A Budget to remember?

The IMF pressure worked

Perhaps the 2026-2027 Budget will be best remembered in future as the one in which the federal government finally accepted the fixed-tax regime for small businesses. The scheme not only flies in the face of the principles of tax collection, but also reflects the visceral fear-based dislike of the business community for the tax administration.

The scheme itself was announced before the Budget, as members of the government scrambled for the political credit. However, if one person deserved the credit, it was Prime Minister Shehbaz Sharif, who became involved with the issue about 40 years ago, when Lahore Chamber of Commerce and Industry President in 1985. The fixed-tax regime is a trader-originated solution, and has a certain specious logic. It is based on the assumption that taxes are paid by businesses not as part of any social contract, but because the state has coercive machinery. The state has got a monopoly of force, so it can administer a rules-based order. One important component is that it maintains law and order, so that businesses can continue unmolested. Peace, ease of communication (good roads), and a robust settlement dispute mechanism are desired by businessmen, and the state is supposed to give that. In response, it is supposed to raise taxes.

In other words, taxes are a sort of blackmail. If you don’t pay, society could descend into chaos. As they say, ‘death and taxes are inescapable.’ Or at least they should be. But what if you slip a little something to the tax collector. He gets something more than his salary. The businessman incurs an expense lower than his assessed share. The state suffers, and has less money than it should.

That means it pays the judges who settle disputes less than enough to ensure honesty. Businessmen don’t mind, because a judge who accepts bribes will always decide in their favour. An honest judge would decide in their favour only if they deserved to win. Taxmen were also corrupt, and introduced businessmen to methods of corruption, according to businessmen. Taxmen on the other hand claim that businessmen were the fertile minds behind most of the methods of corruption.

Of course, that means a fundamental question is unanswered. What is the purpose of taxation? Why should anyone, including businessmen, have to shoulder the burden of the interest of loans that have been embezzled? Will the fixed-rate regime encourage businessmen to enter the tax net they have avoided so carefully all these years?

Whatever the case may be, the businessman’s fear of the taxman is reflected in what seems almost vindictiveness in the fixed-rate’s scheme of excluding the taxman from even entry into the premises if the requisite QR code is affixed outside the establishment. The prohibition from the conduct of an audit is specifically provided.

The total audit is akin to having a tooth extracted without any anaesthetic. Bribes have been extracted on the threat of a total audit, without the carrying out of one. Not only is it almost certain to reveal some concealed income, which will be duly penalized, but it is also found  by businessmen to be very cumbersome, involving the use of records of every transaction. It is rightly the most feared tool in the taxman’s repertoire, and under the fixed-rate scheme, it has been excluded.

Being allied to file a one-page return under the fixed-rate scheme requires paying a fee of Rs 25,000, apart from the one percent of the turnover mandated. This is the point at which the scheme begins to resemble blackmail. Of course, it could be said that all taxes are blackmail anyway. Since they are all backed by the coercive apparatus of the state, collectors have force to back them up.

There is punishment for not paying taxes, mostly fines or imprisonment. Income tax has been particularly pleasant for businessmen, because they have to pay it out of their profits, which they have already received. By contrast, salaried individuals find it easier, because the tax is deducted at source, which means they never receive it. This is the principle behind withholding taxes, for which credit can be claimed in a return.

This is the essential demand for businessmen: they should not be asked about where they get their money. They want to evade tax, and the best way is not to get caught up in the tax net. That is why they have long insisted on a fixed-tax regime, and have only partially responded to amnesties. One problem with obtaining an amnesty is that one was then in the net. One still ends up in the net with the fixed-rate regime, but at least one is protected from awkward questions from sleek and well-fed-looking taxmen.

It is because of this desire to ask questions that taxmen resisted the fixed-tax regime. If they were perfectly honest, a fixed-tax regime would result in loss of revenue to the government, for businessmen only wanted to avoid the taxman so that they could make money on which money would not be paid to the state. But enter the IMF, which has perpetually hounded the IMF to increase revenues.

This led to the invention of the withholding taxes, which nonfiling businessmen treat as a pass-through expense. However, the taxation machinery first tried amnesties, then the Tajir Dost Scheme, after the bright spark in the IMF noticed that the tax potential of untaxed businessmen was in the trillions.

The fixed-rate regime is thus a signal victory for businessmen; it not just means that one of their longstanding demands was accepted, but that it was accepted despite the taxmen. However, there are two issues. Does this provide businessmen with their desire, which is to remain untaxed, just as farmers are. It is noteworthy that agricultural incomes are not taxed to the same extent as business or salary incomes. Apart from the possibility of showing taxable income as agricultural, it just does not seem fair. Land revenue has not been levied since 1996-7 Rabi, so the old justification for not levying income tax has ended. That apparently has become the next target of the IMF, for now it seems the businessmen have delivered themselves into the hands of the Inland Revenue, even as they avoided it.

The agreement on the fixed-tax regime provides that under certain circumstances, usually quite extreme, an audit may be conducted despite the exemption. Taxmen have shown themselves very adept in the past at expanding the space in which they operate. There is no reason to assume  that they will act differently, especially under IMF pressure.

It is perhaps worth examining other possible regimes. The one that seems to suit the businessmen most would be to abolish income tax altogether. That would require an Islamic state raising only taxes permitted by Islam. With income tax and sales tax abolished, there would be left the Zakat as the mainstay of taxation. For businessmen, that would mean two streams of taxation. First, their stock-in-trade would be taxed. Also, any savings from their income retained for a year. Businessmen being businessmen, they would still attempt concealment. Tax collectors would be subject to temptation. And the country would have to leave the IMF orbit.

Of course, that means a fundamental question is unanswered. What is the purpose of taxation? Why should anyone, including businessmen, have to shoulder the burden of the interest of loans that have been embezzled? Will the fixed-rate regime encourage businessmen to enter the tax net they have avoided so carefully all these years?