Traders, shop owners and markets observed a successful nationwide strike last week in protest against what they say are undue tax burdens being imposed on them by the government. According to media reports, private businesses  remained shut as traders observed a complete strike to register their anger against the so-called tax reforms aimed at widening the tax net. Shutters in various parts of the country — including the metropolitan cities of Karachi and Lahore — remained closed as the call for strike from traders received an overwhelming response from the business community.

The situation poses a serious challenge to the PML-N government as the protesting traders have political affiliations with it. This is particularly so as opposition parties and various trade associations have declared their support for the agitating traders. The strike has resulted in tremendous loss to the economy. According to an estimate,  the one-day shutter-down strike inflicted a financial loss of over Rs50 billion on wholesalers and retailers nationwide. Of this, Karachi alone—the country’s economic hub and port city—suffered a Rs4 billion loss. There are over one million small to large wholesale and retail outlets across the country including 600,000-700,000 in Karachi alone. The wholesale and retail sectors contribute an estimated 18-20% to the $375 billion domestic economy, providing 20-25% of the country’s employment. The traders are perturbed due to the unbearable burden of soaring power bills and raging inflation. One of the major demands of the business community is to withdraw the withholding tax (WHT) on food items to alleviate the public’s financial strain.

In response to traders’ demands, the government issued a simple bilingual income tax return form for traders and exempted them from giving details of their assets and bank accounts. The Federal Board of Revenue released a three-page draft income tax return form for tax year 2024 and onwards for those traders who were non-filers in the previous tax year.

The return form carries 34 questions which average traders find difficult to answer. What has riled the traders is the fact that the government has imposed a fixed tax of Rs100 to Rs60,000 per month. However, certain exclusions, mainly related to 100-square-foot shops and the Rs100 fixed rate on 50-square-foot commercial area shops, would make it challenging for the FBR to meet tax targets.

Naeem Mir, general secretary of Anjuman Tajran Pakistan and a coordinator of the Tajir Dost Scheme, has identified two key issues in the conflict between traders and the FBR. The first is that the tax slabs are based on property value (including shop location and area), ranging from Rs1,000 to Rs60,000 in monthly tax. While the scheme requires traders to pay tax according to these slabs and submit annual returns, traders argue that the FBR should impose tax based on their actual income, not indicative figures. The second issue involves traders who are already tax filers but they are being asked to pay advance tax.

It may be added here that previous attempts to bring traders into the tax net were unsuccessful, including compulsory door-to-door registration during General Pervez Musharraf’s tenure. Available figures show that the traders paid a paltry sum of Rs17.5 billion in income tax compared to Rs368 billion paid by the salaried class in the last fiscal year. Under the new scheme, the government has targeted to collect  Rs50 billion income tax in this fiscal year. But this seems impossible now.

The government’s efforts to bring the wholesale and retail sectors into the tax net are driven by the fact  that the country’s tax-to-GDP ratio remains below 8.5 per cent. The wholesale and retail sectors, which account for around 20pc of the economy, largely remain outside the tax net, placing more burden on the salaried class and other sectors.

According to the latest reports, the trading community is in no mood to buckle under government pressure. They are now planning to extend their protest to a three-day strike, with the possibility of an indefinite shutdown if the government does not meet their demands. They argue that the FBR’s scheme is unviable for expanding the tax base. On the other hand, their counter proposals could help expand the country’s tax base more effectively.

Most taxes in Pakistan are collected indirectly, primarily through consumption, which disproportionately affects the poor. As the rich-poor gap is increasing in Pakistan, there is a need to increase direct taxes, which would help expand the tax net. Recently some trade bodies have offered four proposals to the government aimed at increasing revenue: introducing tax based on self-assessment with penalties for fraud, calculating tax on annual turnover, using average income as a basis, and implementing a fixed tax based on business volume. These proposals provide a good basis for working out a tax formula acceptable to both the traders and FBR.