FBR's Tax Directory 2018 Analysis - I: Startling facts & fallacies

Reference two-part series (FBR's statistics: a critical analysis-I, Business Recorder, September 25, 2020 and FBR's statistics: a critical analysis-II, Business Recorder, September 25, 2020, this article presents statistical analysis of all the three documents released by Federal Board of Revenue (FBR) on September 18, 2020, namely, 'Parliamentarians' Tax Directory for Tax Year 2018', 'Tax Directory of all Taxpayers for Tax Year 2018' and 'Tax Directory Analysis for Tax Year 2018'. The data contained in Tax Directory Analysis for Tax Year 2018' on the basis of returns received up to September 14, 2020 reveal some startling facts and fallacies on the part of Federal Board of Revenue (FBR). The forthcoming paragraphs will show the deficiencies, dichotomies and contradictions committed and misrepresentations made by the apex revenue authority with impunity and without realizing that it would further cause serious aspersions on its credibility as well as tarnishing the already negative perception and image of the organization. It is difficult to believe that Inland Revenue, a wing of FBR having a staff of about 15,000 with many enjoying grades 20 to 22 working at headquarters could not give the nation a clear picture of tax-related data with transparency and reliability. This also reflects negatively on the Advisor to the Prime Minister on Revenue and Finance Dr Hafeez Sheikh, who at the time of launching these documents made tall claims that they were "publishing these directories to show how transparent the government is." What makes the situation more painful is the fact that FBR, with a fully-owned IT company, Pakistan Revenue Automation Private Limited (PRAL) having personnel experts in computing and getting market wages, still could not avoid many grave mistakes and misrepresentations in presenting a rather simpler fact-sheet of tax collection and returns filed on geographical and other parameters.

In Tax Directory Analysis for Tax Year 2018 of income tax returns received up to September 14, 2020 (hereinafter as "the Analysis") many mistakes and omissions are apparent that are discussed below. The Analysis failed to mention the base figure (total tax collected up to September 14, 2020) in respect of total returns shown at 2,852,349 (the resident filers are 2,788,335 or 98% of total returns received). In the very first presentation (Serial 1 or Table 1) in the Analysis, the last column shows percentage of tax collected from four categories: Companies, Associations of Persons (AOPs), Non-salaried Individuals and Salaried Individuals. The percentage share in collection of returns filed by these four categories cannot be calculated unless the base figure (total tax collection up to September 14, 2020) is available to ascertain the absolute numbers.

The bifurcation given of returns received is: companies 44,609 (1.56% of total filers with tax contribution of 55.84%), AOPs 64,336 (2.26% of total filers with tax contribution of 8.49%), non-salaried individuals 1,542,088 (54.06% of total filers with tax contribution of 21.01%) and salaried individuals 1,201,316 (42.12% of total filers with tax contribution of 14.66%). Obviously, all those who filed returns for tax year 2018 between July 1, 2018 to June 30, 2019, their contribution would have been reflected in Year Book 2018-2019 and those between July 1, 2020 to September 14, 2020, tax paid if any, would be accounted for in current financial year [2020-21]. However, the determination of what is the total contribution of each filer (category wise) in absolute numbers is not possible in the absence of total amount received from all of them till September 14, 2020.

It is mentioned in the Analysis that the share of companies in total revenue collection is 55.84%. In this regard, the following points need consideration:

• As per record of Securities and Exchange Commission of Pakistan (SECP), the total number of companies as on June 30, 2018 was 87,620. FBR claims that it has compiled the data on the basis of returns filed up to September 14, 2020. On the basis of this data the percentage of filers of companies comes to 50.91%. It is shocking that they could not enforce section 114 of the Income Tax Ordinance 2001 (ITO 2001) requiring every company to file return, no matter if it is exempt or in loss or has even not yet started business or is in the process of liquidation but not yet liquidated. Even after passage of 2 years and 14 days, they did not issue notices to these defaulting companies to file returns or if notice issued why they remained non-responsive! It is an open admission on the part of FBR of its inefficiency in not being able to monitor less than 100,000 corporate taxpayers what to speak of about 90 million unique mobile users as per data of Pakistan Telecommunication Authority (PTA). All of them were paying advance adjustable income tax @ 12.5% during the relevant period. It exposes unbelievable lack of enforceability on the part of Inland Revenue Service (IRS) of FBR having staff of about 15,000.

• It is pertinent to mention that if FBR fails to collect due tax the sufferers are provinces having 57.5% share under the prevalent 7th National Finance Commission (NFC) Award and the federal government that due to this lapse (resulting in huge tax gap) keeps on borrowing money even to run its day to day affairs.

According to calculation from Tax Directory of all Taxpayers for Tax Year 2018', the share of companies (55.84% as per the Analysis) comes to Rs. 499.20 billion. If one takes the figure reported in budget documents, Economic Survey and FBR Year Book for the relevant period, the total collection under the head income tax was Rs. 1536.6 billion. Interestingly, in just issued FBR Year Book for 2019-20, the figure for tax year 2019 is shown at Rs. 1445.5 billion [Table 2, page 6] reflecting a negative growth of 5.9% over the tax year 2017-18 of Rs. 1536.6 billion [TY 2017-18 year on year basis (YOY) with TY 2016-17 (Rs. 1,344.2 billion) registered a growth of 14.3% (Table 2, page 5 of Year book 2017-18].

In the FBR Year Book 2018-19 for fiscal year ending on June 30, 2019 in Table 7 [page 10], total returns filed for tax year 2018 are shown as 2,666,256 out of which companies are 43,246. The incremental increase in number in the Analysis comes to 1363. The incremental tax from these companies is worked out in a report published in (Tax directory of companies: new data, old story, Business Recorder, September 22, 2020) says: "This is also visible in the table for new filers where nearly 81 percent of first-time filers filed a return of zero rupees. For clarification sake, first time filers or new filers are assumed to be those companies whose National Tax Numbers were found in FY18's tax directory but not found in FY17's tax directory. Understandably, this may not be the most tenable assumption, but in the absence of detailed analyses presented by FBR, this should shed at least some light on the expansion of the so-called tax net".

According to findings given in Tax directory of companies: new data, old story, the incremental returns did not yield significant tax revenue. However, the onus lies with FBR to present the correct picture in respect of companies as filers are even less than 45,000 and it is not difficult to work out tax paid by new filers which are only 1363. If 44,609 companies are paying 55.84% tax, then the remaining categories present quite a disappointing contribution.

It is pertinent to mention here that out of total collection of income tax as per FBR Year Book for 2017-18, 81% was through withholding taxes and that too from only 9 major items out of 66 withholding taxes prevalent in that financial year. The bifurcation is as under; Contracts Rs. 283 billion (in that year it was a final tax), Imports Rs 219 billion, Salaries Rs. 133 billion, Dividend Rs. 58 billion, Telephone Rs 47 billion, Bank Interest Rs. 46 billion, Cash withdrawal Rs. 34 billion, Electricity Rs. 34 billion, Exports Rs. 28 billion and Technical Fee Rs. 26 billion. The collection of Rs. 1,536.6 billion reflecting a growth of 14.3% over the collection of Rs. 1,344.2 billion of the previous fiscal year [Table 2, Page 5 Tax Year Book 2017-18].

Taxpayers paid Rs, 42 billion with returns and through advance tax 336 billion [Table 7, Page 9 of Year Book 2017-18]. Collection out of demand created was only Rs 104 billion (arrear Rs. 18 billion and current demand Rs. 85 billion and Rs. 1.3 billion under 146B [tax arrears settlement scheme] as per Table 6, Page 9 Tax Year Book 2017-18 as against total collection of Rs. 1,536.6 billion reflecting a growth of 14.3% over the previous year collection of Rs. 1,344.2 billion [Table 2, Page 5 of Tax Year Book 2017-18]. This shows that the huge workforce of IRS only collected 6.7 percent of total collection with own efforts and the rest came voluntarily either through withholding or advance taxes or tax paid with return. The Analysis has omitted these and many other critical key performance indicators (KPIs) like for example, in collecting Rs. 104 billion cost of collection is not worked out.

(To be continued on Sunday)

(The writers, lawyers and partners of Huzaima, Ikram & Ijaz. Huzaima and Ikram are adjunct faculty of Lahore University of Management Sciences (LUMS) and Syed Muhammad Ijaz is that of Beaconhouse National University (BNU).

Copyright Business Recorder, 2020