Resolving the Banking Transactions’ Tax Crisis

The following article has been published in Daily Nation, dated 3rd August 2015

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Resolving the Banking Transactions’ Tax Crisis

Prof Dp

By: Omer Zaheer Meer

As discussed on these pages before the controversial decision of levying a withholding tax on all banking transactions for non-filers (0.3% till September and increasing to 0.6% thereafter) with the underlying aim of broadening the tax base has not been able to gain acceptance in the presence of serious flaws within the taxation system along-with prevalent corrupt practices. Even if one ignores the increase in the inflationary pressures in the economy and the penalization of ordinary salaried class, the reservations of traders alone are sufficient to make this highly controversial. The disagreement on this matter has now reached a dead-lock between traders and the incumbent Government. So exactly what are their reservations and how can they be possibly addressed? Is there any possible solution for the same?

First of all the withholding tax introduced is more of a transactional tax then an income tax. But more importantly the issue at hand is one of a lack of trust in the system. Not only do the traders fear to be targeted unfairly once they bring themselves in the system to avoid the transactional tax, they haven’t seen the remedial procedures effectively providing relief in an event of witch-hunting by FBR either. Many economists are of the view that introducing new taxes to compensate for FBR’s failures is simply not the answer to Pakistan’s economic and tax woes. The reasons for FBR’s failures are numerous ranging from dissatisfaction amongst FBR’s employees to structural inefficiencies in the taxation system. They’re however not the topic for today and will be discussed at another time.

For now the issue of the trust deficit particularly in the business community is discussed. Besides very high rates of both direct and indirect taxes, the harassment by FBR and blockade of due refunds are often used as tactics by FBR officials to meet their targets. This actually puts off many genuine businessmen who would otherwise like to contribute their dues to the society. Therefore they claim to resort to the alternate in doing charity and stressing that they evade getting within the ambit of the formal documentation to avoid the horrible experiences many of their fellow traders have endured in their dealings with the FBR. None of these issues are of a nature which cannot be positively addressed. Infact this writer has repeatedly proposed several structural reforms including the ones addressing these very issues.

For example the policy of volume over rates can be pursued. It’d entail reducing all the taxation rates to single digits making it economically prohibitive to evade due to the higher costs of engaging professionals as well as fulfilling the demands of the corrupt officials within the tax apparatus. The focus will be to broaden the tax base using indirect taxes for this purpose while direct taxes can be applied on a progressive basis, increasing with the income brackets. If tunnel vision can be shunned then the positive potential of this can be envisioned. Currently less than 0.5% of the population files a return. The number has declined over past four years despite all the “efforts” for broadening the tax base. If this number can be increased to several millions with a consequential increase in the tax base and tax payers, one can envision the positive impact on tax collections.

It’ll be interesting for the readers to know that the honorable finance minister Mr. Ishaq Dar himself used to be a proponent of this proposal during his days of serving the Lahore Chamber of Commerce and Industry. Surprisingly, now that he’s in a position to actually enforce this much needed reform, he’s shying away from it. Moreover the effective implementation of the relief mechanisms and laws can help assure the tax payer. The time limits for deciding the disagreements should also be enforced. For a change, the tax officials can be trained to respect the tax payer instead of treating them as an assumed criminal. Such measures can go a long way to win over the trust of the taxpayers in the system.

Even in the past negotiations between traders and Government officials, the issue of the undue nuances caused by FBR to genuine businessmen resulting in most businesses staying out of the system to avoid these troubles has been raised. Similarly promises were made with traders to review the exorbitantly high rates of withholding taxes deducted in advance. Some of these taxes are treated as non-adjustable even in case of a loss. Even those that are considered adjustable are extremely hard to recover as the FBR seems to have an unwritten rule regarding refusing even the genuine refunds to loss-making businesses when they need their cash the most. However the same FBR seems content to issue refunds to or defer recovery of tens of millions from influential parties. Such behavior doesn’t instill the trust in the business community.

The latest on this issue is the breakdown of the negotiations between Government and traders resulting in strikes been called and social media campaigns been setup. The reduced rate of 0.3% till September has also been turned down by the business community for the reasons discussed above. A successful strike was already observed with the traders threatening to go all out towards a civil disobedience. Government on the other hand has ordered investigations into the affairs of top leadership of traders.

Possible ramifications of this standoff can be damaging for the national economy and the issue needs to be resolved amicably. One possible solution can involve doing away with this transactional tax and reducing the withholding and sales tax rates immediately pending a review of other structural reforms in return for voluntary registration of a minimum number of businessmen. There are many other possible proposals to this effect too. The ball is now in Governments’ court to decide whether it is serious about introducing reforms to win over the tax payer and broaden the tax base or if it simply believes in coercive measures which may seem beneficial in meeting short-term targets but will surely cause damage in the longer-term.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and @OmerZaheerMeer or

Solving Pak’s Economic Woes

The following article has been published in Daily Nation, dated 9th February 2015

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Solving Pak’s Economic Woes

Prof Dp

By: Omer Zaheer Meer

Government of Pakistan borrows more from the IMF. World Bank approves next loan tranche to Pakistan. Asian Development Bank sanctions grant for Pakistan. These are the sort of headlines that regularly defines Pakistan’s economic persona in international media. Why a resourceful country like Pakistan has been caught up in the never-ending web of interest-based borrowings without significant increase in economic output over the recent past is a question that should worry our policy makers. More significant still is the answer to the dilemma of how to solve Pakistan’s economic woes in the short term?

While there are many corrective measures including long-term structural reform that are warranted to ensure a functional, productive and self-sufficient economic apparatus, some short-term measures can provide effective support to the economy till the long-term reforms bear fruits. First and foremost is continuously advocated and inefficiently pursued goal of expanding the tax base. Instead the incumbent government, like many before it, is focused on squeezing the existing limited tax-base, further discouraging people from entering the tax-net and encouraging both tax-avoidance (legal) and tax-evasion (illegal).

Recently when the petrol prices crashed-out in the international markets, first the government was reluctant to pass-on the relief to the masses. However owing to political pressure when the government did reduce the prices eventually, it chooses to increase the General Sales Tax (GST) levied on petrol. At present GST on petrol is up-to 27%, an increase of almost 59% from the previous level of 17%. In simple words it means that app Rs. 25 is collected from everyone on every litre of petrol they purchase, indirectly via GST & PDL. Pakistanis are ending up paying more taxes on petrol than they used to before the huge price drop in international market. Similarly four new taxes (surcharges) have been added to the electricity tariffs. At the same time, for some mysterious reasons, the government seems unwilling & unable to widen the tax net by taxing those with more income.

Pakistan has one of the lowest tax-payers to population ratio in the world where less than 1% of the population pays direct taxes compared to just under 5% in India, approximately 58% in France and almost 81% in Canada. One of the main reasons for this is the huge emphasis on indirect taxation. To elaborate this further let’s briefly overview some key taxation statistics. At present there are only a few million tax payers out of a population of 200 million in Pakistan. While those filing income tax returns (many of which are nil) were a meager 711,000 in 2012 while 800,000 till 16th December 2013 as per official figures released by FBR. This dependence on indirect taxes is worrisome. General Sales Taxes (GST), Federal Excise Duties (FED), Customs Duties, e.t.c. collectively constitute app 74% of all tax collection by the government. I’ve explained before that this high dependence on indirect taxation results in increased costs of production and services, giving rise to inflationary pressures and relatively low economic output results in trade and current account deficits.

This is happening in a country where the bills of import for the luxury items and 4×4 vehicles keep increasing. The property prices are still ballooning with every passing day. In short, Pakistan has no shortage of millionaires and billionaires, let alone a few hundred thousand above the taxable income limit as read from the dismal income tax return filing figures. All that is required is to identify the taxpayers currently not paying their taxes. Integration with NADRA database can be extremely useful for this, more so if various other institutions’ databases can be linked to the main NADRA database. Visualize this, anyone buying a plot in defence or importing a 15-20 million PKR vehicles would be immediately identified by the system and bought in the tax-net (assuming the political pressures are not given in to). As per conservative estimates there are atleast 2-3 million big tax-evaders with due taxes in millions, that can be brought into the tax net in this manner. This translates into hundreds of billions of extra revenue which will greatly reduce the dependence on borrowing. The space provided can then be used to pursue long-term goals to resuscitate the economy. For this we don’t even need extensive time-consuming meetings which lasts the entire tenure of Governments, all that is needed is political will and a few officers willing to implement.

Though FBR has recently taken an important initiative where it has taken data from various institutions including Motor Vehicle Registration Authorities, Car Manufacturing Companies, Electricity Supply and Distributing Companies, Property Registration Authorities, Mobile phone subscribers Cos,  Medical and Dental  council, Pakistan Engineering Council, Pakistan Bar Council and information from Jamal’s Yellow Pages ( about business concerns) and now fed into PRAL’s database, it still needs much to be desired. First of all this data will become outdated soon, secondly each time FBR would need to go through the same exercise to secure the data and thirdly they’ll need to merge it all together in their systems too. On the other hand having a central database where all these and other concerned institutions’ databases are connected with NADRA’s will form a central and continuously updated data pool which can then be allowed to be accessed by FBR. The benefits of such a move would be grand and rejuvenate the ailing taxation system of Pakistan. This would certainly need to be backed with long-term structural reforms including proper resources for FBR along-with an effective accountability system.

Lastly some good news to share about the taxation reforms in the country. A positive measure that has been pursued for quite some time has been approved by the concerned authorities due to the effective campaigning by Lahore Tax Bar Association under guidance of its President Mrs. Ayesha Qazi. The move is to allow the use of CNIC (computerized national identity card) numbers as the NTN (national tax number). This would reduce the hassles in income-tax registrations and will help widen the extremely small tax base. The present system is a sad joke where a citizen has to go and apply for a tax number instead of it being automatically allocated to them via CNIC. If the approved plan is actually implemented (it can later be extended to GST registrations too), this can be a giant leap forward and win accolades for the incumbent government too.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, qualified fellow accountant and anti-money laundering expert with international exposure who can be reached on Twitter and @OmerZaheerMeer or