Majority of Pakistani businesses seek to avoid tax trap

Karachi: Running a wholesale grocery shop in the southern Pakistani port city of Karachi, 43-year-old Khan used to write as many as 40 cheques a month to buy goods from sugar to Unilever tea bags.
That changed when authorities, in a bid to clamp down on widespread tax avoidance, started charging a levy on every bank transaction above Rs50,000 ($477) for non filers. Khan, who asked for his first name to be withheld to avoid prosecution, now pays most suppliers from a pile of cash he keeps at home, changing his practice of many years.
"This tax is unjust,” said Khan, wearing a white shalwar kameez and sporting a maintained stubble at his shop with half-filled sacks of grains and flour. "We are already paying enough taxes, on almost everything,” Khan said, referring to charges when buying fuel, electricity and phone credit. "Why should I pay extra?”
Pakistan is home to about 200 million people, the world’s sixth largest population where only about one per cent are registered taxpayers. The introduction of the bank charges more than a year ago in a country unused to well-functioning state services sparked protests and traders found new ways to avoid tax by stacking cash and operating with multiple bank accounts.
Pakistanis who hadn’t been declaring income started to pay higher taxes on purchases of cars, property or business class flight tickets in 2014 in a bid to make filing income tax returns more attractive.
A year later, the government imposed a 0.6 per cent withholding tax rate on non-filers, but a lower rate was then agreed after negotiations with the traders in a bid to quell rising anger. Last week the reduced rate of 0.4 per cent was extended until March 31, according to the Federal Board of Revenue.
"Let them open 36 instead of six bank accounts, they will badly suffer once nabbed,” said Ashfaq Tola, a member of Pakistan’s Tax Reforms Commission. "The tax is very much in place and will not be withdrawn as it aims to bring the non-filers into the tax net.”
Still, Pakistani’s fled to cash and the amount of currency in circulation rose 31 per cent in year ended June 2016, the fastest pace in at least 15 years when Bloomberg started tracking the data.
Tax avoidance
Across Pakistani society tax avoidance is widespread. The country has one of the lowest tax-to-GDP ratios in South Asia despite reforms introduced as part of International Monetary Fund loan programme that ended in September such as reducing tax exemptions, broadening the tax base and cutting evasion.
The moves have been unpopular as Prime Minister Nawaz Sharif faces a re-election battle next year. Sharif’s family itself has been embroiled in a alleged corruption scandal, when leaked files from a Panama law firm last year showed his children used offshore companies to make investments.
Only about 10,000 traders have registered with tax authority under a voluntary program against target of one million, Rehmatullah Khan Wazir, a member of Federal Board of Revenue, said in June.
"No one is ready to send money through banks,” said Muhammad Akram Rana, vice chairman of the All Karachi Trade Union, which represents about 800,000 traders in Pakistan’s largest city. "Ask a party for payment and he would tell you to collect it in person.”
‘Extreme’ method
The moves in Pakistan to combat tax evasion and graft contrast with India’s, where Prime Minister Narendra Modi invalidated high-denomination currency notes in November. That cancelled 86 per cent of currency in circulation. The surprise move caused chaos as millions of Indians chocked banks to change their worthless cash and economists have cut the country’s growth estimates.
While Pakistan’s central bank Governor Ashraf Mahmood Wathra called India’s method "extreme” in a Karachi interview after speaking at a Bloomberg forum in November, he said that tax avoidance seemed to be written into South Asia’s "DNA, which we need to change.”
Pakistan’s informal industry, which isn’t monitored and taxed, is huge and estimated to be as as much as half the size of the country’s measured $270 billion economy, according to the central bank, citing multiple studies.
However, Pakistan’s tax collection did rise 20 per cent in the last fiscal year, but most came disproportionately from businesses that were already existing payers, the central bank said in its annual report.
‘Immediate fruits’
The attempt to bring more people into the net through the transaction tax has also impacted banks as deposits rose by only 10 per cent in the last fiscal year, the slowest growth in seven, though they have picked up gaining 11 per cent in the past six months ended December, according to State Bank of Pakistan data.
"Such measures do not reap immediate fruits and require some time to make an impact,” said Wathra.
For small distributors of food items, the tax levy eats away at already slim margins of at most 2 per cent, according to Saad Khan, deputy research head at Karachi-based IGI Finex Securities.
"The challenge to widen the net of tax collection and document more of the economy remains formidable,” said Hasnain Malik, head of frontier-markets strategy at London-based Exotix Partners.