EDITORIAL: Traders’ opposition to registration and payment of advance tax based on the location of their business, which can be challenged with proof that income is not as high as the average in that particular location, was palpable on Wednesday as the shutter-down strike in all major markets of the country inconvenienced the general public – an inconvenience that may turn into anger if the shutter down strike continues.
The registration form for traders, uploaded by the Federal Board of Revenue the same day, requires bank account information for refund only, and registration will imply that the filer will pay withholding tax levied in the sales tax mode, that is applicable on filers instead of non-filers – 0.1 percent instead of the existing 2 percent.
The question is whether the simple form will appease the traders sufficiently to forestall any further call for strike action or not.
The traders have refused to pay advance tax, associated with registration, and have cited the reason as a significant rise in input costs in recent years (and which continue to rise) due to what is euphemistically cited as administrative measures sourced to the non-negotiable conditions agreed with the International Monetary Fund (IMF) that include a rise in electricity tariffs, a rise in the price of transportation due to not only fluctuations in the international price of oil and products but also due to the petroleum levy imposed on these products currently at a high of 60 rupees per litre with the 2024 Finance Bill enabling the government to raise it to 70 rupees per litre if it so needs to.
Another obvious reason for their well organised resistance is the fear that once the returns are filed the government would raise rates annually as it has done in the case of petroleum levy, a very low-hanging fruit, which is budgeted to generate a whopping 1281 billion rupees in the current year – nearly 27 percent of total non-tax revenue and 10 percent of total taxes budgeted to be collected by the FBR this year.
The minimum tax on companies and businesses is another example of this practice adopted by the government. Initially, a 0.5 percent of annual turnover was levied as minimum tax.
Today this tax, as its nomenclature suggests, is to be paid even if the taxpayer suffers a loss, goes up to 8 percent of turnover in certain categories.
In the absence of an amnesty for all closed and past transactions prior to the registration and filing of the first tax return for the newly registered traders, it well nigh impossible to convince them to come to this scheme as it would expose them to additional taxation and penalties for stocks and assets in their possession.
In other words, the traders’ fears are quite genuine and therefore merit understanding of the issues that are relevant.
On the other hand, however, it is not possible for the government to extend any amnesty as long as it is under the IMF programme. Furthermore, to understand the possibility of success or otherwise of this tax this attempt must be viewed in a historical context.
Pakistan has been on IMF programmes during the three recent civilian administrations (dating from 2008) and all three attempted to compel traders to register and pay an advance tax.
The 2008-13 PPP-led government cognizant of the detailed purchase data available with Nadra associated with each national identity card attempted to levy a tax directly on traders but backed off due to strikes; needless to add the then ongoing Fund programme was suspended with two tranches remaining; the PML-N government in an effort to raise revenue levied a lower different tax on filers and a higher tax on non-filers – a tax differential that increased with the passage of time.
The government completed the IMF programme but left behind a historically high current account deficit that necessitated going on another IMF programme by the Khan administration.
The onset of Covid early 2020 was the major lacuna in tax reforms with the government then injecting huge unfunded subsidies for political considerations in early 2022 that again led to delays in the quarterly reviews. It is important to note that confrontation between the traders and the government today is not only impacting on the country’s economy but is also causing major inconvenience to the general public.
The immediate solution to this problem is evident: target traders are estimated at 3.2 million and therefore getting them on board will take time but the government can and should rely on a much smaller group of individuals, those mainly sitting in the country’s assemblies, with incomes far above the national average who do not pay taxes at the same rate as those payable by the salaried class.
Provinces agreed to the IMF condition to align taxation on agricultural incomes with the federal income tax system by January 2025 and time will tell if, as and when this condition is implemented.
There is no doubt that the tax structure needs urgent reform and the heavy reliance on indirect taxes (accounting for up to 75 percent of all FBR revenue) whose incidence on the poor is greater than on the rich must be phased out in favour of direct taxes. This together with taxing the traders as well as the politically influential landlords may take time and in the interim period, two years maximum, the government will need to slash current expenditure by at least the amount it raised in this year’s budget against the revised estimates of last year – or a little less than 3 trillion rupees.
Unfortunately, however, it is increasingly clear that traders’ countrywide August 28 strike has added to economic uncertainty despite country’s rating upgrade by Moody’s.
Copyright Business Recorder, 2024