EDITORIAL: Auditor General of Pakistan (AGP) pointed out that the Federal Board of Revenue (FBR) has wrongly credited withholding taxes levied in the sales tax mode, an indirect tax whose incidence on the poor is greater than on the rich, under direct taxes. A tax on salary, interest on securities and rent are undoubtedly direct taxes yet additions that land up being paid by the end consumers cannot be classified as direct taxes. Thus the provisions of income tax ordinance 2001 that relate to imports (as these are passed onto the consumers), exports, utilities, vehicles tax, bank transactions, etc., are not direct taxes.
The AGP report contended that the proportion of withholding taxes constituted 57 percent of total direct taxes credited and among the ten major components of this tax contractual receipts, exports, bank interest and various other items fell under the minimum tax or final tax regimen.
Two observations are relevant. First, that the FBR is deliberately crediting indirect taxes under direct taxes to give the semblance of an equitable tax structure that is reliant on the ability to pay principle. What is noteworthy is that the AGP report is for fiscal year 2022-23 wherein it noted that FBR collected 1.22 trillion rupees withholding tax, 366 billion rupees more than the year before. Clearly, as the following data shows, the reliance on withholding taxes in the indirect tax mode is rising. The reason: it is a low-hanging fruit as withholding agents as opposed to FBR officials are engaged in their collection, a tax deducted at the point of purchase. The current year has budgeted direct tax collections at 43 percent of total target collections of 12.970 trillion rupees, an increase from the 40 percent in the revised estimates of last year – 3.721 trillion rupees under direct taxes and total collections of 9.252 trillion rupees. It is also noteworthy that the budget for last year, formulated under the then approved Stand-By Arrangement of the International Monetary Fund (IMF) envisaged 45 percent of total FBR collections from direct taxes – 4.255 trillion rupees against total FBR collections of 9.45 trillion rupees. In other words, the optimistic direct tax collections fell short of target by 163 billion rupees last year notwithstanding the contingency measures put in place by the Fund, which were activated in the last half of 2023-24 — contingency measures that envisaged raising withholding taxes, amongst other items, on cigarettes and sugary drinks that in turn accounts for the erosion of income of a vulnerable or lower income householder.
And secondly and equally relevant, critics of the FBR maintain that by subsuming withholding taxes collected in the sales tax mode under direct taxes in the budget documents instead of itemising them separately as in the case of capital gains tax and workers profit participation fund may indicate an intent to mislead rather than an oversight — a view that is gaining strength, given that this is not the first time the AGP has flagged this discrepancy.
While the provincial governments have agreed with the IMF to begin levying a tax on farm income from January 2025, hopefully at least at the same rate as payable by the salaried, yet this delay is inexplicable. Failing the passage of a constitutional amendment where this is declared a provincial subject it is critical for the provinces to begin levying a tax on the income of the rich landlords and thereby ease some of these highly inflationary withholding taxes levied in the sales tax mode. In addition, the federal government must decide to levy a tax on the income of those engaged in the real estate sector and builders and desist from extending fiscal and monetary incentives to some sectors, which necessitates reliance on indirect taxes, which, in turn, explains the erosion of the quality of life of the general public, failure for the public to appreciate a decline in inflation and the root cause of 41 percent poverty levels in this country.
Copyright Business Recorder, 2024
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