Zafar Iqbal
Pakistan has been grappling with the ongoing issue of increasing its tax base without making much headway, despite the pressing need for diversified revenue sources to alleviate its chronic debt burden and address the growing fiscal deficit. This predicament is perplexing, given the country’s urgent requirement for a broader tax base.
Historically, Pakistan’s tax system has been heavily skewed, burdening the less affluent sections of society with excessive and inequitable tax levies while granting significant tax waivers, exemptions, and immunities to the wealthy and powerful. As a consequence, the tax expenditure for the fiscal year 2023-24 amounted to a staggering Rs. 4 trillion, representing 43 percent of the total tax collection of Rs. 9311 billion.
A major contributing factor to this challenge is the failure of successive civilian and military governments to implement effective new initiatives and address administrative deficiencies in expanding the tax base. Policy changes aimed at incorporating new segments often lack practicality and fail to consider the ground realities.
In an attempt to confront this issue, the Federal Board of Revenue (FBR) introduced the ‘Tajir Dost Scheme’ to specifically target the retail sector, with the objective of fully integrating it into the tax system. The informal nature of the retail sector has resulted in significant financial transactions occurring outside the tax framework, with a considerable number of traders evading filing income tax and sales tax returns/statements, despite paying withholding taxes.
The untapped potential of the retail sector in Pakistan, if taxed at a sales tax rate of 4% and an income tax rate of 1% based on gross receipts, could potentially yield an annual revenue of US$15 billion. The scheme seeks to rectify this scenario by formally incorporating all such retailers into the tax framework, thereby expanding the tax base and boosting revenue collection.
The ‘Tajir Dost Scheme’ specifically targets traders and shopkeepers operating from fixed locations such as shops, stores, warehouses, offices, or similar premises in cities specified by the FBR. Businesses under this scheme are required to register with the FBR and make minimum monthly advance tax payments. Initially launched in six cities, the scheme has since expanded to encompass 42 cities.
However, the latest notification, S.R.O. 1064 (I)/2024, issued by the FBR on July 22, 2024, has been met with criticism. This notification outlines specific requirements for each city and location and stipulates advance tax payments ranging from Rs. 100 to Rs. 60,000 per month. However, this standardized approach fails to account for the distinct nature and scale of different businesses, leading to inequitable tax burdens and reflecting a lack of adaptability from the FBR in addressing the complexities of modern business environments.
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The current scheme’s inefficiencies and outdated methods underscore the need for the FBR to enhance its intelligence and enforcement mechanisms by leveraging modern technology. A strategy that formalizes the economy and routes transactions through formal banking systems, allowing for easy tracking and monitoring, could provide valuable data for tailoring tax obligations to specific businesses based on their actual financial activities.
The dissatisfaction and unrest among traders and shopkeepers regarding the ‘Tajir Dost Scheme’ highlight the imperative need for a more sophisticated and technology-driven approach to tax administration that aligns with contemporary business practices and ensures fair and effective tax collection.
The government’s approach to broadening the tax base reveals a critical oversight in adapting to contemporary economic realities. Despite rapid technological advances and digital reforms, the reliance on outdated methods for tax collection remains evident, resulting in inefficiencies and inequities in revenue generation.
To address these shortcomings, the digitization of the economy emerges as a fundamental step. Establishing a clear vision and strategic plan, updating the regulatory framework to support digital transactions, promoting digital literacy, investing in digital infrastructure, and digitizing banking services are pivotal measures to align with contemporary business practices and improve tax tracking.
However, despite the urgent need for data privacy laws and the digitization of the Federal Board of Revenue, Pakistan has yet to pass essential legislation to ensure privacy and data protection. Bridging this gap and fostering public-private partnerships and international cooperation will enable the adoption of best practices and technologies, aligning Pakistan’s economic practices with global standards.
By undertaking comprehensive steps, the government can modernize tax collection, broaden the tax base, and enhance overall economic efficiency. This approach will not only support innovation and adaptation but also promote research and development in digital technologies, keeping the economy competitive.
