The International Monetary Fund (IMF) has reportedly agreed to the closure of the Tajir Dost (trader-friendly) scheme in Pakistan, signaling a potential shift in the country’s approach to taxing its vast retail sector. This development comes on the back of a significant improvement in tax collection from retailers following policy changes implemented from July 2024.
The Tajir Dost scheme was an initiative launched by the Federal Board of Revenue (FBR) aimed at bringing unregistered retailers into the tax net. Recognizing the challenges of traditional methods involving letters and documentation, the FBR developed a mobile application to facilitate the registration process. Field teams visited retailers across different cities, collecting data on shop size, location, and electricity consumption to automatically issue their tax registration numbers (Active Taxpayer Number). This initiative, ongoing for the past year and a half, was part of a broader strategy to expand the tax base.
Initially, the government had set a collection target of PKR 50 billion from this sector. However, recent reports indicate a staggering collection of PKR 400 billion. While this figure represents a substantial achievement, it’s crucial to understand that the Tajir Dost scheme itself was not the sole driver of this surge.
The primary reason for the dramatic increase in tax revenue from retailers stems from a significant hike in the tax rate under section 236H of the Income Tax Ordinance, effective from July 2024. This section pertains to the tax charged on sales made to retailers by distributors, wholesalers, or manufacturers. Prior to this change, the tax rate for filers was 0.5%, and for non-filers, it was 1%. However, the budget for the fiscal year starting July 2024 witnessed a drastic increase in the tax rate for non-filers to 2.5%, while the rate for filers remained at 0.5%.
Given that an estimated 90% of retailers in Pakistan are unregistered (non-filers), this steep increase had a cascading effect. Manufacturers, who ultimately determine the price of fast-moving consumer goods, factored in this increased tax burden when setting prices after July 2024. Retailers, often unaware of the intricacies of tax regulations, maintained their profit margins, effectively passing the increased cost onto the end consumer.
This indirect mechanism led to the substantial increase in tax collection, exceeding the initial target by a significant margin. It is this improved collection that has prompted the IMF to agree to the closure of the Tajir Dost scheme, suggesting that the objective of enhancing tax revenue from retailers is being met through the revised tax policy.
However, this approach has raised concerns about fairness. The current system implies that retailers, predominantly non-filers, are effectively paying a 2.5% tax, which is considerably higher than the 1.25% turnover tax levied on manufacturers. This means that smaller retailers are bearing a disproportionately larger tax burden compared to large-scale industries.
While the IMF has given its nod to scrap the Tajir Dost scheme, the FBR is yet to officially announce its discontinuation or clarify the future of the mobile application. Historically, recommendations from the IMF have often been implemented by the Pakistani government, making the closure of the scheme a likely outcome.
Interestingly, there has been limited public discourse or formal communication from major sectors like FMCG to the FBR regarding the impact of this high tax rate on unregistered retailers. This silence might be attributed to the fact that the increased tax is ultimately being borne by the consumers through higher prices.
The current situation presents a complex scenario. While the government has successfully boosted tax collection from the retail sector, the method employed raises questions about equity and the burden on small businesses. Whether the FBR will heed the concerns about the higher tax rate for retailers compared to manufacturers remains to be seen. Moving forward, a more equitable and transparent tax policy for the retail sector is crucial for sustainable economic growth.
The coming days are likely to bring more clarity on the official stance of the FBR regarding the Tajir Dost scheme and the broader strategy for taxing the retail sector in Pakistan.
It’s impressive that the retailer tax collection surged so dramatically. I wonder if the closure of the Tajir Dost scheme will lead to new strategies or if the success will be integrated into broader tax reforms.