The Federal Board of Revenue (FBR) of Pakistan has set an ambitious revenue target of Rs. 11,174 billion for the fiscal year 2024-25, representing a 20.8% increase from the expected Rs. 9,252 billion for FY2023-24. Among the measures introduced to achieve this target is the Tajir Dost Scheme, which aims to bring untaxed retailers into the tax net and generate Rs. 50 billion for the fiscal year. While the scheme is a bold move towards increasing tax compliance, its effectiveness remains uncertain. Similar attempts by previous regimes, including the Musharraf administration and the PML-N and PTI governments, have failed to bring retailers into the tax net. The current unity government is now trying its luck, but success is far from guaranteed.

One fundamental issue that continues to plague Pakistan’s tax system is the reluctance of many retailers to enter the tax net. There are two primary reasons for this: a deep-seated lack of trust in the tax system and the hasty implementation of tax schemes without adequate stakeholder consultation. The newly introduced Tajir Dost Scheme is a prime example of these challenges.

The Tajir Dost Scheme requires traders and shopkeepers to pay a monthly minimum advance tax ranging from Rs. 100 to Rs. 60,000 based on indicative income. However, this mechanism is highly impractical. First, it expects individuals who have never made a single tax payment or filed an annual return to make 12 monthly payments and submissions, plus one annual return, totalling 13 submissions annually. In contrast, other businesses are required to make quarterly payments and submissions, plus one annual return, totalling five submissions per annum. This disparity creates an undue burden on traders and shopkeepers.

Moreover, traders incur various withheld or deducted taxes on imports, supplies, utilities, property transactions, commissions, car purchases, and token taxes. Under the Tajir Dost Scheme, these taxes cannot be adjusted against the minimum tax liability, leading to double taxation. This flaw in the scheme’s design discourages compliance and adds to the complexity of the tax system.

Another significant issue with the Tajir Dost Scheme is its reliance on an estimated income-based tax calculation method, which is based on arbitrary property values fixed by the FBR. This method fails to consider the ground realities of different businesses, such as the nature of the business, value of supply, or profit margins. The arbitrary distinction based solely on property size also overlooks the vastly different income potentials of businesses in the same area, making the tax system seem unfair and disconnected from real economic conditions.

The scheme also deviates from the prevailing Income Tax Law. While the minimum advance tax is legally adjustable against the actual income declared in the tax return, the prevailing basic exemption threshold of Rs. 600,000 per annum is effectively abolished. Under the scheme, an annual income of Rs. 608,000 will create a minimum tax liability of Rs. 1,200 for the year, discriminating against traders and shopkeepers by eliminating the tax-free income threshold.

Service providers such as barbers, property dealers, beauty parlours, and travel agents are not covered under this Advance Tax Collection Scheme, leading to further discrimination. The exclusion of these service providers is contrary to the scheme of law and creates an uneven playing field. The lack of incentives and the additional burdens imposed by the Tajir Dost Scheme also discourage voluntary registration and compliance. The scheme’s design fails to offer substantial incentives for businesses to register voluntarily, and its complexity adds to the existing challenges faced by taxpayers. True simplification of the tax system and significant incentives are crucial for encouraging compliance.

Furthermore, Tier-1 retailers, defined under the Sales Tax Act 1990, are already tax-compliant through the FBR-POS regime and are major tax contributors under the normal tax regime. The Tajir Dost Scheme does not explicitly exclude these retailers, leading to potential dual tax regimes and perceived harassment. This oversight undermines the scheme’s effectiveness and adds to the confusion among taxpayers.

Due to these issues, the Tajir Dost Scheme has faced a poor response, with only tens of thousands of traders registered out of an estimated 3.1 million. The deadline of 31 July 2024, for the first monthly advance tax payment under the scheme has not generated significant tax proceeds, casting doubt on the official registration figures.

The government and tax authorities must recognise that such policies drive businesses to remain unregistered. A 2023 study by the Pakistan Institute of Development Economics highlighted several reasons why businesses choose to remain informal, primarily due to the complexity and perceived unfairness of the tax system. To improve compliance, it is essential to simplify the tax system and offer substantial incentives for voluntary registration. Only by addressing these fundamental issues can Pakistan hope to increase its tax base and achieve its ambitious revenue targets.

Rana Tariq Mehboob
The writer is Chairman of the Chainstore Association of Pakistan.