So the FBR has continued its tradition to extend the deadline for filing income tax returns. All those tax consultants scaring their clients that the taxmen won’t be so soft this year can breathe easy. There will likely be more extensions to follow. But does this practice of extending the return-filing deadline, which is also prevalent in India, really help?
Reportedly, the number of tax returns filed for tax year 2017 (TY17) until September 28, 2017 were 178,945 – up more than two hundred percent over the corresponding period last year. That sounds like a year-on-year achievement. But it’s not quite so, if one adds the proper context. The number of returns filed two days before the deadline is just about 15 percent of the 1.216 million returns filed by all taxpayers back in TY16.
There are three main categories of income tax filers: companies, association of persons (AOPs), and individuals. Data taken from the FBR’s TY16 tax directory show that ‘individuals’ constituted 93 percent of the 1.216 million total taxpayers; the AOPs had a share of 4 percent in the pie, followed by 3 percent for the SECP-registered companies. One doesn’t know which category of taxpayers has been the most lax at arranging for their annual tax returns.
To be sure, there has been growth lately in taxpayers filing their income tax returns. Returns filed by ‘companies’ surged 16 percent in TY15 and 12 percent in TY16. Tax returns filed by ‘individuals’ grew by 27 percent in TY15 and 13 percent in TY16. AOPs’ tax returns saw a growth of 9 percent each in the two tax years. The pace of growth has decelerated in TY16, however, resulting in lower incremental return filers compared to TY15. It remains to be seen what kind of growth TY17 will see.
Serious work needs to be done to breed tax filing practice. As things stand, tax compliance is woefully low in Pakistan, hovering around 0.6 percent of the population, lagging India (3%), which has similar demographics.
BR Research calculations based on the tax directory data show that just 43 percent of the SECP-registered ‘companies’ filed tax return in TY16. Worse, only 48,364 AOPs filed their tax returns in TY16 – this is pittance when compared to the estimated close to three million establishments just in the wholesale and retail trade, restaurant and hotel sectors. Even worse, just 1.136 million individuals filed their tax returns in TY16, compared to many more millions who happen to be eligible filers.
Compared to that, in India, 43 percent of companies, 32 percent of AOPs, and 40 percent of salaried persons had filed their income tax returns last year, as per numbers attributed to the Indian finance minister earlier this year.
The FBR must come up with an approach to get more folks to file their tax returns and do so on time. Those found missing the deadline must be penalized.
The need is to go after all taxpayers. Sure, salaried individuals are captive taxpayers, but they don’t deserve preferential treatment per se. Reportedly, the FBR had identified over two lac employees working at Pakistan’s top 54 companies who had disappeared from the tax net in TY16. Only 21 percent of the employees at these firms had filed tax returns that year. Similarly, some 22,000 AOPs and companies had reportedly gone missing from the tax net in TY16, after filing returns in TY15 and TY16.
The number of return filers has grown recently because new filers joining in each year have outnumbered those who have been disappearing from the tax radar. The taxmen have a tough job on their hand.
To fix this problem, they need to do more than just extending the deadlines. They will need to venture out, find all those missing companies, AOPs, and individuals, and then make them face the law.
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