sector with around 34.5% share, services sector around 24.2% and share of wholesale & retail trade is “2.9% and 2.3%, which is in fact very low as against the existing potential in the country: wholesale and retail trade sectors together paid Rs. 48.2 billion: Large Retail Trade (7.9 billion), Small Retail Trade (9.7 billion) and Wholesale Trade (25.1 billion)”. Critics contest these figures on the ground that commercial importers at import stage pay advance income tax of Rs. 150 billion [total collection was Rs. 221.8 billion that include all categories] during 2018-19 and mere working contribution on the basis of returns filed is totally wrong and amounts to distorting facts.
According to data released by FBR, out of over 3.5 million traders in the country only 312,361 have been filing tax returns. It is true but FBR should also acknowledge huge number of non-filer traders having commercial electricity connections (the number is 3.2 million) and who are paying advance income tax under section 235 of the Income Tax Ordinance, 2001 where tax paid up to bill amount of Rs. 360,000 per annum till tax year 2019 was treated as minimum tax with no claim to a refund! All traders are thus paying advance income tax [figure for 2018-19 was Rs. 25.5 billion] but only a fraction are filing tax returns!! This proves utter failure of successive governments, military and civilian alike. They had been offering unprecedented waivers, amnesties and asset whitening schemes to mighty sections of society, especially to tax-defiant traders. The present government also recently succumbed before the shutter-down powers of traders and compromised on its resolve of getting due taxes from them vis-à-vis documentation of economy.
Data as released by FBR about traders openly defying tax obligations is shocking and presents a bitter reality—only 104,219 traders filed income tax returns in five major markets of Karachi, Lahore, Islamabad, Rawalpindi and Faisalabad.
According to a news report quoting an official of FBR, during the last fiscal year, traders paid just Rs. 35 billion under the head income tax. “There are 3.5 million to 4 million traders and only 392,000 are registered for tax purposes,” the report added. Karachi is the main economic hub of the country and only 85,020 traders of six main markets are tax filers. As per claim of FBR, they paid tax of Rs. 30 billion. FBR did not mention the real potential of tax collection from traders in Karachi and elsewhere as well as how much advance income tax was paid by non-filer traders with electricity bills, mobiles and on banking transactions etc. Details given by FBR for Karachi are simply astounding—just 58,106 traders of Saddar market, 14,780 in Defence Housing Authority and 9,446 traders in Clifton are filers. Traders of four major markets of Lahore paid total tax of just Rs.567.7 million. There were 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 chose to file returns paying Rs.1.09 billion. In the capital city 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.
According to a Press report, referring to above data cited by Dr. Abdul Hafeez Shaikh and FBR Chairman Shabbar Zaidi in a Press conference were refuted and strongly contested by representatives of traders. The Chairman of Businessmen Group, Siraj Kassam Teli and President of Karachi Chamber of Commerce & Industry (KCCI), Agha Shahab Ahmed Khan, according to this report, urged the Prime Minister Imran Khan, Dr. Hafeez Shaikh, Minister of State for Revenue Hammad Azhar and FBR Chairman “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“.
Siraj Teli and Agha Shahab 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 furthering squeezing the existing tax payers.”
While hoping that the Prime Minister would soon issue strict directives to the Ministry of Finance and the FBR to compile city-wise data of tax collection and ”the same will also be publicized at the earliest:, they said, “Prime Minister Imran Khan talks a lot about change and justice but it is a matter of grave concern and a sheer injustice to the taxpayers when our prime minister claims that nobody wants to pay taxes. The loyal taxpayers contribute billions of rupees each year which are being utilized to run the government yet they (the taxpayers) are being discouraged as they stand at the same array where the tax thieves and evaders were standing.”
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 the office of 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 by FBR a few years back, the contribution of traders in income tax was just 0.5% and in sales tax about 1%. Like mighty absentee landlords, traders pay meagre income tax. However, they successfully keep revenue authorities at bay due to powerful political influence and shutter power that they wield. According to a report, the Government of Pakistan Tehreek-i-Insaf (PTI) “is no different from earlier governments in blowing away the third opportunity in two decades to rope traders into the tax net”, the federal government on October 30, 2019 “succumbed to their pressure and agreed to give them sweeping concessions including relaxation in registration conditions, reduction of income tax rates by 66% and postponement of the CNIC condition till January 31 next year”.
After agreement following countrywide strike, Adviser to the Prime Minister on Finance Dr. Abdul Hafeez Shaikh agreed on an 11-point agreement with traders, announced in the presence of PTI’s disqualified stalwart Jahangir Khan Tareen. The Parliament passed the law 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. The PTI Government later enhanced the threshold to Rs. 1.2 million excluding many traders from the scope of the net. According to a report published in a newspaper, “the agreement that traders signed with the government has pushed us back 20 years, as they reached a similar agreement with Ishaq Dar in 1999. This time they gained advantage of taking the non-documentation limit from Rs. 50 to Rs100 million”.
Little has been written about power of Bazaar. The term Bazaar in Pakistan refers to traders occupying big markets that have always played a pivotal role in economics and politics of the country. These markets are well represented through traders’ bodies and chambers. Though their contribution in total tax collection is negligible as confirmed by FBR in its study quoted above, they are highly influential.
It is obvious that immense power of Bazaar is the main hurdle in the way of proper tax collection in Pakistan. In the past, they successfully managed to defeat introduction of Value Added Tax (VAT)—later renamed as Reformed GST—by then Finance Minister, Abdul Hafeez Shaikh, now heading economic team of the PTI Government. While addressing convocation in Karachi on December 4 2010, he frankly conceded that “one-third of the country’s population is below the poverty line and the elite are still reluctant to pay taxes and are resisting reforms.” In the past and even today, unholy alliance between the traders and tax collectors is depriving the State of billions of rupees. The seasoned and skilful tax administrators in FBR wrongly pose that they are at war with traders. In fact, they manage to get concessions for them by posing that tough decisions are that of the Finance Minister alone. Their tough posture towards traders is a tactical move to mint more money from the unscrupulous elements in business, trade and industry.
In the beginning of 2000, shop-to-shop survey [National Tax Survey] was conducted with the army’s help and there was hope that all traders would be brought 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, both government and traders finally concluded an agreement on August 22, 2000 in Islamabad by virtue of which it was decided that retailers and shopkeepers would be given an option to opt for a new slab of 1% turnover tax, without being registered under the sales tax regime. It was really shocking that military regime of Musharraf, having no electoral obligations also succumbed to the pressure of Bazaar and since then Bazaarwalas have defied all measures for documentation of economy.
All the regimes in Pakistan—military and civil alike—resolved to extend retail sales tax to all exempted areas of economy, but failed to do so. The Bazaarwalas have ultimately proved their strength. Documentation, despite the main demand of IMF, has proved to be yet another unrealised dream. Poor people of Pakistan are the real losers, being a hapless lot; their voices remain mute in democratic or military eras alike. They have been left to face the unprecedented burden of rising cost of life, as the mighty sections of society are not ready to pay taxes that include unscrupulous traders. They have now not even the slightest doubt about the fact that this country is only meant for powerful high-ranking civil military bureaucracy, corrupt politicians and profit-hungry Bazaarwalas.
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 traders must declare correct income but there should be simple return, low rate of tax and ease of payment. Present laws and procedures are too complex. It should be strongly recommend that self assessment be accepted and for at least the first five years of someone becoming a filer, no audit or any contact with the FBR staff. The FBR can send automated reports to the filer during these five years to point out if numbers are not reconciling, but NO action without confronting the definite information and seeking explanation. Action against non-filers should be taken as per law.
The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of management Sciences (LUMS).
“Huzaima Bukhari and Dr. Ikramul Haq have designed a tax reform plan that would dramatically change the structure of taxation in Pakistan by correctly aligning incentives to promote economic growth and voluntary tax compliance. An ideal tax system should consist of the lowest possible tax rate on the broadest possible tax base. Such a system gives people the least incentive to evade, avoid or otherwise not report taxable income. Along with sound money, free trade, spending restraint and minimal regulation, the adoption of these recommendations will launch Pakistan onto a new trajectory of economic growth and prosperity for all”
—Dr. Arthur B. Laffer, Father of Supply-Side Economics, Creator of “Laffer Curve”