Traders and taxes

Dr. Ikramul Haq

According to data released by the Federal Board of Revenue (FBR) out of over 3.5 million traders in the country only 312,361 have been filing tax returns. The affluent traders who frequently perform Umrahs in one year alone are not less than one million. But, the FBR has failed to bring them into tax net. While not admitting its ineffectiveness and inefficiency, FBR also did not reveal the complete truth. Though the number of filers amongst trading community is pathetically low but all having commercial electricity connections (the number is 3.2 million) pay advance income tax under section 235 of the Income Tax Ordinance, 2001 and tax paid up to bill amount of Rs. 360,000 per annum is treated as minimum tax with no claim to a refund! All traders are thus paying advance income tax but only a fraction of them is 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 the traders and compromised on its resolve of getting due taxes from them vis-à-vis documentation of economy.

The data 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 9446 traders in Clifton are filers.

The traders of four major markets of Lahore paid total tax of just  Rs.567.7 million. There were only 2096 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 study conducted by FBR a few years back, the contribution of traders in income tax is just 0.5% and in sales tax about 1%. Like mighty absentee landlords, the traders pay meagre income tax. However, they successfully keep revenue authorities at bay due to powerful political influence that they wield. The legislative history of income tax law is fraught with provisions that were amended and/or re-amended on account of the bazaar’s shutter-down threats or violent demonstrations by traders, causing legislators to get cold feet and succumbing to their demands. The governments—civil and military alike—have been extending amnesty schemes to tax evaders to whiten their undeclared incomes and ill-gotten wealth—for example Self-Assessment Schemes of the 1970s, Special National Fund Bonds or Simplified Self-Assessment Scheme of the 1980s, Foreign Currency Accounts or Foreign Exchange Bearer Certificates of the 1990s, various other millennium immunity schemes and the infamous section 111(4) of the Income Tax Ordinance, 2001. 

According to Shahbaz Rana of Express Tribune, the government of Pakistan Tehreek-i-Insaf (PTI) is no different from earlier governments by “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 the 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 in utter disrespect of laws passed by Parliament has now 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 Rs50 to Rs100 million”.

The concessions given to traders by PTI are not a new phenomenon. Nawaz Sharif on becoming Prime Minister for the third time announced unprecedented benefits when in September 2013 the then Finance Minister, now a fugitive, proudly announced that “all demands of traders are accepted”. With this announcement and tax amnesties announced in person by Nawaz Sharif for non-filers, the authority of FBR was further eroded. As in the past, many mighty traders are still not inclined to file income tax returns or pay retail sales tax.

The spokesperson of FBR on March 21, 2014, while speaking at a workshop in Karachi revealed that “no encouraging response has so far been received for the tax amnesty scheme announced by the Prime Minister due to the lack of stakeholders’ interest”. Shockingly only 3000 traders availed the scheme paying paltry amount of Rs 88 million. FBR’s spokesman afraid of political masters could not boldly say that the real culprits for the failure of scheme were traders. Despite extending deadline of amnesty scheme from February 28, 2014 to April 30, 2014, defiant traders were least pushed to avail it.

Before coming to power PTI repeatedly claimed that tax culture and huge untaxed business empires—generating money power essential for winning elections in Pakistan—could not co-exist. PTI resolved to take action against the powerful keeping assets worth billions of rupees abroad without paying taxes. It accused the earlier governments of getting generous funds from business magnates and after winning paying them back through tax amnesties and concessions and by way of statutory regulatory orders (SROs). They alleged that the tax evaders and some leaders of PMLN and PPP made billions through rent-seeking, including tax evasion, and parked the major portion abroad. However, after coming into power, the PTI also offered tax amnesty and asset whitening scheme to those who invested billions in property abroad and in Pakistan! Now concessions for mighty businessmen prove that the PTI has also adopted the same policy of appeasement as its predecessors. 

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The writer, Advocate Supreme Court, is Adjunct Faculty at the Lahore University of management Sciences (LUMS).