The federal government, while announcing the 2015-16 budget in June imposed a 0.6 per cent withholding tax on all the bank transactions for the non-filers of the income tax returns with effect from July 1. But after a strong protest by the traders across the country, the government entered into negotiations with traders’ leaders. Finance Minister, Ishaq Dar, announced slashing down the rate to half with effect from July 11 till September 30, 2015 at 0.3 per cent.

This temporary relief, however, did not convince traders to end their protests as they have threatened to observe a country-wide strike on September 9 and another shutter down on October 7, if this withholding tax is not withdrawn. The main reason of their protest seems that they are reluctant to file their income tax returns and, thus, come under tax net. But the government is still steadfast in its decision.

"The purpose of this advance income tax was to encourage documentation and provide an opportunity to the traders to voluntarily file their returns," says Tariq Bajwa, Chairman Federal Board of Revenue in a statement. "The FBR is taking steps to remove apprehensions of the traders in filing of returns and declarations of assets," he adds.

Economists and tax experts believe that Pakistan needs to develop a tax culture and introduce serious tax reforms, including introduction of automation for filing tax returns in order to minimise interference of tax collection machinery.

"It is unfortunate that a meagre 0.3 per cent population in Pakistan, out of around 7 million income tax eligible individuals (or less than 500,000) people pay their income taxes annually," says a recent report titled, "Tax: the Existential Crisis of Pakistan" released by Research and Advocacy for the Advancement of Allied Reforms (RAFTAAR), an Islamabad-based alliance led by leading Pakistani experts. The group’s research was funded by the UK Department for International Development.

With one of the lowest tax-to-GDP ratios in the world at 9.45 per cent in the year 2014-15, Pakistan has been striving hard to widen its tax base. The tax-to-GDP ratio in the last fiscal year 2013-2014 was a little less at 8.92 per cent.

Read also: Editorial -- Tax files

For many years, successive governments have tried to increase the number of taxpayers but failed due to many reasons, including lack of political will and absence of tax culture in Pakistan. The ruling elite, including powerful agriculturists’ lobby and big industrialists and traders, have always opposed tax measures.

The only option available with the government has been to increase tax burden on the existing taxpayers or resorting to imposing withholding tax on the documented sectors, like telecom and banking. Another avenue to raise tax revenues is to increase indirect taxes, like the general sale tax.

"We have already excluded the agriculture sector, which contributes around 21 per cent in GDP from direct taxes. Agriculture is a source of livelihood for 43.5 per cent of the rural population, but only 1 per cent tax is collected from agriculture income," says Dr. Shahid Hasan Siddiqui, Chairman of the Karachi-based Research Institute of Islamic Banking and Finance.

Unfortunately, he says, many sectors like property and stocks are undervalued so they contribute less in the national tax revenue. There are many tax exemptions, including immunity on the incomes from foreign exchange remittances under the Section 111, subsection 4 of the Income Tax Ordinance 2001.

"No question is asked on the income coming from abroad through banking channels, and this lacuna in the law has encouraged tax evasion by major politicians and large businessmen," says Siddiqui.

"There is a potential to collect taxes worth Rs 8,500 billion annually against total tax revenue of last year comprising all sources worth Rs 2,811 billion," he claims.

Currently, the FBR estimates say there are approximately 3.7 million tax-registered individuals, out of which only 850,000 are filing their tax returns. But interestingly, nearly 40 per cent of them do not pay tax and just file the return. The reasons are absence of an efficient and equitable tax structure, tax environment, and a transparent and accountable system of tax administration.

Sakib Sherani, former Principal Economic Advisor of the federal finance ministry and head of Macro Economic Insights (Pvt) Ltd, a consultancy firm based in Islamabad tells TNS on phone that more than 55 per cent economy is tax-exempted due to the existing laws and policies.

"Agriculturists, professionals like doctors and lawyers, transporters, traders are either officially exempted from tax or it is not properly enforced," says Sherani.

Despite a dismal tax collection situation, he points out that the present government has taken some positive measures towards tax reforms and improvement of tax collection system. "Maybe under pressure from the IMF, the government has published a directory of taxpaying parliamentarians, which is a big step. Previous governments since 1993 have failed to do this. This government has done it, which may put a moral pressure on those public representatives who do not pay any tax."

Moreover, he says, "compilation of full record of all the active taxpayers and removal of some exemptions are also positive steps towards better tax management."

According to him, "the FBR has issued around 200,000 notices to the potential new taxpayers, which may bring more people into the tax net whereas the tax audit system is reintroduced by the FBR."

Appointment of a professional Chairman of FBR and other tax reforms can give an indication of a right direction.

Every government in the past has received tough resistance from the businessmen whenever it tried to document the economy. One can recall severe opposition on the decision to impose general sales tax (GST) at retail level in the late 1990s and later in 2010. The government received a big blow when the previous PPP government of Prime Minister Yousaf Raza Gilani wanted to introduce Value Added Tax (VAT) and then the reformed general sales tax (RGST), but failed to proceed further after tremendous opposition from traders’ lobby.

Automation of the FBR is one of the solutions for a better tax regime, recommends Sakib Sherani. "The World Bank had provided the federal government adequate funds for automation," recalls Sherani, adding that due to vested interests in the FBR, those funds were not properly utilised. "Proper automation might have affected the discretionary powers of the tax authorities, so they discouraged it," he remarks.

"A strong opinion exists among the potential tax payers about the wastage of their tax money, this often discourages them to pay their due taxes," he says.