Net­ting the traders

The Pak Banker - - 4EDITORIAL - Khur­ram Husain


SOME­THING very in­ter­est­ing is hap­pen­ing. The with­hold­ing tax on bank­ing trans­ac­tions by non-fil­ers of tax re­turns has cre­ated a storm of con­tro­versy, and the real face of in­for­mal sec­tor prac­tices is be­ing re­vealed.

Here's some back­ground. In its latest bud­get the gov­ern­ment an­nounced a with­hold­ing tax on all bank trans­ac­tions con­ducted by non-fil­ers of tax re­turns. The tax would be­come ap­pli­ca­ble on any trans­ac­tion, whether cheque or pay or­der or online pay­ment or any­thing else, that was larger than Rs50,000. The rate was set at 0.6pc of the trans­ac­tion, later ne­go­ti­ated down to 0.3pc, and the funds would be de­ducted from the ac­count be­ing trans­acted upon.

The banks were re­quired to use the Fed­eral Board of Rev­enue (FBR) data­base to de­ter­mine all those de­pos­i­tors who have filed tax re­turns and those who have not. Once they had done this, they were re­quired to au­to­mat­i­cally start de­duc­tions from trans­ac­tions be­ing made from the ac­counts of non-fil­ers and de­posit the money with the FBR at the end of the day.

The gov­ern­ment es­ti­mated that it would get Rs35 bil­lion in rev­enue from this mea­sure. But more im­por­tantly, it sought in­for­ma­tion on those non-fil­ers who are trans­act­ing in large amounts for fur­ther ac­tion.

For most in­di­vid­ual de­pos­i­tors who are non-fil­ers, this wasn't a huge prob­lem. The amount of the tax be­ing levied is very small, and most trans­ac­tions tend to be be­low Rs50,000 in any case. The prob­lem came in with busi­nesses, par­tic­u­larly traders and whole­salers, but sur­pris­ingly enough, also in­dus­try.

I was sur­prised to see reg­is­tered own­ers of large in­dus­try protest­ing this tax. Surely they had filed their re­turns and the tax would not be levied upon them. So why were they protest­ing? Many who do file tax re­turns con­duct a large por­tion of their busi­ness through pri­vate bank ac­counts.

Take a look at who all is protest­ing. Large-scale in­dus­try, such as for­eign in­vestors or large-scale man­u­fac­tur­ers, are silent. The large textile lob­bies are also silent on this mea­sure, although they are press­ing ahead with other de­mands and is­su­ing strike calls of their own, more re­lated to "cost of busi­ness" type of con­cerns. But many in­dus­tri­al­ists are protest­the mea­sure, the sort who are in­deed fil­ers of re­turns. What's their an­gle? This is where things get a lit­tle in­ter­est­ing.

When you ask them, these in­dus­tri­al­ists will tell you that much of the busi­ness deal­ings are with non-reg­is­tered par­ties and there­fore the tax im­pacts them. But how would it im­pact them if they are fil­ers? Out­go­ing pay­ments from the ac­count of a tax filer will see no de­duc­tions.

The real rea­son is that over the years many for­mal sec­tor, reg­is­tered busi­ness own­ers who do in­deed file their re­turns and are there on the ac­tive taxpayers list have taken to the prac­tice of con­duct­ing a large por­tion of their busi­ness through pri­vate bank ac­counts opened in the name of mis­cel­la­neous in­di­vid­u­als. So a large mil­lowner might op­er­ate a cou­ple of dozen bank ac­counts, some opened in the name of loyal mem­bers of his work­force, some in the name of his driver or cook or chowki­dar, and make many of his pay­ments from these ac­counts to be able to con­ceal his real turnover.

This prac­tice has be­come very wide­spread, and sud­denly the new with­hold­ing tax has net­ted these pay­ments, which in some cases can be very large. Not only that, the new tax can now start to gen­er­ate in­for­ma­tion which can po­ten­tially iden­tify such ac­counts to tax author­i­ties. So the mill-owner will now have to ei­ther move the por­tion of his busi­ness that is con­ducted through these ac­counts onto his own books, thereby show­ing a sharp rise in his turnover and mak­ing him li­able for ad­di­tional taxes, or he can in­crease the num­ber of such ac­counts to try and keep the turnover in each be­low the ceil­ing of Rs50,000, or he can go and file re­turns for each of these ac­counts and bring them onto the ac­tive taxpayers list.

Each course of ac­tion car­ries risks. A sharp rise in turnover in one year could trig­ger an alarm bell with the tax author­i­ties, who could then ini­ti­ate an au­dit of his past fil­ings to de­ter­mine if turnovers in the past were un­der­stated. Mul­ti­ply­ing the num­ber of ac­counts and spread­ing your trans­ac­tions out amongst them is cum­ber­some. And fil­ing re­turns for all of the ghost ac­counts is risky be­cause the tax author­i­ties might again no­tice high turnovers in the ac­counts while de­clared in­comes in the re­turns are be­low the tax­able thresh­old.

The traders and whole­salers are protest­ing the tax for clear rea­sons: they con­duct their busi­ness through bank ac­counts but do not file re­turns and their ac­counts see very high turnovers, so they are look­ing at a sub­stan­tial amount be­ing de­ducted via this with­hold­ing tax.

As a re­sponse to this mea­sure, the traders have said they will start con­duct­ing all their trans­ac­tions in cash. This is a bluff. The kinds of turnover that they have on a daily ba­sis would be next to im­pos­si­ble for them to carry on en­tirely in cash. For­eign ex­change com­pa­nies do re­port a rush into dol­lars by many non-fil­ers, which cre­ated a short spike in de­mand for dol­lar cur­rency in the mar­ket, prompt­ing the State Bank of Pak­istan (SBP) to al­low ex­change com­pa­nies to im­port dol­lars from abroad to meet the de­mand. But the SBP spokesman con­firms that in the month of July there is no ap­pre­cia­ble de­cline in rupee de­posits, mean­ing peo­ple are not ex­actly rush­ing out of the bank­ing sys­tem ever since the new tax went into ef­fect. With a lit­tle skill, the gov­ern­ment should be easily able to man­age the protests against the mea­sure. Traders can­not keep their shops shut for very long, and fil­ing a re­turn is not ex­actly a very dif­fi­cult process any more.

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