ISLAMABAD: International tax expert Dr Ikramul Haq has said that the Finance Act, 2019 has distorted the direct taxation system by changing the presumptive tax regime on the business community to levy income tax on net income along with the minimum tax.
Haq presented this opinion, while speaking at Aaj TV programme "Paisa Bolta Hai" with Anjum Ibrahim on Sunday.
The renowned tax expert stated that the distortion in direct taxation started from 1991-1992, when the government moved to presumptive tax regime.
Gradually the rates were substantially increased, which resulted in tax evasion and distortion of the tax system.
Former chairman Federal Board of Revenue (FBR) Shabbar Zaidi made the presumptive tax regime both minimum tax and net income basis, he said.
Many issues related to "minimum tax" measure, made in Finance Act, 2019, are causing problems for the taxpayers.
It was in violation of Constitution and judgement of the Supreme Court.
Legislature can either use Entry 47 or 52 of Part I of Federal Legislative List, Fourth Schedule to the Constitution. Once Entry 52 "in lieu of income" (presumptive) is opted by Legislature, it cannot go back to Entry 47 that is tax on "income".
The Finance Act used both, by resorting to "minimum tax". The Finance Act, 2019 violated this constitutional command. This may be corrected by opting either net income taxation or presumptive but not both, Dr Ikram suggested.
He stated that with the passage of time, the FBR had gradually moved the tax base from direct taxation to indirect taxation. The main reliance of the FBR is on indirect taxes. The ratio of direct income tax is only 30 per cent. This is the weakest area of our tax system. As a result, there is an element of laziness in the tax officials of the FBR.
If 80-90 percent of the tax is coming from withholding regime and only 5-6 percent tax is collected from creation of demands, the independent experts would judge the FBR's performance on this basis.
This problem is not only related to this government, but in 1991-1992, when Nawaz Sharif came into power, they introduced this PTR.
The scheme also suited the traders and businessmen to pay a fixed amount of tax or percentage of turnover instead of showing their actual accounts. The FBR must reduce reliance on withholding taxes, otherwise, there are very less chances of success, Dr Ikram said.
He said that Pakistan was a classic case of distortion of tax base of direct taxes. Former finance minister Ishaq Dar blocked refunds of around Rs600-650 billion to show average growth of 20 percent in revenue collection. Since then, the due refunds accumulated to Rs710 billion.
Dr Ikram stated that the Federal Tax Ombudsman (FTO) constituted a committee of exporters on non-payment of refunds headed by him. The committee's report was removed from the website by the former finance minister Ishaq Dar.
Forensic analysis revealed that Rs512 billion pending refunds is from the past legacies. Out of Rs710 billion of pending refunds, the difference is pending for the last two years.
The performance of the PTI government is also not satisfactory as far as payment of refunds is concerned.
Former Special Assistant to the Prime Minister on Revenue Haroon Akhtar Khan responded that during his tenure the maximum amount of pending income tax refunds were estimated at around Rs200 billion, which was adjustable.
The payment of sales tax refunds during the current regime cannot be compared with the past because when he was the special assistant, five zero-rated sectors were paying nominal amount sales tax (2-5 percent), and there were no accumulation of refunds.
Later five export sectors were completely zero-rated and there was no refund of these sectors.
Now all five exports sectors have to pay 17 percent sales tax.
If the present government is claiming that we have paid sales tax refunds of Rs100 billion in one year against Rs75 billion in 2018, you are comparing apples with oranges. During his tenure, 90 percent of the sales tax refunds were paid to the zero-rated sectors.
Now, payment of Rs100 billion is not even 25-30 percent of the pending amount of total refunds due after imposition of 17 percent sales tax on five export sectors, Haroon Akhtar maintained.
For the first time in the history of the FBR, an amount of Rs100 billion has been diverted from the budget to the FBR for payment of sales tax refunds. Despite this, the Tax-to-GDP ratio declined from 11.5 percent to nine percent in 2019, Haroon Akhtar added.
Tax lawyer Waheed Shahzad Butt stated that the chief commissioners should set up dedicated units for recovery from the tax evaders in specific sectors falling within the jurisdiction of Large Taxpayer Units (LTUs) or Regional Tax Offices (RTOs). If the chief commissioners are able to defend the revenue loss at the appellate system, it would be a big success.
Waheed stated that the taxpayers had approached courts against commissioners to seek remedy and obtain refunds under the prime minister's package.
The government should not give credit of tax collected through the system (withholding taxes) to the tax officials working in the field formations. If the withholding tax collection is excluded from the targets of LTUs, CRTOs and RTOs, the field formations in any year, even cannot meet their cost from tax recovered from the taxpayers, Waheed added.
Copyright Business Recorder, 2020
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