Fixing the ailing tax system

On February 22, 2019, the Government of Tehreek-i-Insaf (PTI) published two tax directories- 'Parliamentarians Tax Directory' and 'Tax Directory for the year ending 30 June 2017' (these have been tabulated from returns filed manually and electronically till February 21, 2019 for tax year 2017). As per previous practice, these could have been published by the end of February 2018. However, the last government of Pakistan Muslim League (Nawaz) delayed it without any valid reason. The PTI Government could have published consolidated directories for tax year 2017-2018. The delay of one year gave a chance to the PTI Government to include all the returns filed for tax year 2017 till February 21, 2019-much after the last date of filing of returns for all categories of the taxpayers, namely, companies, Association of Persons (AOPs) and individuals. Due to non-disclosure of total number of returns filed for tax year 2018 till end of February 2019 by Federal Board of Revenue (FBR), comparative analysis vis-à-vis tax year 2017 and earlier years is not possible.
The top officials of FBR at the time of launching electronic version of tax directories for year ending 30 June 2017, as in the past years, tried to give an impression that "marvelous" progress was achieved-the same modus operandi they adopted when Tax Directory 2016 was published. They claimed "substantial growth" in tax collection and the number of return filers, but the following facts, extracted from Tax Directory 2016 and Tax Directory 2017, speak otherwise:
Companies & Association of Persons (AOPs)-tax year 2016
-- There were 73,207 companies registered with Securities & Exchange Commission of Pakistan (SECP) as on 30-06-2016 but only 31,364 filed returns (41% paid NIL tax) though law requires mandatory filing of return by every company.
-- Total returns filed by AOPs were 48,364.
-- Cumulatively 81.85% paid less than Rs 100,001 as tax.
-- Cumulatively 764 entities paid Rs 25 million or more as tax.
-- Only 66 entities paid Rs 1 billion or more as tax.
-- 300 entities (companies/AOPs) paid about 69% of the total taxes paid by all companies and AOPs.
-- 10 top companies/AOPs contributed about 53% of total tax paid by these two categories.
Individuals-tax year 2016
-- Total returns: 1,136,886 with 29.3% paying NIL tax.
-- Cumulatively 62.69% paid less than Rs 20,001 as tax.
-- Cumulatively 82.35% paid less than Rs 100,001 as tax.
-- Only 2,455 individuals paid more than Rs 10,000,001 as tax.
The same position prevailed for tax year 2017-in some respects, it has even deteriorated. Out of total registered companies, only 42% (37,130) filed returns! If FBR cannot enforce section 114(1) of the Income Tax Ordinance, 2001, whereby all companies are obliged to file returns, then what other evidence is required for its ineffectiveness and incompetence. The SECP has complete data of all the registered companies. Section 114 binds even loss bearing and dormant companies to file returns. It is also a matter of fact that over 200,000 salaried persons working in various government departments though having taxable income opted not to file returns!! The same is the case for private sector. About 5 million business houses opted to remain non-filers though having annual taxable income exceeding Rs 1,200,000. It is worthwhile to mention that they are paying various withholding taxes, especially through electricity and mobile bills, and FBR has their complete data!!!
According to a report [Tareen tops the list of lawmakers who paid taxes in 2017, The Express Tribune, February 23, 2019], Tax Directory 2017 shows that "the top ten parliamentarians in terms of their tax contributions paid Rs 322 million in taxes, equal to 60% of total taxes paid by all members of the parliament in tax year 2017, raising questions whether lawmakers were fulfilling their moral and legal responsibility. Excluding these ten members, the average tax contributions by the remaining 413 members of the National Assembly and the Senate paid Rs 212 million in taxes-an average of Rs513,000 per parliamentarian. Such a poor tax contribution does not commensurate with the life styles of these worthy members of the Parliament, a fact that was acknowledged by Finance Minister Asad Umar......"
The report adds: "tax contributions by former premier Nawaz Sharif and incumbent Prime Minister Imran Khan also nosedived in tax year 2017, which was the fiscal year 2016-17. Few weeks after the end of that fiscal year, Nawaz was removed by the Supreme Court in the Panama Papers case. Presumably, his tax returns were filed after he was ousted from power. Former Prime Minister Nawaz Sharif paid just Rs 263,173 in taxes in 2017, as against Rs 2.52 million paid in the preceding year. Meanwhile, PM Imran was a member of National Assembly at that time. He paid a paltry sum of Rs 103,763 in income tax, which was less than by 35% or Rs 55,000".
Overall, it says, "there was an upward trend in tax contributions by members of parliament. The fifth tax directory of parliamentarians showed that national lawmakers, including members of the federal cabinet, paid Rs 535 million in taxes during tax year 2017-up by Rs 139 million or 35 per cent The tax contributions by the members of the Senate increased to Rs 254 million-up by 14 per cent. MNAs paid over Rs 281 million during tax year 2016, an increase of 26 per cent'. The report, however, notes that "a significant number of parliamentarians were still paying far below their potential, showed the tax directory. Many of them paid Rs 138,573 annual tax, which suggested that they paid taxes only on the income that they earned as member of the National Assembly or the Senate".
Out of a total 1,169 members of the Senate, the National Assembly and the four provincial assemblies, as many as 98 legislators did not file their tax returns. Under the law, filing income tax return is binding on every citizen who earns more than Rs 400,000 per annum and non-filer parliamentarians may face serious consequences, provided FBR plays its due role.
It is estimated that about 10 percent of Pakistan's employed workforce that is 6.5 million earns taxable income. According to a report of Groupe Speciale Mobile (GSMA), there were 95 million unique mobile users in 2017 who paid 12.5% [rate prior to July 1, 2017 was 14%] advance and adjustable income tax but only less than about 1.5% of them filed income tax returns in 2017.
According to Active Taxpayers List (ATL) as updated on February 1, 2019, the total number of taxpayers who filed tax returns for tax year 2017 increased to 1.81 million. The figure for tax year 2018 is yet not disclosed by FBR to public. Previously ATL was updated on weekly basis. However, through Finance Act, 2018 a new section 182A was added in Income Tax Ordinance, 2001 under which late filers for tax year 2018 were disentitled from appearing on the ATL. Many sane circles criticised this provision and held it violative of Article 13 of the Constitution of Pakistan amounting to double jeopardy. It is high time that the PTI Government should get it deleted it through the Finance Supplementary (Second Amendment) Bill, 2019 and allow people to become part of ATL even as late filers. There can be many having non-taxable receipts or below taxable income or income falling within presumptive tax regime. By not filing returns, they did not cause any loss of revenue. They should not be penalised unnecessarily. The Federal Finance Minister, Asad Umar, and State Minister for Revenue, Hammad Azhar, must take a decisive action asking FBR's bosses to come out of their negative mindset.
According to a Press release of October 11, 2018 by FBR, it received till October 10, 2018 "482,275 Income Tax returns for the Tax Year 2018, which are 170,208 more than the 312,067 Income Tax returns received for Tax Year 2017 by the same date, registering an impressive increase of 55%". Another Press release of FBR, issued on March 2, 2018, claimed that "a meaningful comparison of the number of returns filed for a year with the preceding year has to be for a given date because the returns for the preceding year continue to be filed even in the next year. By the 28th of February 2018, 1,260,181 returns have been filed for the tax year 2017 and that are 246,945 more than the 1,013,528 returns received for the tax year 2016 by the same date, i.e., 28th of February 2017".
Total income tax returns filed till the many times extended date [December 17, 2018] for tax year 2018 were 1,483,020 [later increased to 1,552,287 by the end of January 2019] as compared to 1,756,982 persons on Active Taxpayers' List (ATL), as per website of FBR on the said date for tax year 2017. This shortfall of 273,962 returns as on December 17, 2018 was despite the fact that non-filers could not buy either immovable property exceeding Rs 5 million or any car and would not become part of ATL. The Minister of State for Revenue was jubilant that the number of income tax return filers had increased by 30% as last year only 1.1 million returns were received for the corresponding period. He claimed that this rise was "due to action against non-filers and facilities to the traders"-both measures were introduced by the last government of PML-N! It is strange that FBR in its annual year books does not give total number of income tax filers and total number of registered sales tax persons on the closing date of every financial year for which it highlights its performance. For the sake of transparency, they must give on website historic and current up-to-date data of return filers and sales tax registered persons as early as possible. Hopefully, the Finance Minister, Asad Umar, and State Minister for Revenue, Hammad Azhar, will take note of it.
In an official communiqué (Press release of December 31, 2017 issued by FBR), it was admitted that 1,158,380 returns were received till December 31, 2017, showing an increase of 21.5% in the number of returns received during the same period of 2016. It is pertinent to mention that Jorge Martinez-Vazquez and Musharraf Rasool Cyan in their book, 'The Role of Taxation in Pakistan's Revival', mentioned [page 676, Figure 36] that 2.1 million Pakistanis (individuals) filed income tax returns in 2006-07. This shows that FBR has lost one million return-filers in the last 10 years despite prescribing higher withholding tax rates for non-filers. Every year, even after giving many extensions in the last date for filing of returns, compliance is wavering. This confirms dwindling efficacy of FBR-it must conduct a study to find out what has gone wrong after penalising non-filers who are happy to pay more by way of advance tax rather than file returns!
As per provisional results of 6th population and housing census-2017, total population in 2017 was 207,774,520. Out of total population, 60% were in the age group of 20-24 years and 60 million were below the age of 15 (dependents). As many as 30 million were chronic poor earning less than two dollars a day. Our labour force, tenth largest in the world, was around 65 million, out of which 56.5 million were employed. Rural labour force of 55.5 million was earning below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance, 2001. Reading all these facts together, total persons liable to income tax could not be more than 6 million whereas FBR is extorting income tax at source from over 95 million active/unique mobile users alone!
At present, the entire taxable population and even those having below taxable incomes are paying income tax at source, yet FBR is engaged in a vicious propaganda that people of Pakistan are tax cheats and that our tax base is narrow! This is highly lamentable on the part of FBR especially when all traders using commercial electricity connections are paying advance income tax under section 235 of the Income Tax Ordinance, 2001.
All commercial electricity users pay advance income tax under section 235 of the Income Tax Ordinance, 2001 with their bills, and tax paid up to annual bill of Rs 360,000, is treated as minimum tax with no claim to a refund! In the presence of this section, read with section 181AA, was there any need to impose tax on banking transactions by non-filers? A report, 'Doing away with the transactional tax', Business Recorder, October 30, 2018, says: "The idea of the transaction tax was two folds-one was to increase the tax revenues and the other was to incentivise the non-filers to file by penalising them. But the adverse impact of documentation was not well thought of. Spanning over three years, neither the tax revenues increased significantly nor the tax filing enhanced meaningfully. On the flip side, the informality in the economy increased disproportionately".
It is an undeniable fact that FBR has failed to get due tax from the rich and mighty and thus its main emphasis is on withholding taxes (WHT). FBR's Year Book 2017-18 concedes that "WHT contribute "a major chunk i.e. 65% to the total collection of income tax". It adds that "the WHT collection during FY 2017-18 has been Rs 1,047 billion against Rs 944 billion indicating a growth of around 10.9%". The actual contribution of WHT is 68.5% that is 3.5% more than what FBR has claimed in Year Book 2017-18.
According to details given in Year Book 2017-18, total direct tax collection was 536.6 billion, out of which income tax was Rs 1528.5 billion. Year Book 2017-18 does not mention what was the nature of direct tax of Rs 8.1 million, other than income tax, collected by FBR. In respect of income tax, besides collection of Rs 1,047 billion from WHT(68.5%), Rs 335.79 billion came as advance tax (21.9%), Rs 41.64 billion with returns (2.7%) and Rs 1.31 billion under 'Tax Arrears Settlement Incentive Scheme (TASIS) 2008' (.08%).
FBR's own efforts (collection on demand) yielded only Rs 102.82 billion (6.7%)-from arrears Rs 17.69 billion (1.2%) and from current demand Rs 85.13 billion (5.6%). It confirms negligible share on the part of FBR to tap the actual tax potential as it would have been hurtful to the rich, majority of which are non-filers, despite having substantial undeclared, untaxed wealth and the audacity of ruling this country as a matter of right. They are ready to pay additional tax at source as non-filers but are not inclined to file tax returns.
Why FBR wants tax returns from even those who have no taxable income? This is against the supreme law of the land-Article 4(c) of the Constitution which says: "no person shall be compelled to do that which the law does not require him to do". More "filers" mean more "speed money", more earnings for unscrupulous tax advisers -majority comprising lower staff (working evenings with unscrupulous consultants) and even some high-ranking officers of FBR.
In Pakistan, the ultra-rich are avoiding tax obligations whereas millions having no income or incomes below taxable limit have been forced to pay advance tax. It is gross violation of their fundamental rights. Why should poor people engage a tax adviser to file return and pay money to get some refund? FBR owes an open apology to the people of Pakistan for gross negligence in reporting incorrect figures regarding income taxpayers in Pakistan. Out of total income tax collection during 2016-17, the percentage of withholding taxes and voluntary payment is 90%. It proves beyond any doubt that blame shifted to business houses, especially SMEs, for alleged non-payment of taxes, is just an eyewash.
The crumbling, inefficient and corrupt tax apparatus is the root cause of the present scenario. Tax officials persistently squeeze and penalize existing taxpayers on the one hand but on the other, join hands with and protect big tax evaders-massive over and under invoicing is not possible without their connivance. Small business houses, already heavily taxed through withholding tax mechanism are victims of their highhandedness. It is high time that FBR should check its own working and stop malicious propaganda against the people in general and business community in particular.
It is FBR's own failure to enforce provisions relating to filing of returns by people having taxable income, for which it cannot blame the public at large. Are the people of Pakistan responsible for this pathetic performance? The responsible officials of FBR should be taken to task for this gloomy state of affairs. It is high time that FBR should put its own house in order and enforce tax laws across the board rather than blaming the already over-taxed people of Pakistan for its own managerial fiascoes and established record of protecting the rich and mighty. It must be remembered by all that non-collection of tax where due is as detestable as its collection, where it is not due.
In the first seven months of the current fiscal year, FBR has collected Rs 2,060 billion registering the lowest revenue growth rate of 3.2% in 20 years. Before coming into power, PTI claimed it would double FBR's collection to Rs 8,000 billion. On the contrary, the government reduced FBR's target to Rs 4,398 billion from Rs 4,435 billion. FBR reportedly says even this would be difficult and final collection would be around Rs 4,100 billion. FBR was not able to collect even Rs 4 trillion in fiscal year 2017-18 and shortfall forced the government to resort to borrowing more and more from commercial banks.
The issue of slackness of FBR was raised in a lecture delivered to senior officials of FBR on October 26, 2018. The speaker raised the question: "What was the result of the audit of parliamentarians including Prime Minister Imran Khan whose case was selected for audit in the past?" No answer is given by FBR and political master till today of the question asked. Parliamentarians were selected for audit for Tax Year 2015-16 by FBR by employing a parametric selection mechanism through a computer ballot. The speaker highlighted that key challenges being faced by FBR included revenue inadequacy, lack of capacity and skill-based training, preferential treatment of certain sectors, horizontal inequity and higher tax incidence on some sectors, complicated tax codes, out-dated structures resulting from ad hoc decisions, excessive use of withholding taxes, unjustified exemptions and low compliance with weak enforcement. The latest data released confirm these factors.
The prevailing tax system is unjust, outmoded and unproductive with high taxes, yielding low revenues and operationally complex, time-consuming and costly. It is not taxing the people according to their ability to pay but relies mainly on indirect taxes that are regressive, as these take a much larger percentage of income from low-income families than from high-income earners. For implementation of fundamental structural reforms ['Agenda for Tax Reforms', Business Recorder, August 11-13, 2017] and fixing the ailing tax system, there is a need for political consensus, three-core stakeholders (tax administration, taxpayers and policymakers) to be on board, parliamentary commission to evolve broad national consensus, and need to strengthen fiscal analysis capacity at FBR and Revenue Division of Ministry of Finance along with twin-track improvement mechanism of tax policy and tax administration.
(The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)