The Federal Finance Minister, Muhammad Ishaq Dar, has shown in a characteristic manner the spine to withstand pressure from PML (N) supporters, the traders, mainly retailers who are demanding withdrawal of 0.6 percent withholding tax on banking transactions of non-filers.
However, he has halved the rate to 0.3 percent, which is the rate for filers only in the first quarter of FY16. The non-filers have been asked to file their tax returns by September 30. And after that date, non-filers will have to pay 0.6 percent on bank transactions.
Let us hope that the September 30, 2015 deadline is not extended. Retailers have also been assured that the sales tax rate on fast moving consumer items, popularly known as FMCGs, could be reduced on sector-to-sector basis, as well as, the rate of turnover tax could also be reduced as done for cigarettes and POL, because the margin in distribution and wholesale is marginal compared to the retail price of goods.
And, the commission is based on volume traded and not on the listed retail price or the price fixed by the government.
This amendment does make a greater sense. Expecting a Pan/cigarette seller to pay at the same rate, a turnover tax, as a general merchant selling medicines or food stuff is being unrealistic.
Similarly, location disparity in the same trade will also vary. The question is why we have landed ourselves in this unenviable situation. Is it not because of the presumptive tax regime? It was introduced only as a stop-gap measure.
But now it has become the norm and is widely prevalent. And, most of our revenue increase now comes from this source, rather than any effort on part of our revenue officials.
So everyone is collecting revenue on behalf of the State. And, businesses are subjected to numerous audits and have to spend both time and manpower resource to carry out this task as it is laid down in law without any compensation from the State.
This is not how taxes are collected the world over. Presumptive tax regime was introduced as a temporary measure for enhancing collection of taxes in a pre-dominantly cash-based society. It was hoped that this would be eliminated as we progress towards documentation.
However, this has not happened. On the other hand, we have started collecting even indirect taxes, in this fashion, by extending the presumptive tax regime to sales tax as well.
What has been the response from taxpayers to all this? They now treat the deduction at source of Advance Tax as a cost and not as an adjustment. The reason for this is evident in the non-payment of refunds or inordinate delay in payment of refunds by the State which has become more acute with the passage of time.
And collection of revenue has no bearing with our bloated expenditure. Therefore, we always overstate revenue and understate the expenditure to show the fiscal deficit below 5 percent which is said to be a sustainable figure. And, at the end of the year, we opt to seek approval of supplementary grants. This is indeed the reality.
Once the fiscal deficit target is agreed with our lenders and the administrative or recurring cost of running the country estimated, a target for revenue collection is supposedly fixed instead of being estimated.
This target is distributed – by FBR – among various revenue heads and respective members distribute to their underlings. This methodology is unheard of in developed economies.
If, indeed there is no solution to this and we intend to continue doing it then revenue targets need to be on gross basis and not on net basis as it leads to corrupt and other unsavoury practices and also lies at the root of withholding of refunds of business.
In turn, it forces these companies to borrow – to keep themselves liquid to run their businesses and also adversely impacts tax collection. Top revenue officials are seen begging big taxpayers to pay advance tax prior to end-June in order to come close to their target and take an adjustment in July, ie, beginning of the next financial year. A shortfall in revenue is thus built into the system from its onset.
Economists, analysts and tax advisors have all kinds of short-, medium- and long-term solutions. But they are not the ones who have to meet the pay-roll and keep the businesses ticking. It is businesspeople who know better since they face this real problem head-on.
They are no angels either. They are forced to cut corners. They are perhaps the most generous as they give a far bigger share of their income to charities than any other class. That is why Pakistanis are considered as a charitable lot but the world regards them with low esteem when it comes to tax collection.
Therefore, our taxation system needs to be overhauled. People must see and feel that their taxes are working for them. And, improving the quality of their life. When people are forced to spend money to buy civic amenities such as clean drinking water and keep a private army of guards to protect themselves and their loved ones, they then question whether or not the state doing anything for them. Non-taxpayers need to feel shunned and see taxpayers are respected and not hounded.
Only then will the non-taxpayer be incentivized to join the list of taxpayers. We need to keep the differentiation in rate for filer and non-filer. If the rate for non-filer is punitive, only then will it not be passed on. And, it would encourage a non-filer to become a filer.
According to the plea of retailers, it is not they do not want to pay taxes and willingly accept that they have been stealing tax by under reporting their turnover. “If all of a sudden their turnover goes up – they would end up attracting the revenue hound who would want a piece of meat for himself by subjecting them to all kinds of audit.
They would be hard pressed to justify their total expenses paid for by their hidden income. The Finance Minister needs to be cognizant of this challenge and needs to build their trust and bring them into the tax net gradually. He will also be required to keep his tax hounds away from them.