EDITORIAL: Reforming the Federal Board of Revenue (FBR) has become a hot topic again. The caretaker finance minister is working on an FBR reform plan by separating the policy from enforcement and spin off Customs as a separate board independent of the FBR. Both of these measures have been floated of and on in one form or another since the FBR was still CBR (Central Board of Revenue). Recently, the privatisation ministry commented that anything that increases the size of the government is not a reform per se. The key is to separate the roles and enhance transparency within the existing 20,000 plus force of the FBR.
The subject is important as an IMF (International Monetary Fund) technical team is visiting Pakistan to discuss tax reforms. The taxation system in Pakistan is not helping the economy to grow or document. The FBR’s role has become concentrated in, if not confined to, extracting more juice out of compliant taxpayers to the point of harassment at times.
The tax policy is overwhelmingly skewed towards indirect taxes as most of the direct taxes are being collected in an indirect mode. According to the privatisation minister, Fawad Hasan Fawad, 93 percent of collected tax revenue is either voluntary or withholding tax (WHT), whereas a meagre seven percent is collected by the FBR, although the FBR is constantly sending notices to businesses and individuals. The minister noted that in three years, the revenue board sent Rs600 billion tax notices, but the actual recovery was less than Rs4 billion in that period.
This succinctly indicates that FBR notices are mainly creating noise while there is not much merit in these missives and thus no benefit for the exchequer. These statistics give credence to the SME businesses and individuals who mostly complain that the FBR officials usually send exaggerated number of notices and later enter under-the-table deals. Whatever the case, the reality is that FBR has failed to expand the tax base so far. And that is resulting in shifting the onus of collection onto the corporate sector where the tax burden has increased by 40 percent since 2016. This results in incentivising those who opt to remain out of the system.
This is also why the number of tax filers is not increasing in a meaningful and effective manner despite aggressive plans by the government to enhance it. This cannot happen while the FBR keeps on growing the rate of minimum tax based on turnover regime, which is another form of presumptive taxation. Initially, the WHT regime was imposed to encourage tax filing and netting off the paid taxes in the final liability.
However, the shift is on moving, albeit slowly, to the minimum tax regime on revenues, and the collection of sales tax on behalf of the suppliers, which are mainly informal.
The all encompassing income tax withholding schemes for all payments similar to the VAT mode of Sales Tax has converted the income tax, which is supposed to be a direct tax, into an indirect tax as its incidence is added to the cost and passed on to the purchaser. The situation is further confounded by the application of high rates of minimum tax based on turnover.
This convoluted tax structure where taxpayers are being coerced on pain of penalties to become tax collectors for the FBR is not only burdening the formal sector to the point of killing it but serves as an incentive to avoid documentation and remain in the informal sector.
While doing away with the ‘No-questions-asked’ presumptive income tax in budget for fiscal 2020 was a much-needed step for documentation of the economy but declaring the presumptive tax rates prevailing at that time as minimum tax was a ruthless demonstration of highhandedness that is in vogue to-date and is responsible for many small and medium taxpayers to opt out of the documented sector by closing their existing businesses and doing business under another name.
That is the case for the domestic market while exporters are becoming uncompetitive where refunds are not easy to get for small players and new entrants, which is hindering the growth in exports. Some rely on flying invoices, which is illegal anyways. If the government really wants to implement reform, it should have an objective of relying more on the direct taxes and that too in the direct form in letter and spirit.
The government should do away with accommodation of non-filers by stipulating a tax on their transactions and enforce filing by large numbers of businesses and individuals who are shying away.
There are all forms of data and technology the government has and all what is required is the political will to reform direct taxes and disturb some powerful circles within the government at large and those who influence them.
Copyright Business Recorder, 2023
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