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Tax compliance and strong-arm tactics

December 09, 2012

ONE can sense a lot of nervous energy as customers brush against each other in the cramped lanes and side alleys of a bazaar in the heart of the old city of Karachi.

The shops are packed with products but the national taxation number certificates cannot be seen in any of the several hundred outlets in the vicinity.

“Under the law it is obligatory on retailers to prominently display tax certificates” Israr Rauf, the senior member and the acting Federal Board of Revenue (FBR) chairman, told Dawn over telephone from Islamabad.

A young shopkeeper in downtown Karachi sounded defiant when reached for comments. “If the government decides to use strong-arm tactics to enforce decisions that hurt our interest, we will be left with no option but to take to streets to press for our right to fair treatment by taxmen who are corrupt to core”, he asserted. Mohammad Talha, 29, is a third generation trader, who joined 50-year-old family business recently. He manages a furniture showroom in the furniture market at Aram Bagh.

He defended the policy of resistance by the trading community that, he said, was ready to chip in their fair share to public revenue pie but dread cumbersome documentation that was not manageable for petty traders.

Last week, the FBR concluded a month-long media campaign to inform the huge community of retailers about the legal condition that requires them display taxation certificates in their shops. It is said to be a part of a series of measures initiated by the taxation authorities to broaden the country’s tax base and plug loopholes in the system to improve revenue generation.

The revenue collection has doubled over the past five years but the low-tax-to-GDP ratio continues to project Pakistan as an irresponsible nation of free riders. This key pointer is stuck at a low nine per cent, lowest in the region and among peers in the world.

Over the past 10 years the ratio moved both ways in a narrow band of two per cent (9-11 pc of the GDP) despite all the noise raised in an intensive taxation reforms/stabilisation and donors’ resources spent to improve collection.

The tax-to-GDP ratio looks unrealistic as incomes drawn from high value real estate, retail and agriculture manage to dodge tax liabilities.

“From Rs1 trillion in 2008, the revenue improved to Rs1.8 trillion in 2011, and expected to cross to cross Rs2.38 trillion when the democratic government closes its fifth year term in 2013”, Israr Rauf boasted, skipping the tax-to-GDP ratio dimension.

Listing initiatives of the FBR to close income-expenditure gap for unleashing development potential in the country, he mentioned the recent awareness campaign. “Our system of direct taxation is based on voluntary self assessment but certain segments collectively evade tax liabilities, burdening the responsible segments who fulfill their duty by filing tax returns honestly. It would be unfair to allow them to carry on with their ways”, he said.

“To this end, we decided to start with the retail sector. The process that started with the awareness campaign will be followed by physical survey of markets. On the basis of data collected legal proceedings will be initiated against shopowners who fail to oblige. Beside fines, we are considering to block identity cards of tax laws violators to force them to honour their obligation towards this country”, he explained.

“Let them try, they will not succeed. We will resist tooth and nail. The FBR surveyors will be chased out if they make an attempt to enter any of several hundred markets in Karachi,” Atiq Mir, president All Karachi Tajir Ittehad told Dawn over telephone.

“We care for the country and are ready to pay a flat tax per shop promptly. Let the FBR decide the rate for different categories of shops after consultation with the representative trade bodies. But we will not let ‘babus’ to harass us when our community is already exposed to tremendous pressure in the challenging economic and security environment”, he said articulating sentiments of the majority.

The Ittehad enjoys the support of the Federation of Pakistan Chamber of Commerce and Industry and the Karachi Chamber of Commerce and Industry on the position it has taken on NTN certificate display. The Lahore Chamber of Commerce and Industry, however, sided with the government and urged retailers to do the needful in this regard.

According to an informed estimate, there are about one thousand markets across the country. If small mohallah shops are counted in, the total number of shops in the country runs into several hundred thousands. In Karachi even a small beetle shopowner earns more than Rs400, 000 a year. It implies that at least 85 per cent of all retailers irrespective of products they deal in, earn taxable income. However, as a majority of them prefers cash dealings, their businesses are not documented allowing them to game the system in their favour.

Recently at a public forum, Shaukat Tareen, the former finance minister, mentioned that gigantic retail sector, was contributing a paltry sum of Rs75 million to national exchequer while the Canteen stores department was paying Rs50 million pushing the total up to Rs125 million.

“If calculated honestly, the collective tax liability of the retailers of top three malls of Karachi would exceed the amount”, said an expert.

“Nowhere do people pay their taxes without tears, otherwise tax practitioners with skills to suggest ways of tax avoidance wouldn’t be so successful in the developed world. The problem in Pakistan compounds because those vested with the responsibility lack credibility in public perception and the governments are both inefficient and wasteful”, he added.

In recent years Turkey has enhanced its tax- to-GDP ratio from 13 per cent to 33 per cent while Brazil has expanded its ratio to 37 per cent over last 15 years.

“I see no reason to provoke the powerful shopkeeper community so close to elections. They need to understand the muscle power behind the PNA movement that led to the fall of Bhutto in 1977 before letting the officers at the FBR play their little games that may cause a lot of heat but little light”, a political analyst marked the timing of the move.