Tax reform and defiant untaxed bazaar

Pakistan's tax administration remains formidable where incomes are visible and hesitant where organised power resists scrutiny. Another disappointing retail scheme exposes that imbalance. Reform cannot mean repeatedly asking compliant businesses to finance the state while influential traders negotiate their obligations.

The latest reporting identifies only 1,750 scheme participants against 3.6 million potential retail nonfilers, including merely 220 fresh filers. That means participation below 0.05 per cent and fresh filing near 0.006 per cent. These are measures of a scheme's reach, not proof that every nonfiler owes tax.

The revenue chronology also matters. Reported first quarter receipts exceeded the aggregate target; October subsequently exposed weakness. Provisional estimate, as reported in this newspaper on October 31, put the July–October shortfall at Rs124 billion, while subsequent reporting put the figure at Rs129 billion and finally another source says it is Rs96 billion. The distinction matters when evaluating what revenue performance reveals about reform. The central failure is sustainable collection from previously undertaxed activity.

Refunds and advances demand equal scrutiny. The Karachi Tax Bar Association recently raised refund delays and due process in advance tax recovery. Refund payments can increase while substantial arrears remain. Equally, lawful advance tax must be distinguished from pressure to pay before liability falls due. FBR should disclose both refund ageing and the legal periods against which collections are credited.

Taking tomorrow's receipts today does not enlarge the tax base. Retaining money that belongs to taxpayers does not constitute administrative productivity. Both practices, wherever established, distort performance and deprive businesses of working capital.

The IMF's own assessment acknowledges that transformation measures continue primarily to target existing taxpayers. Why does programme approval tolerate such persistent asymmetry? The World Bank, ADB, REMIT and McKinsey should face a common test: what additional, lawful, recurring revenue has their supported work generated from previously noncompliant businesses, after costs and refunds?

Loans, guarantees and consultancy payments are different things; adding them together as money wasted would be misleading. Nevertheless, public support requires public accounting. Publish contracts, deliverables, expenditure and independently verified outcomes. Training sessions, dashboards and installed systems are inputs. Sustained compliance is the result taxpayers are entitled to demand.

The alternative has long been available: simplify obligations, reduce discretion and enforce consistently. The earlier retail proposal combined four per cent sales tax with one per cent income tax. Its arithmetic must remain honest. Ten billion dollars from four per cent requires annual taxable sales of $200 billion. That base has been established by current official consumption data.

A transparent scaling exercise can bring the earlier combined proposal close to $15 billion, but this remains a conditional gross scenario, not additional cash ready for collection. Existing taxes, exemptions, input credits and incomplete compliance must be reconciled. A low turnover rate can also burden traders operating on very thin margins.

Begin with large commercial sellers identified through supplier invoices, imports, property and payment records. Give small businesses one simple return, credit taxes already collected and protect subsistence activity. Separate policy from collection, select audits by published risk criteria and provide independent appeals. Technology should identify discrepancies for verification, never manufacture liability.

A public quarterly scorecard should distinguish new taxpayers who actually pay from registrations alone, disclose refund arrears, and identify collections shifted between periods. Independent scrutiny must determine whether reform spending changes behaviour in major markets.

FBR's authority should be measured by its capacity to apply the same lawful rules to the well-connected and the already documented. The bazaar cannot remain politically negotiable while compliance elsewhere becomes progressively more expensive.