Budget FY18: Some taxation suggestions

Why has the mistrust between the tax collectors and the taxpayers so widely developed that the masses are reluctant to enlist themselves by filing annual tax returns. The causes of mistrust and irritants may be summarized viz:-

Every person who earns less than Rs.400,000 is not liable to tax however this comfort is nullified by subsequent legislations whereby the presumptive/final regime is applicable to all in respect of certain classes of income where tax deducted/ collected is treated as final tax. Masses in general who are illiterate suffer these withholding taxes even on the usage of mobile phones. Section 114 requires (in addition to every company), every person having income above the minimum limit and those who own immovable land or property where the land area is 250 Sq. Yds or 500 Sq. Yds. and owner of a flat having covered area of 2000 Sq. Ft., owns a motor vehicle above the engine capacity of 1000 cc (whether old or new) and persons who have been charged to tax in any of the preceding two years (charged to tax includes the presumptive tax collected at source).

The ground realities that out of the total population of about 200 million, the persons who file returns according to FBR are simply around 1.2 million and if you look at the requirement of law, the number of persons, who have been subjected to any withholding tax, would at least be 50 million. This include widows, pensioners and owners of inherent properties having no or little income and this category of persons have rendered themselves as “defaulters” and any stringent action against such persons would hardly be warranted.

Tax defaulters and persons not filing the tax returns are two different categories; the non-filers are already penalized by charging tax at source at much higher rate which may constitute penalty whereas for the same offense; the penalties as provided in section 182 are also applicable. Primarily, the mistrust has to be addressed and an environment of trust is to be developed, the atrocities of law have to be removed, usage of discretionary powers has to be regulated and in cases of patent abuse of power, action against culprits should be initiated. If one examines the table appended to section 182 of the Ordinance, the penalties provided are extremely harsh, enough to scare every person and reason for keeping them away from filing tax returns. This table provides the minimum penalty of Rs.20,000 whereas penalties for non furnishing of statement under the presumptive/ final tax regime is Rs.2,500 for each day of default subject to a minimum of Rs.10,000. Additionally, the wealth statement which is now a part and parcel of the tax return income that includes statement under section 115(4) and for failure to file wealth statement yet another penalty is provided at 0.1pc of the taxable income per week. The complex legal provisions and the level of education in this country and the fact that the presumptive/final regime which have been so widely extended to cover almost the entire lower and middle class, the drastic measures as contained in terms of section 182 should be reasonably amended. It is also suggested that a scheme of convenience should be framed to facilitate and induce/ attract people to file tax returns by rationalizing the penal provisions.

The tax return, the statement under section 114(4) and the wealth statement be separated and one consolidated return that presently is complex and a common man cannot prepare and file the return without the assistance of legal experts which is an additional cost to the taxpayer.

The presumptive/final tax regime for retailers which has been done away with should be revived.  In this manner, the retailers were somehow contributing to the exchequer.  However, with the phasing out of this scheme, the contribution by retailers has not improved.

The masses have to be educated. If we look at the historic position of response by the taxpayers, the current situation is that the number of defaulters appears to have been growing every year; we have had very few defaulters even when the rate of personal taxes was as high as 70pc. It is a known fact that the people of Pakistan are ranked very high on payment of donations and charities. This fact should not be ignored; it calls for reforming our system of taxation and utilizing those funds for establishing a civilized society. The spending should be transparent, for which a legislation is lacking. The FBR has recently came to revive out-of-court settlement under Alternate Dispute Resolution Committees and has published panel for major cities. I have personally worked on such committees and expended enough energies and professional time free of cost but it didn’t work. One should try to find how our earlier efforts have failed to achieve favorable results. The answer is very simple. Once again efforts are being made through which these Committees would recommend a settlement which ultimately has to seek a sanction and approval of FBR which has sole discretion to reject any recommendation made by the committee without assigning any reason thereof.

It may be noted that for salary class the rate of tax is 27.5pc upto the income of Rs.7,000,000 and for income exceeding Rs.7,000,000 the rate is 30pc. This rate card must be amended and the people with higher income be taxed at higher rates whether the income is from salary or from business or from agriculture sector. The agriculture sector has been brought into the tax net by the provisions of section 111 where the income in excess of the imputed income emerging from the agriculture tax or levy is deemed as income from other sources and for such income the leviable rate of tax as suggested above should be made applicable.

A large segment of businesses has been saddled with the responsibly of collection/deduction of taxes and its deposit in the government treasury. These even include individuals as well as Association of Persons with certain limits of turnover in some cases. This responsibility of collection of withholding taxes should be restricted to corporate sector. This is for the reason that corporate sector is an organized sector while it is seen that from individual businesses, no significant amount of withholding taxes are collected whereas the efforts undertaken for verification of collection/ deposit of taxes from this sector do not commensurate with the results.

Suggestion

* The tax laws have to be simplified.  The provisions relating to compulsory filing of return should be amended so as to exempt persons having paid presumptive tax upto Rs.20,000.

* The owner of immovable properties or vehicle of any engine size should be excluded as the FBR is fully equipped with the relevant data from the registration authorities and have ample powers that with the help of such data, it can reach out to persons who own vehicles to file tax return if already not filed

* The withholding regime has widened the gulf between the rich and the poor is contrary to basic norms of taxation. This needs to be rationalized as discussed above

* It is alarming to note that in the management of presumptive/ final tax regime the taxes are required to be collected by a vast majority of persons and all those persons are compulsorily agents of the government for collection and deposit of tax. They are required to maintain full record and subjecting themselves to the monitoring proceedings by the Tax Department on a regular basis. They are then subject to penalties even if based on interpretational issues, they do not withhold tax where they are of the view that tax withholding is not required. On the contrary they are not remunerated for the job they perform for the government of collection of almost 70pc of the FBR’s share. This is highly unfair and cumbersome as the cost of all this is to be borne by them.  The withholding job, therefore, should be restricted to the corporate sector alone.

* Another important suggestion is the use of foreign remittances made by Pakistanis living abroad.  These can be used for development projects in Pakistan after consulting the Pakistanis through foreign missions located in foreign countries.

The Pakistanis remitting the foreign exchange may be issued equity in such projects so as to make them owners of such projects on which return on the investment may be given.  As such, the government will be saving enormous amounts it pays on account of debt servicing relating to loans obtained from foreign lenders for such development projects.