A taxing problem

April 14, 2024

Will the government achieve its aim of broadening the tax base with the new Tajir Dost Scheme? There are some caveats

A taxing problem


he federal government has launched a Tajir Dost Scheme to broaden the tax base by bringing traders into the tax net.

The scheme, launched via SRO 420(I)/2024 dated March 21, titled Special Procedure for Small Traders and Shopkeepers (Tajir Dost), comes after the International Monetary Fund asked the government to broaden the tax base and tax those who are still out of the tax net in order to document the tax economy alongside easing the tax burden on the existing taxpayers.

However, as in the past, it is expected that the government will surrender to shutter power. The tax bureaucracy has already started suggesting alternatives to the technocrat ministers looking after the finance and economic affairs.

The focus at the Federal Board of Revenue has always been on meeting the revenue target at the expense of the documentation of economy.

In recent past, the FBR did the same thing by deducting tax at source from suppliers, importers. 85 per cent of the income tax is collected in the withholding mode. This means that FBR’s 25,000 employees put in little effort to collect most of the income tax. The withholding taxes have increased the revenue collection but distorted the tax regime. A majority of sellers add this cost to the end consumer price so that their incomes remain untaxed. Most of them treat withholding tax as the final tax liability and do not pay any tax at all. The result is that the tax to GDP ratio has not improved.

In introducing the Tajir Dost Scheme, the government has to show political will. The traders have always resisted government attempts to bring them into the tax net. On the other hand, the government has always been revenue focused. When it is unable to get the desired results besides facing a reduction in revenue, it agrees to bring down the tax rates or amend the rules.

Three million traders are doing business currently in the country. 50,000 are filing regular returns. They are also paying taxes under the annual turnover scheme at their will. There is no mechanism for tax assessments. They do not provide any data about their purchases and sales.

The Tajir Dost Scheme is an extension of the current mechanism. Under the scheme, traders are categorised for filing their returns on a monthly basis. The scheme does not exempt any trader.

Theoretically, it will improve the revenue collections from July 1 when the implementation of the scheme starts.

In practice, the situation is different. Lahore Chamber of Commerce Industry president, Kashif Anwar, says that the government is asking the traders to file returns on a monthly basis.

“The traders are never against any tax schemes. However, they have some reservations about the recently announced Tajir Dost Scheme,” he says. He says that there is no link between the area of the property and value of the property with the turnover of the sales. “the government is asking the traders who did not even file annual returns to file returns on a monthly basis. This will add to the problems of both the government and the traders,” he says.

The LCCI has already written a letter to the federal finance minister, Muhammad Aurangzeb, regarding the scheme. It has expressed the traders’ concerns and suggested that the government revisit the scheme to make it a successful broadening of the tax base.

The chamber has suggested annual/ bi-annual payment of advance tax returns instead of monthly returns to alleviate the traders’ concerns. Furthermore, the chamber has recommended collection of adjustable advance tax through electricity bills based on actual consumption from commercial meters of the shops.

Kashif says that there is a need to introduce single page simplified tax return for the retailers and shopkeepers in addition to giving a minimum of five years to the Tajir Dost Scheme for consistency and continuity of policies.

Former LCCI executive committee member Awais Saeed Paracha says that the government must tax those who are not in the tax net. “This way, there will be a balance between tax compliant and non-compliant businesses,” he says. He adds that “…currently it is very difficult for the tax compliant businesses to compete with non-compliant businesses.”

“One can gauge the huge potential of the tax from traders with the registered associate class members of any chamber in any city of Pakistan and number of shops there” he says. “For example, out of thousands of shops in Badami Bagh markets, only about 800 are members of the LCCI. So is the case in every market of Lahore,” says Paracha.

Kashif says that the FBR needs to remove the confusion and ambiguities surrounding the Tajir Dost Scheme in order for it to succeed. “The government must clarify whether the scheme applies to existing or new retailers. Also, we need to know the tax rates that will be prescribed in the future,” he says.

A cabinet member says that the government is considering all the suggestions and responses from traders’ community and their leaders.

The writer is a staff reporter at The News. He tweets @Jawwadrizvi

A taxing problem