Asset-based tax for traders proposed

The International Monetary Fund (IMF) has urged Pakistan to introduce a new asset-based tax scheme for traders who remain outside the tax ambit despite multiple attempts, amid the government’s reluctance to venture again into a politically sensitive area.

Sources told The Express Tribune that the global lender proposed the new scheme after the last two attempts, the Tajir Dost Scheme and retail sector-based tax collection targets, could not yield the desired results. However, the Federal Board of Revenue (FBR) was not receptive to the IMF’s proposal and instead emphasised continuing with the existing arrangements, said the sources.

Unlike the last area-based tax scheme, the IMF has proposed taxing traders based on their assets. However, the tax authorities were of the view that since the overwhelming majority of traders do not file returns, they cannot accurately assess their assets or determine tax liabilities. The government had introduced at least two schemes for traders in the past three years, but both initiatives failed to produce the desired results.

During the PDM-I era, a fixed income tax had been imposed on retailers through electricity bills. However, the federal government had to retreat after the PML-N senior leader and now Chief Minister Punjab intervened and asked the then finance minister to withdraw the tax. Under the current IMF programme, the government had implemented a new scheme for traders with the aim of collecting Rs50 billion during the last fiscal year 2024-25.

The scheme had initially been introduced for commercial areas but was later extended to shops in residential areas. The government introduced a fixed income tax ranging from Rs100 to Rs60,000 per month, based on the measurement of business premises.

The coalition government announced the traders’ scheme for all dealers, distributors, retailers, manufacturer-cum-retailers, importer-cum-retailers, or any person involved in the supply chain of goods doing business in 42 cities.

Out of these 42 cities, 25 were in Punjab, seven in Sindh, six in Khyber-Pakhtunkhwa, three in Balochistan and one in Islamabad. However, after a strike call by trade unions in August 2024, the government of Prime Minister Shehbaz Sharif again retreated and stopped the implementation of the scheme.

Tax authorities were of the view that because of a lack of political commitment and the strong street power of traders, no special scheme could work to convince them to enter the tax net. They emphasised that traders could gradually be brought into the tax net through initiatives like Point of Sale systems and digitisation of invoices. However, these two initiatives are not enough to convince traders to pay their due share in taxes.

The FBR’s data showed that during the first eight months of this fiscal year, traders paid a paltry Rs28 billion in withholding taxes. The amount was higher by only Rs5 billion compared to last year. In addition, the FBR collected Rs17 billion worth of withholding taxes at the supply stage, which was hardly Rs1 billion more than last year.

The combined income tax under sections 236-G and 236-H amounted to Rs45 billion, which was not even close to the over Rs350 billion that salaried persons have paid so far in this fiscal year.

Tax officials said that manufacturers were also not providing data on retailers despite withholding taxes from them under section 236-G. Due to the FBR’s inability to go after traders and weakened political will, traders are doing informal business in Pakistan. This has exposed salaried persons and manufacturers to an undue tax burden.

The FBR has not been able to bring these people into the tax ambit despite the government giving it 1,000 cars with an engine capacity of 1,300cc, which is the entitlement of a federal secretary. The FBR could not broaden the tax net even after receiving up to four extra salaries.

After PM Sharif’s new austerity measures, the FBR may now have to take back at least 600 of these cars. It is not clear whether the FBR will also continue the practice of giving up to four salaries as performance rewards every month after the government’s decision to reduce expenditure by 20%. For the current fiscal year, the government had given a Rs14.13 trillion tax target, which the FBR may miss by a margin of Rs800 billion to Rs1 trillion.

During the first eight months of the fiscal year, the shortfall against the original target is already over Rs640 billion. This is despite the fact that the FBR has taken the bonanza of Rs125 billion in super tax recoveries after the federal constitutional court ruled in favour of the government.

The FBR had assured the prime minister that it would collect Rs1 trillion additional in this fiscal year through enforcement measures and pending court recoveries. This target is going to be missed by a wide margin.

The FBR has already asked the IMF to further reduce its tax target to Rs13.5 trillion – about Rs630 billion less than the original goalpost.