EDITORIAL: For years, FBR (Federal Board of Revenue) has tried and failed to expand the tax base, leading to an economy with limited documentation. The tax to GDP ratio has in essence fallen by two percentage points from its recent peak in 2018.
Efforts into digitization, data sharing and slashing of tax expenditures have not yielded any meaningful dividends. The route FBR is choosing to take is penalizing non-filers, this time with force, while laudable, is difficult to implement. There are legal impediments and questions of fundamental rights that may arise.
Not only that, filing of tax returns is not a simple exercise that can be done by an individual particularly; pensioners, widows, who may own real estate, or vehicles but do not have any taxable income. FBR, therefore, should simplify the tax return form to enable an individual to file a return without being compelled to hire services of a tax consultant.
It is disconcerting to note that efforts to document transactions appear to have taken a back seat and revenue leakage continues with impunity. The case of tobacco products is one such glaring example where despite installation of a ‘track-and-trace’ mechanism, the goal of plugging massive leakages remains elusive.
In the last few years, the number of filers has increased, but many are filing nil taxable income returns or little income tax. Similar is the story for sales tax registration. In addition to the issue of non-filing then, a major mounting issue is under-reporting. This too needs to be dealt with efficiently.
Penalties like account freeze or ban on foreign and local travel through airlines and motorways and other curbs may hurt those disproportionately who are not really required to file returns while evaders and specially under-filers would navigate around these measures at will. At best the number of filers may increase but the tax-to-GDP ratio would not without focusing on documentation of economic transactions.
The problem is how shall the State tax the evaders when nearly half of its lawmakers do not pay taxes, many government entities are not tax compliant and on top, numerous FBR employees evade taxes and do not file returns at all? Among the tax evaders are individuals who are serving and retired personnel of powerful state institutions. Without correcting these elements, any effort to enhance the tax base would have limited efficacy.
The right way is to document the economy and once that is done, filing individual return would not be an issue. Once the FBR is able track the income, whether someone is filing tax return or not, their tax liabilities can be assessed, and then they should be liable to the tax they avoid or evade - be they are filers or non-filers.
Many today claim that they pay higher amount of tax without being a filer, as the system puts more pressure on the non-filer while the filer who under-pays the tax is a beneficiary. There are loopholes created by the FBR or government and many adopt new methods of evading taxes due to these leakages. This has to be dealt with by the will and use of technology.
There are a host of issues: why are people/businesses under-declaring revenues? Why are some segments exempted from tax net- such as agriculturalists? This then is made up for by other sources of income. The question is why is the income tax regime for retailers not simple enough – as some without filing are paying higher tax in direct form while others paying less?
The state should focus on building higher tax revenues, not on whether folks are filing returns or not. There is no fun in higher number of filers paying a lower amount of overall collection as many new filers report zero income.
The key is to document transactions, and to limit cash transactions beyond a certain amount. And the more important point is to have sales tax registration by all. The government must also do away with sectors where no income tax is being paid with large sum of truncations - especially where government footprint is deeper.
For example, the consolidated revenue of power sector is around Rs3.5-4 trillion, but virtually no income tax is being collected from the chain, as IPPs (independent power producers) are tax-exempted while state-owned entities in the sector are loss-making enterprises. Had this area been with the private sector, there would have been some income tax generated through it.
Then the story of the airline sector is not much different. In the agriculture value chain, the middleman is earning huge income, but in cash; hence undeclared. These transactions are to be documented and income must be taxed. The thrust of FBR efforts should be to have the right reporting of income; not mere filing while under-reporting remains neglected or tolerated.
Copyright Business Recorder, 2024
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