The withholding tax brouhaha

The very people who are against the withholding tax are the biggest undocumented segments of the economy

When it comes to taxation, the government’s policy has, historically, been to tax what it can, not necessarily what it should. It is a shortsighted policy that has done irreparable damage to the country’s revenue collection system and bred a culture of complacency at the Federal Board of Revenue (FBR), a culture from which several successive governments have yet to be able to shake the nation’s tax collectors out of. At first glimpse, our inclination was to view the withholding tax on banking transactions in the same light: a lazy, easy way to raise revenue. Indeed, on the surface, that is precisely what it looks like. The banking sector is among the most documented in the country, so forcing banks to act as tax collectors is relatively easy. Levying a 0.6 per cent withholding tax for every banking transaction above Rs50,000 appears to fall in line with the lethargic approach to tax policy that has characterised the government of Pakistan since independence. We were inclined to be opposed to the move.

But then we saw the uproar, and noticed who was opposing it and why. Make no mistake about it: the very people who are against the tax are the biggest undocumented segments of the economy that have persistently refused to pay taxes since the very founding of our republic. Most people do not realise this, but the retail and wholesale sector — represented by the traders’ lobby that has been the most agitated by this new tax — is actually larger as a percentage of the total size of the economy than agriculture. And when one considers the fact that there are a lot more farmers in Pakistan than there are traders, one realises that there are a lot of wealthy traders who can afford to pay taxes, but simply refuse to do so. When that lobby squeals in agony at the thought of being taxed, it indicates that the government might just have ended up doing the right thing here.

We must commend Finance Minister Ishaq Dar and Prime Minister Nawaz Sharif for not backing down amidst pressure from within their own party and its core support base. The most recent reports are that, despite intense pressure, Mr Dar has only offered to give the traders three more months to document their businesses and reduced the tax back to its 0.3 per cent level for that period. More importantly, he has refused to withdraw the tax in its entirety. It is not often that one gets to witness this sort of political courage in pursuit of a policy that has the long-term benefit of the nation in mind. Such behaviour is rare and we hope that the prime minister and his cabinet remain steadfast in their resolve. It cannot be easy, considering the fact that the trader lobby forms the very core of the PML-N’s support base and even Punjab Chief Minister Shahbaz Sharif is reportedly worried by the tax.

Having said that, we do believe there is at least some grain of truth in the traders’ complaints. There is, for instance, no evidence yet that the banks or the government has a way of ensuring that the tax applies only to businesses that do not file their tax returns. This is a technological and operational detail that is of utmost importance. Another important complaint is that of harassment by corrupt FBR officials seeking to extort bribes out of legitimate businesses looking to document themselves. The government needs to evolve a mechanism whereby it is able to allow such businesses to enter the tax net without harassment, while at the same time ensuring that the system is not abused as an open amnesty for all tax thieves in perpetuity. And finally, the FBR is notoriously slow at handing out refunds on overpayments of withholding taxes, a system that desperately needs to be reformed if people are to develop faith in the taxation system.

We like the government’s approach with this policy: make life painful for those who do not file their tax returns. But fixing these details will matter. Otherwise, all that political courage will have been for naught.

Published in The Express Tribune, July 14^th, 2015.

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