Pakistan has been facing the perpetual challenge of expanding its tax base without any tangible results, a situation that is quite ironic given its need for broader revenue sources to come out of chronic debt enslavement and get rid of burgeoning fiscal deficit.
Historically, Pakistan’s skewed tax system has been imposing oppressive, excessive and disproportionate tax burden on the less-privileged segments of the population, while extending unprecedented tax waivers and exemptions, amnesties and immunities to the rich and mighty.
Resultantly, the tax expenditure in the fiscal year 2023-24 reached the staggering figure of Rs. 4 trillion (43 percent of total tax collection of RS. 9311 billion).
One major issue contributing to this problem is inability of the successive governments, civilian and military alike, to introduce effective new initiatives, coupled with administrative shortcomings in expanding the tax net. Policy changes aimed at including new segments often lack practicality and/or implementation, without taking into consideration the ground realities.
In a recent effort to address this issue, the Federal Board of Revenue (FBR) launched the ‘Tajir Dost Scheme’. This initiative, specifically targeting the retail sector, aims at integrating it fully in the tax system. The retail sector has long remained an untapped area, functioning largely in the informal economy, and the majority though paying withholding taxes, is not registered with FBR to avoid filing income tax and sales tax returns/statements.
The real potential of retail outlets in Pakistan, if taxed at sales tax rate of 4% and income tax at 1% of gross receipts, could net US$15 billion annually [see details at: https://thefridaytimes.com/25-May-2024/the-retail-sector-s-dollar-15-billion-tax-potential]. Over three million traders and shopkeepers are engaged in substantial financial transactions without leaving any tax trail. The scheme aims to address this anomaly by formally incorporating all such retailers into the tax framework, thus broadening the tax base and enhancing revenue collection.
The “Tajir Dost Scheme” targets traders and shopkeepers who operate from fixed locations such as shops, stores, warehouses, offices, or similar premises in cities specified by FBR. Businesses under this scheme are required to register with FBR and pay a minimum advance tax monthly. Initially, in March 2024, the scheme covered six cities, but has since then expanded to include 42 cities.
The most recent notification, S.R.O. 1064 (I)/2024, issued by FBR on July 22, 2024, details specific requirements for each city and location. It assigns an “indicative income” estimate for different types of businesses and stipulates advance tax payments ranging from Rs. 100 to Rs. 60,000 per month. This approach aims to standardize tax obligations based on the business’s location and expected income, thereby streamlining the tax collection process and improving compliance.
The scheme’s major flaw lies in its disregard for the nature and scale of different businesses, highlighting a noteworthy oversight by the FBR. The S.R.O. 1064 (I)/2024 exemplifies the inefficiency and outdated methods of FBR officials in expanding the tax net. For instance, the scheme imposes the same rate of advance tax on a photocopy shop and a motor vehicle showroom situated in the same location, despite their vastly different business operations and income levels.
This ill-conceived approach of FBR fails to account for the distinct dynamics and economic realities of various industries and business segments. By applying a uniform indicative income across diverse business types, the scheme overlooks the unique characteristics and financial capacities of each sector. As a result, it not only creates inequitable tax burdens but also demonstrates a lack of nuanced understanding and adaptability from the FBR in addressing the complexities of modern business environments.
Ideally, FBR should have enhanced its intelligence and enforcement mechanisms by leveraging modern technology. To date, both the government and FBR have struggled to formalize the economy and channel transactions through formal banking systems, where these can be traced and monitored. Such an approach would provide valuable data for tailoring tax obligations to specific businesses based on their actual financial activities.
Instead, the current scheme has led to widespread dissatisfaction among traders and shopkeepers. Many have expressed their frustration through calls for nationwide protests and strikes, reflecting the scheme’s failure to address the real-world complexities of their businesses. This unrest highlights the need for a more sophisticated and technology-driven approach to tax administration, one that aligns with contemporary business practices and ensures fair and effective tax collection.
The government’s approach to broadening the tax base in Pakistan reveals a critical oversight in adapting to contemporary economic realities. Despite the rapid evolution of technology and the digital reform, the reliance on outdated methods for tax collection remains evident. This antiquated approach fails to align with the modern business environment, resulting in inefficiencies and inequities in revenue generation.
A fundamental step toward addressing these shortcomings is the digitization of the economy. First and foremost, establishing a clear vision and strategic plan is essential. This involves setting specific goals for digital transformation, such as increasing transparency and efficiency, and outlining a roadmap with detailed timelines and required resources. Additionally, updating the regulatory framework to support digital transactions is essential. This includes implementing standards for digital identity verification, security, and transaction processes to ensure that digital interactions are secure and legally compliant.
Promoting digital literacy is another critical step. Comprehensive training programmes and public awareness campaigns are a prerequisite to help businesses and individuals understand and utilize digital tools effectively. Alongside this, investing in digital infrastructure is paramount. Expanding reliable internet access and upgrading IT infrastructure, such as data centers and cyber security measures, will support seamless digital transactions and monitoring.
In the financial sector, digitizing banking services through online and mobile platforms, as well as promoting digital wallets and fintech innovations, will modernize financial transactions and improve tax tracking which Pakistani banks are offering.
However, the need is improving the ratio of financial inclusion, which is extremely low, in comparison to the neighbouring China, India and Iran. Similarly, the retail sector must adapt by integrating e-commerce platforms, digital point-of-sale systems, and digital marketing tools to streamline tax compliance. For the wholesale sector, digital B2B platforms and improved supply chain management through digital tools will enhance efficiency and transparency.
The trade sector (wholesale and retail) also requires digitization, including the adoption of electronic trade documents and digital customs processes to facilitate smoother cross-border transactions.
Addressing the role of middlemen/intermediaries by developing digital platforms for brokers and agents will reduce inefficiencies and enhance transaction transparency.
The governmental services should transition to e-government platforms, integrating data across agencies to streamline public sector operations and improve service delivery.
Moreover, ensuring robust data privacy and security through strong data protection laws and advanced cyber security measures is essential to safeguarding digital transactions and personal information.
However, it is a failure on the part of our legislature that they have failed to pass the data privacy laws. It is shocking reality that despite tall claims to digitize the FBR, until today, Pakistan has not passed even the personal data protection law.
However, our rulers still dream about bringing IT revolutions, and claim and cherish their efforts for the promotions of information technology. The reality is that they are not ready to implement basic legislation to ensure privacy and protect the data.
The regular monitoring and evaluation, including audits and feedback mechanisms, can ensure the effectiveness of digital systems and prompt resolution of issues. Such steps on the part of the government will not only support innovation and adaptation, but also certainly promote research and development in digital technologies, which will keep the economy competitive.
For this, public-private partnerships and international cooperation will facilitate the adoption of best practices and technologies, aligning Pakistan’s economic practices with global standards. By undertaking these comprehensive steps, the government can modernize tax collection, broaden the tax base, and enhance overall economic efficiency.
Copyright Business Recorder, 2024