Traders are furious these days. Led by two different factions of the All Pakistan Anjuman-e-Tajiran, they kept shutters down for two days last week to protest against the government’s decision to impose adjustable withholding tax on banking transactions over Rs50,000 at the rate of 0.6 per cent for non-filers of tax.

The decision to extend the scope of the banking transaction tax was made in the federal budget for the present fiscal year, by introducing section 236P of Income Tax Ordinance, 2001, to punish the non-filers and at the same time encourage them to file their income tax returns.

The tax is expected to generate about Rs35 billion in revenue.

Banks on behalf of the government will make the collection.

However, after vehement protests, mainly by traders, the government decreased the levy to 0.3 per cent with effect from July 11, 2015. This reduced rate will remain effective until September 30, 2015.

Despite divisions, and much political wrangling, the traders’ organisations are unanimous in their demand for an amnesty scheme besides seeking a fixed income tax rate aimed at avoiding the complexities of the country’s tax system.

The government has shown reluctance so far to accept the amnesty demand, perhaps, due to the anticipated opposition by the International Monetary Fund. Pakistan is currently in negotiations with the IMF in Dubai under the eighth review of the $6.6 billion bailout programme that would decide if the country receives the next loan tranche.

A large number of traders do not file tax returns while those that do grossly understate their income. According to rough estimates, currently, over 80 per cent traders are non-filers and those who file returns grossly understate their sales, incomes and assets.

How did it come to this? How have the traders become so brazen about bypassing the taxation system to not pay tax? What if everybody did that, wouldn’t some sort of anarchy ensue? "The law of the land stipulates that they should file tax returns," says economist Asad Sayeed. "Whether a withholding tax on bank transactions is the right way to go about it is a moot point, the fact that these traders don’t file returns means the state will go about different ways to collect taxes from them."

Ijaz Ahmed Mumtaz, President Lahore Chamber of Commerce and Industry thinks the imposition of this tax is quite unfair as the profit margins of small traders will decrease. Also, he say, "persons not liable to pay tax, like widows and agriculturists, will be caught in the net too".

On the other hand, owners of medium to large businesses that are already in the tax regime object to this tax because, he adds, "they are afraid their benami accounts will be exposed."

The practice of conducting business through benami or ghost accounts is common in Pakistan. Businesspersons open bank accounts in the name of their wives/husbands, children or their loyal servants, and their earned income finds its way in acquisition of property or assets.

The recent amendments in the tax laws are designed for the FBR authorities to ultimately tax the true income of the owners of these transactions, whether they be traders, industrialists or other individuals with substantial earnings but who don’t pay taxes in accordance with the law.

Tax evasion is morally repugnant. It’s stealing money from law-abiding people who pay taxes, to make good their own profits. Still, it is a risk worth taking in Pakistan -- because it is a well-established belief that tax authorities in Pakistan go out of their way to harass even law abiding tax payers. It is a commonly held belief that if you get into the tax net, you will be at the mercy of the corrupt officials who will, through misuse of their authority, impose an extraordinary amount of tax or force the people to bribe them to avoid the harassment.

People therefore believe that it is best not to file the tax returns in the first place.

It is difficult to say at this stage whether this amendment in the tax law will achieve the desired objectives. Only time will tell. However, there is a possibility that individuals start reducing the quantum of transactions through banks.

But, information gathered by TNS from banks based in Lahore and Karachi suggests neither the volume of transaction nor the value of transactions has reduced since the imposition of this tax. Also, the State Bank confirms that no significant decline was recorded in deposits in July.

If this pattern continues, will the FBR succeed in achieving its gargantuan goal of widening the tax base? "It will, for sure," says Sayeed. Wholesale and retail trade contribute 18 per cent to the GDP. Considering that they are protesting against this policy implies that a large number of them transact through the banking sector. As such, it will broaden the tax base. The only interesting thing to observe in the coming months is the extent of broadening. One should expect a number of transactions from this segment opting out of the banking system. But if you are starting from zero taxation from this sector, as we are, then there will be some impact."

However, he thinks, "A much better way was extension of the GST to the retail stage (as proposed by the previous government under the banner of RGST) but that was ironically rejected by PML-N and the traders both. GST would have recorded all transactions -- regardless of whether they were channeled through the banking system or not), and would have been a much fairer and more transparent system to assess taxable incomes of individuals and businesses".

Even if we assume that the FBR collects all the data related to big transactions, implementing the law to catch tax evaders is another story. As is normally the case, such laws and powers are used by corrupt tax officials to exhort the concerned individuals, and through connivance, pocket a part of the tax.

Tax professionals agree that the FBR has to be reorganised along professional lines -- with the hiring of well-paid professionals from the accounting and legal backgrounds. Also, they say, the discretionary powers of the tax officials have to be reduced drastically, rates of taxes reduced, tax base broadened (still large segments of society do not pay any taxes because of statutory exemptions), audit proceedings made less complicated, and the tax officials’ high handedness controlled.

There is a political side to the trader’s protest. Sayeed agrees, "It is political. Traders, especially in the Punjab are the core constituency of PML-N. They will use their political clout to remain outside the tax net. The PML-N, on the other hand, is under pressure to broaden the tax base and cannot keep ignoring such a significant contributor to GDP remaining outside the tax net to its international creditors, mainly the IMF. If they had agreed to impose the RGST proposed by the previous government, they could have blamed the PPP government and retained their goodwill from this constituency."

Until all these matters are settled, tax cheats will remain one step ahead. They will keep replenishing their coffers with untaxed income. It’s time we had a financial system that encourages fairness rather than greed.

Is the thought too utopian for you?