Tax Net Expansion: Challenges and New Strategies

FBR is grappling with the challenge of broadening its tax base to achieve ambitious revenue targets outlined in the FY25 budget. Finance Minister Senator Muhammad Aurangzeb has reaffirmed the government's commitment to bringing all traders into the tax net, aiming to bridge the gap between revenue generation and national spending.

Ambitious Revenue Targets and Balancing Act

The FY25 budget sets a demanding tax revenue target of Rs13 trillion, signifying a significant increase compared to the previous year. This ambitious goal includes a 48% rise in direct taxes and a 35% hike in indirect taxes. Additionally, non-tax revenue, primarily driven by petroleum levies, is projected to grow by 64%.

While these targets highlight the government's focus on fiscal stability, achieving them requires a delicate balancing act. Aurangzeb assured business leaders of addressing their concerns in the upcoming fiscal year, emphasizing the need for a comprehensive approach considering both the immediate budgetary needs and long-term economic health.

Streamlining Government and Tax System Reforms

Aurangzeb advocated for extensive reforms to address Pakistan's economic difficulties. He suggested streamlining government operations by closing redundant federal departments and devolving responsibilities to the provinces. Additionally, he questioned the continued existence of the "non-filer" term in Pakistan's tax system, suggesting its lack of relevance in other countries. Furthermore, he expressed his opinion on gradually reducing the policy rate to stimulate economic growth and proposed increasing the tax-to-GDP ratio to 30% over the next three years.

Seeking Public Trust Through Transparency

Aurangzeb acknowledged the public's dissatisfaction with the substantial allowances enjoyed by bureaucrats and government officials. He admitted that criticism of the government not reducing these perks and privileges was justified, suggesting a need for greater transparency and accountability in government spending.

Promoting SMEs and IT Sector for Growth

In his concluding remarks, the Finance Minister emphasized the importance of supporting small and medium-sized enterprises (SMEs) and the IT sector. He believes these sectors hold tremendous potential for fostering long-term economic growth and stability in the country.

Challenges of Bringing Retailers into the Tax Net

Despite these initiatives, a major challenge remains: integrating millions of retailers into the formal tax system. The recently launched Tajir Dost Scheme, a voluntary registration program, yielded disappointing results, with only 44,830 retailers registering out of a targeted 3.6 million. This highlights the need for a more effective strategy.

FBR's New Strategy: Fixed Tax Based on Shop Valuation

The Federal Board of Revenue (FBR) is exploring alternative approaches. One option under consideration is a simplified fixed tax scheme based on the valuation of shops. This scheme would categorize retailers based on shop location and value, assigning a fixed tax amount to each category. The FBR is currently conducting property valuations in major cities and towns to establish a basis for this scheme.

History of Challenges and Need for New Approach

This is not the first attempt to bring retailers into the tax net. Past efforts, including electricity bill-based taxation and shop size-based assessments, have proven unsuccessful. Similarly, IT-based solutions like Point-of-Sale (POS) machines, Track & Trace systems, and Digital Invoicing have faced implementation hurdles and technological limitations.

FBR's Argument: Lack of Cohesive Vision

FBR officials acknowledge the lack of a cohesive national strategy for documenting the economy. They highlight the absence of a registration system for retail shops, making it challenging for the FBR to accurately identify and register all potential taxpayers.

This article was published at Compulsory Registeration of Traders/Retailers for Broadening of Tax Base