THE government is not likely to completely withdraw the levy on bank transactions of non-filers despite mounting pressure from trade and industry. It wishes to help the textile sector, but its options are limited and involve high opportunity cost.

While the government appeared nervous last week as indications of a storm gathering on the horizon were too obvious, many members of the ruling party’s economic team were cautiously optimistic that they would succeed in containing the situation with the help of a segment of supportive businessmen.

The government is expected to use the tried and tested policy of carrot and stick to handle the angry businessmen.

With marathon IMF review meetings in progress in Dubai, the government cannot afford to go back on its firm commitment to broaden the tax net

If the issue of legitimacy is set aside, the demand of the trading community is precise and clear. They are demanding a full and final withdrawal of any levy on bank transactions by non-filers.

Meanwhile, the wish list of the textile industry is long and its demand to reduce the cost of doing business vague. The industry could be overstating the intensity of the crisis, but there is a greater recognition of their position within government circles.

With marathon IMF review meetings in progress in Dubai, the government cannot afford to go back on its firm commitment to broaden the tax net and narrow the scale of subsidies. This has left very little negotiating space for Islamabad to appease the business representatives invited by the finance minister last week.

The meeting, participants told this scribe, did not pacify all the defiant businessmen, who now enjoy the support of some opposition parties. But it did weaken the position of hawks who were advocating direct confrontation.

It would be premature to comment on the final outcome of the strike call by the textile industry, but the dialogue was said to have brought down temperatures for now.

“The reaction of the trading community was expected but the conduct of political parties endorsing the protests by tax dodgers is astonishing and expose their claims of spotless credentials,” commented Privatisation Commission Chairman Mohammad Zubair, who returned from Dubai on Friday after participating in some IMF review sessions. He referred to the PTI in particular, and added that “the worst part is that they are doing it knowingly just for political point-scoring”.

“The government has a compassionate outlook towards the textile sector, which indeed is in trouble. Prime Minister Nawaz Sharif has directed the economic team to carve a policy to help them as best as possible.”

He said the situation is extremely difficult and ready solutions are not available. The best way out of the current imbroglio, in his view, would be a policy of ‘openness and responsibility sharing’.

“My suggestion would be to take the business leaders on board, share the limitations and let the competing interests debate and suggest options. If nothing else, it would build bridges and facilitate the PML-N and the business community to better understand each other’s positions,” he argued.

The government had imposed a 0.6pc withholding tax on bank transactions exceeding Rs50,000 per day for non-filers, effective from July 1. But under pressure from the traders’ lobby, the rate was revised down to 0.3pc for three months to grant them time to file their tax returns.

However, after initially generally accepting the proposal, many trade bodies have done an about-face, rejected the agreed-upon deal and threatened to go on strikes in a bid to get the tax reversed altogether.

“We are not ready for the deduction from our daily bank transactions, so we are left with no option but to close our bank accounts and switch to non-banking channels. In many towns, commodity traders are using handwritten receipts that are considered as good as legal tender and making final payments in cash at a mutually agreed time and place,” said All Karachi Tajir Ittehad chairman Atiq Mir.

“I do not expect a popular movement on the issue, but I don’t think the government can afford to let banks bleed dry of cash,” he added.

Meanwhile, the State Bank of Pakistan dismissed the traders’ claims. In a written response, SBP spokesperson Abid Qamar said: “We have not witnessed any unusual decline in bank deposits so far as an after-effect of the fiscal measures taken with respect to bank transactions”.

And the textile industry, which claims to have been disproportionately burdened with taxes, is seeking amendments in the economic policy framework so that its stuck-up sales tax refunds are settled; the gas infrastructure development cess (which will hike the cost of running captive power plants of textile millers) is reversed; a steady power supply is ensured; and the policy of keeping the rupee artificially stable (which is hurting exporters) is discarded.

Aptma Chairman S.M. Tanveer said the industry has built its case of hardship by comparing the business environment in Pakistan with its regional competitors.

Published in Dawn, Economic & Business, August 3rd, 2015

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