Documentation is of utmost importance for enhancing tax base. There should be no compromise on efforts deployed to achieve the goals. This government has a policy of penalizing the undocumented businesses or undocumented transactions through advance taxes, higher sales tax or higher withholding taxes. The idea is to incentivize them to file returns, and those who are under filling, declare their original numbers.
The federal government envisaged a few steps last year and has expanded its policy scope. The hot issue is the WHT on all banking transactions. In FY14, government levied 0.5 percent tax on cash withdrawals in excess of Rs50,000 per day for non-filers while the levy was 0.3 percent for those who file and that again was adjustable at the time of filing returns.
That was easily cracked down by business community as they bypassed the cash withdrawal through other banking transactions. This year the scope of the tax expanded to all the banking transactions and increased the rate to 0.6 percent for non-filers. The traders, retailers and others could not take the brunt and stood against the levy and built pressure against the government.
Here comes the tricky part as the business community is primarily the vote bank of PMLN government in urban Punjab and the pressure is from all the corners to do away with this measure. Dar immediately could not withstand it and wisely reduced the rate to 0.3 percent till September and asked people to file tax returns by that time.
But the traders could not wait till September and gathered once again to convince the Finance Minister to not levy the WHT. Why is it the problem when all you need is to file returns to avoid transaction tax? The problem is that most of the trading community is already filing return but most of their transactions are taking place from personal accounts or benami accounts.
And they want to continue with this practice because they just don like to declare their exact income. Why? Are they afraid of FBR harassment? Or they just don want to pay their due share of income tax? Apparently, both factors are contributing to their resentment. Dar has been trying to provide the comfort that FBR will not be draconian once they get hold of businesses actual worth. He is assuring that the FBR will not run tough audit and impose actual tax liabilities all of a sudden.
Although the objective in the long run is for everyone to pay his due share to have a just system but doing it abruptly can be counterproductive. The markets behave efficiently in a system where prices are set based on no or little tax. The gap between what they pay and what their actual liability is big and sudden imposition can distort market mechanism.
At the same time the government must not get carried away by the pressure of the vote bank. There are precedence in the past, be it democratic government or military leadership, the efforts of bringing traders, agriculture and other non-paying sectors in tax net were futile.
The only government that can have the spine to is the current government. It has the mandate of the community and the Finance Minister has the political capital to withstand the pressure from within the party. He rightly so, formed different committees in two days round of negotiation with traders from all over the country to take care of their legitimate issues while he remained firm of increasing the tax to 0.6 percent after September.
If this happens, it will eventually force some to pay fair share of taxes and the myth that the money will go out of the system by increasing cash will be short lived as eventually the major chunk of that cash money will touch the formal system.
This will pave way for other sectors to be taxed – however the caveat is most of these sectors are in provincial domain and there has to be a mechanism designed in the next NFC award to incentivize provinces to follow the federal counterpart in levying due taxes on real estate transactions and agriculture income.
Source: BR research