The Federal Board of Revenue (FBR) - apex revenue authority - is epitome of deceit, inefficiency, corruption, indiscipline and highhandedness. It has failed on all fronts: collection targets, widening of tax base, countering tax evasion and avoidance, recovery of arrears, voluntary compliance, reform process and what not.
The greatest failure of FBR during the last 10 years has been in the area of tax-to-GDP ratio - in the 2011, the last year of the Tax Administration Reform Project, it dipped to 8.2% from 10.6% when the programme started in 2005. Borrowed funds of millions of dollars have been ruthlessly wasted on so-called reforms. Pakistan stands at 155th among 179 nations in terms of tax-GDP ratio. The number of tax filers is pathetically low. The figures in Table A and Table B testify to these facts.
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Table A: Tax-to-GDP ratio for 2009-2010
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Nature of Tax Collection (Net) Tax/GDP
(In million Rs) Ratio (%)
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Direct Taxes 443,548 3.39
Indirect Taxes 717,602 5.48
Surcharges 18,071 0.14
Total Taxes
without Surcharges 1,161,150 8.87
Total Tax
with surcharges 1,179,221 9.01
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According to reports, tax-to-GDP ratio further deteriorated to 8.2% during the financial year 2010-11. It is frightening to note that number of people who filed tax returns during 2010 was pathetically low. The claim of FBR about number of returns received is also a scam. They take into account statements filed under section 115(4) of the Income Tax Ordinance, 2001 as returns which gives a deliberate false impression of exaggerated number of filers. The people covered in presumptive tax regime just filing statements under section 115 of the Income Tax Ordinance, 2001 cannot be termed as return filers under section 114.
The same is true for salaried persons. Tax in their case is deducted at source and annual withholding statement filed by the employer suffices as being a substitution for return. About 98.4 million people in 2010 paid income tax and sales tax with their mobile bills (pre-paid or post-paid), but only 523,208 non-salaried persons filed tax returns in 2010 - out of these 106,348 paid some tax, 53,985 claimed refunds and 363,121 neither paid any amount nor claimed any refund [Table B].
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Table B: Returns filed by non-salaried persons during 2010
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Number of
returns
Number of Number of showing
Total returns returns neither tax
number showing claiming payable
Category of Taxpayers of returns tax payable refunds nor refund
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Companies 20,057 2,493 9,292 8,562
AOPs 30,085 6,390 11,735 11,952
Business Individuals 473,066 97,465 32,958 342,607
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Total 523,208 106,348 53,985 363,121
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Analysis of statements and returns received by FBR during 2010-11 shows the following results:
--- 1,916,300 income tax returns and statements received during 2010-11 were marginally higher than 1,797,000 received in 2009-10.
--- 755,671 income tax returns, excluding statements, were received as against 642,777 received during 2009-10.
--- As of January 31, 2011, 16,281 corporate sector income tax returns were received as against 14,903 returns filed by the corporate sector up to the same period in 2010.
--- Association of Persons (AOPs) filed 41,863 returns as compared with 28,154 returns.
--- Salaried class filed 114,495 returns as against 119,759 in 2010.
--- Non-salaried class filed 583,032 income tax returns as compared to 481,961 returns in 2010.
--- 18, 828 salary certificates were received as compared to 20,745 in 2010. Number of employees covered in the statement was 1,053,708 as compared with 1,055,954 employees in the same period of 2010.
--- Number of importers who filed statements was 12,262 whereas 11,510 importers filed their statements in 2010.
--- Some 8,473 exporters filed their statements as against 8,050 exporters in 2010.
--- 13,332 retailers having up to Rs 5 million annual turnover filed their statements as compared with 18,272 retailers filed the same in 2010.
--- Only 581 retailers declared over Rs 5 million annual turnover and filed their statements as against 830 such retailers who filed the same in 2010.
--- 24,378 contractors and suppliers filed their statements as against 24,030 statements during 2010.
Despite an extravagant media campaign, FBR could not compel 25 million potential taxpayers to file tax declarations in 2010 by the extended date. The same is the position in 2011. People are not filing returns under one pretext or the other and FBR as usual is extending dates. It is an undeniable fact that the majority of non-filers in Pakistan are rich and mighty - indomitable bureaucrats, corrupt politicians and unscrupulous businessmen. FBR has not only failed to tap the actual tax potential - not less than Rs 4-6 trillion - but is also guilty of shifting tax burden from the rich to the poorer segments of society. FBR - serving as handmaid of the ruling elite comprising civil-military bureaucracy, inefficient-cum-corrupt politicians and greedy businessmen - has become a symbol of oppression, responsible for destroying industrial and business environment.
According to FBR's own admission, 1,916,300 income tax returns and statements were received from July-January of the fiscal year 2009-10 as compared with 1,797,000 returns and statements in the same period of 2008-09. Total number of income tax returns received up to 25 January 2010 was only 755,671, the rest are statements under section 115(4) - last year 642,777 returns were received - indicating an increase of 112,849 returns.
According to a Press release by FBR as of January 25, 2010, it received just 16,281 corporate sector income tax returns as against 14,903 returns in the same period of 2008-09, showing an increase of 1,378 returns. It is worthwhile to mention that during this period, there were over 51,000 companies registered with SECP and according section 114, it is incumbent upon all registered companies to file return of income whether they earn income, incur loss or have remained dormant.
It is admitted by FBR that even after "great efforts" (sic) less than 2 million Pakistanis filed income tax declarations in 2010. FBR miserably failed to implement law even in Islamabad as out of 43,000 commercial and residential rental properties in Islamabad, only 7,000 owners filed returns. In Pakistan, the number of mobile users alone, who pay more than Rs 40,000 as annual bill, is about 10 million. Why have they not been compelled to file returns? Does FBR need any further evidence to demonstrate its inefficiency and ineffectiveness?
At least the FBR stalwarts cannot convince informed people of its "wonderful performance" by just juggling with figures. FBR took great credit of extra 119,300 declarations filed in 2010. However, it is completely silent about its failure to expand the tax net - we have at least 15 million persons [other than those having presumptive incomes] earning taxable income, but only less than 550,000 out of these file income tax returns.
For a long time now, FBR has been apologetic (specifically before the IMF & the World Bank) that total income tax payers (referring to registered only) in Pakistan are just 2 million in a population of 180 million. This is a myth! Total number of mobile and landline telephone users, subjected to withholding tax, in the country, is in excess of 100.50 million in 2011 - yet FBR claims that our tax base is narrow! Since July 1, 1992 all commercial electricity consumers (including about 3.2. million retail outlets in urban areas), irrespective of whether their income is chargeable to tax or not, are paying income tax with bills. The total number of persons earning interest on bank deposits is not less than 30 million. They pay 10% mandatory withholding tax irrespective of their quantum of income. The incontrovertible reality is that due to FBR's incompetence people having taxable income are not filing returns. The total number of such persons is not less than 25 million.
FBR's claims and reality In 2010, FBR announced that it had finally decided to bring all the persons earning taxable income in the tax net through its tax intelligence system. The then Chairman of FBR referred to various proposals such as: "Tax legislation will be introduced for installation of electronic cash registers at the retail outlets. Prime Minister has agreed to provide free of cost electronic cash registers to retailers to document their sales.
Political support/will is requested for taxing black economy and brining informal sector into the tax net. Most of the housing schemes are involved in selling of files of plots. There is proposal to tax transfer of plots through sale of files that would be instrumental in generating additional revenues. Under new Value Added Tax (VAT) regime retailers having annual turnover of Rs 7.5 million would be registered-only essential food items and life saving drugs would remain exempt and 15 percent VAT would be imposed on all other goods from July 1, 2010.
The professional service providers eg doctors, lawyers, engineers and architects would also be brought under VAT from July 1, 2010. The implementation of the broad-based VAT would generate around Rs 150-200 billion in next fiscal year. The revenue generation from VAT implementation would reach to around Rs 600 billion in coming years.
The importers, wholesalers and big retailers are paying Rs 125 billion, which is below the actual potential. In most of the cases they deposit withholding tax collected from the consumers and do not declare their actual income, thus presumptive tax regime will be abolished".
FBR despondently failed to meet its own goals and targets announced in 2010 and as usual, in order to hide its shortcomings and inefficiency, started accusing people of Pakistan of not paying income tax. Whereas the reality is that even a petty village shopkeeper (whose total income is much below the minimum taxable limit of Rs 350,000) is paying tax as high as Rs 960 per annum if his monthly electricity bill is between Rs 401 to 800. If his bill is between Rs 801 to Rs 1000 his income tax comes to Rs 1200. On the contrary, big absentee landlords in his village, earning millions by leasing out orchards/lands, are not paying even a single penny as personal income tax.
Out of total population of Pakistan, 43.1% are below the age of 15 years - overwhelming majority of them would not have taxable income. Rural labour of 40 million earns meagre income. Thus, the total income tax paying population having taxable income of Rs 350,000 can safely be estimated around 25 million. FBR is not only taxing all of them but a large number of those whose incomes fall below taxable limits-out of 100.42 million mobile users majority is not earning taxable income of Rs 350,000. The poor are paying not only indirect taxes but also income tax at source under various provisions of the Income Tax Ordinance, 2001 - section 148 to 156A, sections 234 to 236. Thus in reality the people - except the ruling trio - are over-taxed. In return they get nothing. Successive governments have failed to fulfil even their basic obligation of safeguarding life and property of people, what to talk of providing them basic facilities of health, education, water and other civic amenities.
It is FBR's duty to allot National Tax Numbers (NTNs) to all those who have ever paid tax under sections 148,149,150,151,152,153,154,155,156, 231A, 231AA, 233, 234 and 235 of the Income Ordinance, 2001. Had FBR in the past, merely issued notices for filing of return to all commercial electricity consumers, mobile and landline users (paying bills of Rs 50,000 or more) and vehicle owners, today we would have over 25 million registered return filers. Even till today, FBR has not bothered to prepare a database of all such persons though millions of rupees were provided under TARP for automation.
FBR is guilty of criminal negligence in not taxing persons having taxable income, but extorting money from those who earn income below taxable limit. It has been misreporting figures regarding income tax payers in Pakistan. Failure is entirely of FBR in not compelling those having taxable income to file returns. Its performance is pathetically abysmal in achieving a satisfactory tax-to-GDP ratio. It is just thriving on withholding taxes and voluntary payments - constituting 92% of total collection. The contribution of field officers [collection on demand through investigation or audit] is just 8% of total collection proving beyond any doubt how unproductive this organisation has become.
The inefficient and corrupt tax apparatus is the root cause of the present scenario. Tax officials persistently and ruthlessly squeeze and penalise existing taxpayers while collaborating with tax evaders - massive over and under invoicing is not possible without their abetment. Small business houses and salaried persons, already heavily taxed through withholding tax mechanism, are victims of their highhandedness. It is high time that FBR should put its own house in order and tax the rich and mighty tax evaders. It must tell the nation through media how many bureaucrats, parliamentarians and businessmen, including their dependants, are paying utility bills of over Rs 200,000 in a year, but not paying any income tax. They must be asked about the sources from where they enjoy a life of luxury whereas the poor are dying of starvation and untreated diseases. FBR must also reveal how many professionals (doctors, lawyers, chartered accountants and architects etc) have shown income of more than Rs one million in their returns - as individuals or AOPs.
The Standing Committee of Parliament on Finance must conduct a thorough probe in the matter and seek the assistance of tax experts to determine the amount of loss caused to the national exchequer by the FBR stalwarts during the last decade, especially in respect to non-collection of taxes where it was due and illegal exaction of the same when nothing was payable.
(The writers, tax lawyers, are Adjunct Professors at Lahore University of Management Sciences)
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