For the last many years, even legal ways (sic) were provided through amnesties and immunities and favourable SROs (Statutory Regulator Orders) to help the rich and mighty to avoid tax-certainly unscrupulous elements in FBR got their "due share". The high-ranking officers make good use of SROs for them as well. For example, SRO 569(I)/2012 was issued on 26 May 2012 providing that officials in Grade 20-22 would pay just 5 percent tax on monetized transport allowance (many are still using government vehicles as well). Bureaucracy bestowed on itself this benefit of reduced rate taxation, blatantly bypassing the Parliament. Finance Minister, Ishaq Dar, despite being aware of it has done nothing against it till today, which confirms that politicians and bureaucrats work hand in hand to cause the stupendous loss to the national exchequer.
The Finance Minister and FBR stalwarts keep on blaming the people for "not paying taxes" and that our "tax base is narrow". These are blatant lies. The fact is that Pakistanis are the most heavily taxed nation in whole of South Asia. According to data available at the website of Pakistan Telecommunication Authority, there were 134,907,976 mobile subscribers as on March 30, 2015. A huge population, approximately 50 million (if we exclude multiple and inactive subscribers), is paying 14% adjustable income tax and 19.5% sales tax, but only 856,229 filed income tax returns in 2014. The majority of the mobile users may not have taxable income yet they are burdened with undue liability. On the contrary, majority of rich just pay a fraction of income tax (withheld at source) on actual taxable incomes without even bothering to file income tax returns-in 2014 only 52,349 admitted tax liability of more than Rs 500,000! FBR has not uttered even a single word about it which confirms beyond any doubt that the rich and mighty in Pakistan are evading taxes with impunity for which sole responsibility lies with the FBR. To hide this fact and their incompetence, they keep on blaming the public at large.
There is a gradual and disturbing decrease in the number of income tax filers, though over 50 million Pakistanis are paying advance income tax at source. FBR has recently released the figures claiming that out of 282,180 notices issued so far to potential taxpayers, only 54,790 filed income tax returns with payment of only Rs 442 million. However, no explanation is given why the number of return filers has decreased from 1,443,414 in 2011 to 856,229 in 2014.
FBR claims that it is broadening the tax base, whereas the reality is that it is trying to regain the lost tax base. There was a time when FBR used to get over two million returns! They need soul-searching to find out what has gone wrong and where these taxpayers have vanished. Can FBR stalwarts explain why out of registered companies of nearly 67,000, only 24,188 filed returns for tax year 2014? For tax year 2013, total number of companies that filed returns was 25,152. Is it an issue of broadening the tax base or enforcing tax obligations? Law requires that every company has to file tax return irrespective of its earning any income or not.
The following are some disturbing facts and figures vis-à-vis performance of FBR derived from Tax Directory 2013, Tax Directory 2014, and Active Tax Payers List:
-- Out of total returns of 856,229 filed for tax year 2014, 38% filers (322,439) paid NIL tax
-- 1,323 paid tax between Rs 1-99
-- 8,454 paid tax between Rs 100-500
-- 520,290 tax paid tax less than Rs 10,000
-- 136,953 paid tax between Rs 20,001-100,000
-- 82,801 paid tax between Rs 100,001-500,000
-- 20,318 paid tax between Rs 500,001-999,999
-- 32,031 paid tax between Rs 1,000,000 and Rs 10 million.
-- 3,663 entities declared tax over Rs 10 million
-- 40,763 Associations of Persons (AOPs) filed returns in 2014, whereas in 2013 the figure was 42,749 AOPs. As per Active Tax Payer List (ATL) on FBR website of 14-10-2014 relating to Tax Year 2013, there were 835,220taxpayers.As per ATL of 14-10-2014 relating to Tax Year 2014, number is decreased to 736,272. Thus FBR lost 98,948 Active Taxpayers in one Year!
The above facts and figures confirm that Legislators and tax collectors together have made Pakistan a haven for tax dodgers and plunderers of national wealth. Parliament has been encouraging tax evaders by allowing them to bring in Pakistan as much money as they want to through normal banking channels with no questions asked about their "source". Legal cover is provided through section 111(4) of the Income Tax Ordinance, 2001. This facility, they claim, is necessary for economy. Such lethal prescriptions for economic survival have actually destroyed the entire social fabric of society as has been proved during the last many decades. There is no tax culture, hence, no healthy competition or economic growth.
The most appalling fact that proves that FBR has become epitome of inefficiency, incompetence, lethargy, apathy, and corruption is that only 24,188 Companies filed income tax returns in Tax Year 2014, whereas 25,152 companies filed returns in Tax Year 2013. It must be remembered that total registered companies were around 64,000 in 2014 as per record of Securities and Exchange Commission of Pakistan.
According to SECP, every year there is an increase in the number of new companies registered, raising the total corporate portfolio to about 67,000 by June 2015. Around 92% companies registered as private limited companies, while about 6% companies registered as single-member companies. Around 1% of the companies have been registered as foreign companies and as associations under Section 42 of Companies Ordinance each. The alphabetic list of companies registered with SECP can be seen by anybody on its website, yet FBR has failed to force the non-compliant to file tax returns!
Every company under the law is required to file income tax return. Can worthy Finance Minister and Chairman FBR explain why only 38% of registered companies are filing returns? If FBR cannot enforce tax laws in respect of a few thousand companies how can it claim to broaden the tax base and increase the number of tax filers?
The reality is rather painful and shocking. FBR itself allotted Sales Tax Registration Number (STRN) to thousands of fake companies. These can be identified by matching data of SECP and FBR (Tax Directory for 2014 and list of active sales taxpayers).
Sales Tax refunds position and contribution of active sales tax payers reveal how big the Refund Mafia is-thus so no zero-rating for exporters, no single-stage sales tax! Refund Mafia will never allow it! This is their main financial life line! Credible data is available to prove that effective rate of sales tax is less than 5% in most of the cases against the standard 17%. From where do "extraordinary inputs" come? In most of the cases, these are manoeuvred and "created" through fake and flying invoices generated by fictitious companies backed by Mafia-comprising unscrupulous officials and businessmen.
The Budget 2015-16 has failed to address the fundamental reform of making FBR an efficient and autonomous organisation, run by professionals, is again ignored in the present budget. Neither any legislative measures are suggested nor have any funds been allocated. No step is also taken to introduce an independent and efficient tax appellate system so that tax obligations are judiciously imposed and collected rather than through arbitrariness and highhandedness. FBR, having failed to force millions to file income tax and sales tax returns keeps on creating huge demands against the existing filers only. This is the reason why people do not file returns as they say that once you do so then you are under constant threat of being blackmailed by officials and in case you do not oblige, you are subjected to arbitrary orders, harassment and costly litigation.
The real issue of non-taxation of super-rich who owe billions to the national exchequer is conspicuous by its absence in the Finance Bill 2015. The real challenge of enforcement of tax laws compelling all persons having income of Rs 400,000 or more to file tax returns was not addressed by the Finance Minister at all. No steps are suggested to bridge the huge tax gap highlighted in joint study of the Andrew Young School of Policy Studies at Georgia State University and World Bank. The tax potential of Pakistan is not less than Rs 8 trillion. The simple calculation is: according to the Household Integrated Economic Survey (HIES) 2011-12 conducted by the Pakistan Bureau of Statistics, five million individuals have annual taxable income of Rs 1.5 million. If all of them file tax returns, income tax collection from them at the prevalent tax rates would be Rs 1650 billion. If income tax collected from corporate bodies, other than non-individual taxpayers and individuals with income between Rs 400,000 and Rs 1,000,000, is added the gross figure would not be less than Rs 5,000 billion. The FBR collected only Rs 880 billion during FY2013-2014 and in the current year the figure will be not more than Rs 900 billion.
Similarly, due to leakages in sales tax, federal excise and custom duties, the total collection is not more than 50 percent of the actual potential. In 2013-2014 the FBR collected Rs 1002 billion as sales tax, Rs 139 billion as Federal Excise and Rs 241 billion as customs duties. Collection under these heads should have been at least Rs 3000 billion. This year there will be a slight increase of Rs 200-250 billion. The target of Rs 8 trillion is achievable provided the mighty segments are properly taxed, tax machinery is overhauled, leakages are plugged and all exemptions to the privileged classes are withdrawn.
By just tinkering with tax rates here and there and imposing or enhancing regressive taxes, fixing revenue collection target at Rs 3103.7 billion for fiscal year 2015-16, the PML(N) government has confirmed that like its predecessors it has no political will to tax real potential of Pakistan, which is not less than Rs 8 trillion. It is obvious from the bare reading of Finance Bill 2015 that Ishaq Dar paid no heed to proposals given by Tax Reforms Commission, trade and professional bodies, and tax experts for broadening of tax base and taxing the rich according to their ability. He even opted to continue with regressive presumptive and minimum tax regimes inflicting income tax regime.
The Finance Minister, Ishaq Dar, following in the footsteps of his predecessors, has shown no intention to punish tax evaders and looters of national wealth as done his counterpart in India by introducing 'Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. By introducing law of confiscation of untaxed assets, the government could have generated billions. On the contrary, the worthy Finance Minister has relied more on imaginary figures (anticipated foreign grants, overstated revenues etc) to assure the IMF restricting fiscal deficit to less than4 percent of GDP in 2015-16. No solution is offered for the Pakistan's real malady that is colossal wastage of resources, open and blatant non-compliance of tax laws by the powerful segments of society and existence of a large untaxed economy. Since the rulers themselves are the principal beneficiaries of elitist economy, they are not ready to undertake any corrective action or implement workable policy to streamline the entire tax system.
In his write-up, Federal budget: A question mark on FBR's capacity, Shafqat Mehmud, ex-senior officer of FBR, has observed that: "The budget figures indicate that out of Rs 238 billion, the tax machinery has only been assigned to collect Rs 15 billion that is less than 10% of budgetary measure. "Is it not appropriate on the part of finance minister's strategy to collect Rs 238 billion at source without disturbing and bothering the huge machinery of FBR," asked a fiscal expert. Such feelings are shared by different trade organisations as well.
The FBR thought it easier to enhance revenue by using banking instrument for withholding tax 0.6% on the non-filers. Similar is the strategy for collecting tax from the various sources of banking companies. One of the officers involved in budget-making remarked that the junk of the revenue should accrue from these levies. The private banking management, however, differs with this approach. It is not the role of the bank to act as agent of FBR, they argue, as people will prefer to keep their deposits away from banks. The logic of finance minister that decrease in the cost of electricity has necessitated the increase in withholding tax has not generally been well-received by the small traders. One measure that goes unnoticed by the media is that it has also been taxed as the levies have been imposed on the advertisement to print/electronic media. One of the prominent members of Lahore Tax Bar remarked that this tax has been imposed to keep the "unguided missiles" within the media industry in control.
The supply or sale to unregistered person has been made subject to 2% further tax. One of the tax practitioner pointed out that similar tax was imposed before 2003 resulting in the fake invoices to the registered persons. Fraudsters used to make dummy firms; get them registered to avoid 2% further tax and made sales to them issuing fake and flying invoices. It made compliance uncompetitive as they used to pay extra tax. One wonders as to what stops FBR from learning the past experiments.
All power-distribution companies have been assigned broader role to collect taxes with electricity bill from all the non-filers. Isn't it ridiculous to collect 2% extra tax from poor person consuming only 50 or less than 50 units of electric city, asked a small farmer from southern Punjab.
As many as Rs 42 billion will be collected at source through custom duty. Sharing the philosophy of taxing at source, senior FBR officers explain that this has been adapted in order to (1) curtail informal economy (2) save the tax payers from the taxman fleecing their pockets and (3) to broaden the tax base. Asked if such kind of taxation at source has been experimented elsewhere in the developed world, the answer is the African and few of the Latin American countries.
They further argue that the economy of scale is not relevant as we are facing fiscal deficit. To an another question that is it fair to tax a person on his electricity/mobile phones, cells cards, the answer was quiet surprising. "They can make adjustment against their final liability."
It is hard to believe that FBR management is unable to understand that the poor don't fall in the tax net, let alone making adjustment in the final liability. One of the CEO of a company however is of opinion that any person who can afford to use mobile phones can very well pay the tax. Such is the "amazing" world of riches.
Does this budget provide the rational of retaining FBR especially when taxes are collected at source? What is the use of 24 FBR tax formations across the country with an army of officers? Will taxing the non-filer result in compliance or broadening the tax base? These are the core questions that policy makers must answer. Carlos Salvani, pioneer of withholding-tax regime in VAT and World Bank guru had once stated that unless FBR goes through surgical changes to tax actual liability, it has to put up with taxing at source. Instead of FBR, it appears, the government has decided to collect taxes through banks, power-distribution companies and through import duty that virtually showed its lacks of confidence in FBR capacity to collect taxes. Is anybody listening in FBR lest it is practically privatised?"
Ishaq Dar, like his predecessors, has accepted what was suggested by the crafty tax bureaucrats sitting in FBR. The tax wizards in FBR have managed to hoodwink the new government as well by keeping the laws and procedures complex and cumbersome and by imposing more taxes on corporate sector and giving free hand to their "friends" to keep on avoiding paying income and sales tax. The businessmen were expecting single-stage low-rate sales tax, but FBR refund-mafia managed to frustrate this move that could have ended their financial life-line.
Before coming to power, both Nawaz and Shahbaz were highly critical of the economic policies of Pakistan People's Party, especially for seeking external loans and foreign aids. Now they have even broken their records. They are begging before IMF, other lending institutions and donor agencies to extend maximum co-operation to find a solution to energy crisis, population control and development of health and other sectors. The budget instead of raising revenue to the extent of Rs 8 trillion by taxing the rich and mighty, is eyeing further billions of dollars through loans, aid and grants.
Both Nawaz and Zardari have enormous assets abroad and they cannot even think of taking any action against tax evaders. In fact, in the coming days, they will join hands to what they call "baseless" allegations from certain agencies under the control and command of armed forces alleging involvement of political parties in organised crimes in Karachi. In the past, flight of capital and fake remittances to whiten untaxed money have been acknowledged as "great achievements" of Ishaq Dar in the wake of passing the so-called Protection of Economic Reforms Act, 1992 that helped Hudabiya Paper Mills to launder funds and seek immunity from any kind of probe by FBR or even Federal Investigation Agency (FIA). Zardari during his rule made it a point no action is taken his admitted millions lying in Swiss banks alone!
All said and done, knowing the present political elites and militro-judicial-civil-complex will not implement any of our suggestions, we have to fulfil our responsibility and inform the citizens how they are being robbed by the crook they vote. In future elections, they can use the power of their votes to defeat them! Many would say it is just a wishful thinking and nothing will change unless elitist system is dismantled. We agree, but then they should lead the masses rather than just crabbing.
TAX MEASURES The claim by Finance Minster that focus of the budget 2015-16 is to accelerate growth and improve tax-to-GDP ratio, which will ultimately be increased to 15 percent by 2018 is not supported by any reliable programmes or pragmatic strategy. No detailed plan is given and it is nothing but rhetoric.
The broad themes of government's taxation policy should have been(i) taxing those who are not paying any tax, (ii) enhancing efficiency of the tax machinery, (iii) removing anomalies and distortions in the tax system, (iv) simplifying the tax procedures, (v) broadening of the tax base, (vi) rationalisation of tax rates and exemptions, (vii) encouraging corporatization and documentation (viii) taxpayers facilitation and (ix) to eradicate maladministration and corruption in all government departments.
Ignoring the above, Finance Bill 2015 only proposes a number of new taxes, sales tax on many essential items and more withholding taxes. The burden on the common people would increase manifold. The rich and mighty would have no fear that untaxed assets can be confiscated. They would never be asked to declare all the assets and their sources at home or abroad. Illogical tax measures like enhancing withholding taxes on banking transactions are announced but no law is passed for confiscation of billions lying home and abroad using the obnoxious laws like Protection of Economic Reforms Act, 1992 and section 111(4) of the Income Tax Ordinance, 2001.
Making hollow promises to the people of "coming golden days" or making tall claims of "wonderful economic indicators" and "great achievements" have no more electoral appeal for PLM-N. In practice, people know that the leaders of all political parties are owners of huge assets and politics is their necessity to protect and promote their financial interests. They own political parties like personal assets, investing heavily in elections and then ensuring that after coming into power they reap more financial benefits. Democracy is just a sham in the Pakistani milieu where every budget is meant for cementing the control and rule of ashrafiya.
(To be continued) (The writers, authors of many books and partners in HUZAIMA IKRAM & IJAZ, are Adjunct Faculty Members at Lahore University of Management Sciences)
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