The Federal Board of Revenue (FBR), in its Biannual Review (January-June 2014-15), claims that "despite several challenges like poor law and order in the country, energy shortages and compression of imports, FBR has been able to collect net tax revenues of Rs 2,590 billion during the year FY 2014-15, yielding a 15% growth over the collection of Rs 2,254 billion during FY 2013-14." On the contrary, the State Bank of Pakistan (SBP) in its Annual Report (FY 2015) on the State of Economy released on December 11, 2015, has mentioned that "within tax revenues, FBR taxes were Rs 2,588.2 billion in FY15, compared with the original target of Rs 2,810 billion for the year." This difference between two documents needs to be reconciled-FBR says its figure is 'provisional' whereas no such disclaimer is made by SBP. In any case the figure claimed by FBR included blocked refunds of Rs 200 billion as admitted by the Finance Minister, so the real collection was around Rs 2390 billion.
Last year as well, FBR claimed to have collected Rs 2266 billion (provisional data) for FY 14 as against Rs 1946 billion during 2012-13 and "a positive growth of 16%" was claimed in its Year Book 2013-14. Later, it was admitted that actual collection was Rs 2254 billion and not Rs 2266 billion. It has been suggested in these columns time and again that the government must order a forensic audit of FBR's collections through an independent commission comprising senior chartered accountants. It is also the constitutional duty of the Auditor General of Pakistan to verify these figures and make public the audit report. Every citizen of Pakistan has the fundamental right under Article 19A of the Constitution to have access to such vital information. The Ministry of Finance and FBR should not make things controversial unnecessarily by hiding figures and facts from the masses.
On November 26, 2015, the worthy Finance Minister eventually admitted before the National Assembly's Standing Committee on Finance, Revenue, Economic Affairs, Statistics and Privatisation that FBR had outstanding refunds of Rs 200 billion. This figure was earlier contested by ex-Chairman FBR, Tariq Bajwa during a hearing before the Senate Standing Committee on Finance on May 13, 2014. He claimed that only Rs 97 billion were payable as refunds.
It is now a matter of record that FBR's declared figures always include blocked refunds of billions of rupees and advances taken though not due. Public Accounts Committee in the past, even after admission of figure fudging by FBR bosses, never punished anyone. Strangely, but expectedly, till today nobody has raised this issue in the National Assembly or Senate. As elected members protect FBR bosses, they in return do not investigate their tax affairs. Tax Directories for 2013 and 2014 show ludicrous income declarations by majority of parliamentarians, yet no action is taken till today against anyone. This unholy alliance must end if we have to collect taxes from all, wherever due, and stop extorting money from them where not due.
While FBR in Biannual Review (January-June 2014-15) has claimed "extraordinary performance, SBP in its Annual Report says: "Federal Board of Revenue has failed to address structural problems in the taxation system and tax-to-GDP ratio remained stagnant in the range of 8.5 percent to 9.5 percent over the last ten years." State Bank says that if the government wants to achieve the goal of tax-to-GDP ratio of 11.3 percent in FY 2018, FBR will have to take various measures to document the economy, and to broaden the tax base.
State Bank further comments that the budget deficit during FY 2015 was 5.3 percent of GDP, slightly lower than 5.5 percent for FY 2014. If compared with the target for the year, the deficit was slightly higher. SBP says that fiscal consolidation during the year was challenged "by lower than expected tax revenues" by FBR. The budget FY15 envisaged a growth rate of 30.1 percent in total taxes-"major part of which was to be collected by FBR; however, actual growth rate of taxes realised during the year was 17.7 percent. Key factors affecting tax revenues were: (i) sharp decline in oil prices, which adversely affected sales tax collection; (ii) continuing issues with tax enforcement; and (iii) subdued manufacturing activity," it adds.
According to State Bank, a sluggish tax collection has squeezed the space for development expenditures because in order to consolidate fiscal account and to keep overall deficit within target, the government could only increase public sector development expenditures by 14.1 percent instead of the target of 35.8 percent. It says that a shortfall in revenue has a direct bearing on development expenses. As public development expenditure are key to stimulate overall investment and growth, the shortfall in tax revenues eventually hurts economic growth. State Bank has identified structural problems in the taxation system such as (i) large informal economy and a lack of documentation, (ii) low social and economic cost of tax evasion, (iii) complexities involved in voluntary tax payments; and (iv) administrative issues in tax collecting authority. These conclusions should be an eye-opener for FBR. We have been pointing out these deficiencies for a long time and FBR has been conveniently ignoring them portraying us as 'unkind critics'. This time SBP has also vindicated our viewpoint. It is high time that the culture of sycophancy and self-praise should end and worthy Finance Minister must refrain from appreciating FBR for its "extraordinary performance," (sic), which according to SBP is 'sluggish" hampering overall investment and growth.
Till today, not a single publication of FBR mentions what is the actual tax potential of the country. Of course, this shows a lack of seriousness and will to strive for optimising tax collection on realistic grounds. The biggest failure of FBR is its inability to compel about 15 million people having a taxable income to file income tax returns-though about 50 million, or even more, are subjected to withholding taxes (under 58 different provisions of Income Tax Ordinance, 2001) yielding collection of Rs 691 billion (62.6% of gross income tax collection of Rs 1096 billion).
The oft-repeated narrative-popular with analysts, TV anchors, academicians, policymakers and foreign donors- that Pakistanis do not pay taxes is factually incorrect. The reality is that millions of mobile users alone paid advance income tax of Rs 44.67 billion in FY 2015 though majority of them have below taxable income of Rs 400,000. On the contrary, total tax paid by exporters was only. Rs 26 billion in contrast to salaried individuals who paid Rs 79 billion!
While the salaried persons and mobile users having meagre incomes are contributing toward national exchequer, the privileged classes, militro-judicial-civil-political complex enjoy unprecedented perks, perquisites and benefits at the expense of taxpayers' money. The mighty landowners exploit labour of landless tillers and unscrupulous industrialists and traders exploit poor urban workers to amass more and more wealth. Additionally, they create artificial hike in prices of essential items to snatch back whatever little is earned by the poor and the fixed-income classes. The prevalent tax system protects them, ruthlessly shifting the burden of unjust taxes on the weaker sections of society.
A little more than 90% Pakistani adults had wealth less than $10,000 in 2015. The share of Pakistani adults with wealth between $10,000 and $100,000 in 2015 was 9.8% while only 0.1% adults owned wealth in the range of $100,000 and $1 million, as per a report compiled by Credit Suisse, a global financial services company. How much income tax is paid by these 0.1% percent ultra rich? In tax year 2014, only 32,031 admitted tax liability between Rs 1,000,000 and Rs 10,000,000! Those admitting liability of more than Rs 10 million are only 3,663!! This shows how tax system has failed to tax the rich and imposing unjust taxes on those who have less wealth and meagre incomes.
Dr Kaiser Bengali, a known economist, has stated that the average net worth of Pakistani parliamentarians is $900,000, yet few of them pay due income tax. "The dearth of tax revenue limits government investment in sectors like education and healthcare that could help reduce inequality, and keeps the country dependent on international aid. This prevents the growth of a diverse and strong economy, while perpetuating economic and political inequalities," he added.
The regressive taxation, retarding growth, has resulted in shrinking of middle class in Pakistan. Presently just a few families have per capita income of $4,286-the minimum benchmark set by the World Bank to qualify as a middle class person. Average family size of middle class is four to five and according to the World Bank's definition, a four-member family collectively earns $17,144 (Rs 1.83 million) a year or Rs 152,867 per month. During his budget speech, Ishaq Dar while imposing higher tax on persons earning above Rs 500,000 per month proudly claimed "it would affect only 3,500 individuals." He should have been concerned about the shrinking size of middle class in Pakistan, but he was telling us we have only a handful of them! This shows how little he and his party care for social mobility and redistribution of wealth through a progressive tax policy.
In any society, middle class, comprising professionals, scientists, doctors, and engineers, plays a pivotal role in the growth of a country but our ruling elite does not want them to grow as they can challenge their monopoly over resources. India is striving to increase the size of its middle and even upper middle class-expected to be 50 million by 2018. But our State Oligarchy is bent upon pushing the middle class towards the poorer class and the poor class, below the poverty line. If Pakistan's economy remains captive in the hands of State Oligarchy, it will never turn around. Pakistan will have more and more people below the poverty line what to talk of increasing the size of middle class, which is considered as the backbone of any economy. It is in the interest of State Oligarchy as the poor can be exploited and forced to vote for them whereas educated middle class cannot be coerced for "engineered electioneering" paving the way for a sham democracy.
Another shocking fact that emerges from FBR's Biannual Review (January-June 2014-15) is the dismal performance of FBR field formations in collecting income tax through their own efforts by employing forensic audit techniques, using third party information or utilising data collected by FBR over different periods of time, about the rich and mighty who do not even bother to file tax returns. Figures show that out of gross collection of income tax of Rs 1,096 billion, voluntary payments (advance tax and tax with returns) was 26.3%, withholding taxes, 63.2% and collection on demand was just 10.6%. This alone confirms the pathetic state of affairs prevailing in the Inland Revenue Wing where a large number of officers are getting double salary and honorariums.
The position under the indirect taxes is even more pathetic as admitted by saying: "The collection of sales tax has been highly concentrated in few commodities. This is confirmed by the fact that only petroleum products contribute around 44% of the total sales tax domestic. Major 10 items including POL and natural gas shared 73% of the total net sales tax domestic."
The following facts expose the narrow base of sales tax and lack of enforcement efforts by FBR:
-- Net collection under sales tax: Rs 1087.7 billion
-- Imports: Rs 556.6 billion
-- Domestic: Rs 531.2 billion
POL products:
-- Contribution in STD: Rs 233.2 billion (43.9%)
-- Contribution in STI: Rs 166 billion (29.8%)
-- Out of total 175,000 registered taxpayers only 117,072 (67%) filed returns and only 55,000 (less than 32% of registered persons and 0.025% of total population of the country) paid any tax.
-- Out of total domestic sales tax collection of Rs 531 billion, more than 89% was paid by only less than 400 entities. In other words, only 0.19% of the registered taxpayers contributed more than 89% of sales tax.
-- The effective sales tax rate for total domestic sales is 4.55 percent. This rate is 6.81, 7.96, 8.36 and 13.56 for top 40, 30, 20 and 10 sales tax paying entities. This shows that domestic sales made by more than 99% of taxpayers contribute sales tax at effective rate less than 4.55%.
Unfortunately, till today, FBR has not admitted its failure in improving tax-to-GDP ratio despite imposing all kinds of irrational taxes and blocking refunds. On the contrary the process of self-praise continued in Biannual Review (January - June 2014-15) and in daily Press briefing. There is a consensus among all that real tax potential can only be tapped by broadening tax-base and making tax laws simple to understand and easy to administer. For this we have already presented a comprehensive model. But obviously vested interests in government will never favour it as such a model leading to autarky will empower people that elites cannot afford!
If our model is adopted, Pakistan can come at par with many developing countries in achieving a tax-to-GDP ratio of over 15% (presently it is dismally low at 9.5%). Our model suggests radical changes like flat-rate, predictable income taxation, harmonised sales tax (HST) at low rate and simpler procedures. This system will not only yield more tax but also encourage investments and savings and discourage informal economy. The government, captive in the hands of vested interests, is least interest to tax undocumented economy and benami transactions. The mighty sections of society are engaged in these transactions and they have political patronage.
FBR remains busy in constituting committees to resolve tax disputes arising due to its own idiosyncrasies and myopic approach to get taxes through impractical and oppressive means. Legislation is the exclusive domain of Parliament but unfortunately members of Parliament are least bothered to discuss these vital areas in the House. The Income Tax Ordinance, 2001, was a work of a military dictator as was repealed Income Tax Ordinance, 1979. Our Parliament is not even inclined to enact a simple Income Tax Act that deals with personal taxation in a fair manner. In this scenario, it is understandable why FBR has become a de facto legislature. The root cause of problem is FBR's unwillingness to perform its own duty and indulgence in activities that fall outside its purview/domain. For this, however, the main fault/responsibility lies with Parliament that has gladly surrendered its powers to the FBR!
(The writers, lawyers and partners in law firm, Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)
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