The proposals to impose income tax surcharge and disaster import duty to generate additional revenue for flood victims reflect failure of the tax machinery in checking revenue leakages and massive tax evasion, hindering the upward trajectory of the tax-to-GDP ratio.
Sources told Business Recorder here on Tuesday that FBR's inability to bring potential taxpayers into the tax net and enforce filing of returns has resulted in massive revenue leakage. At the same time, under-reporting of taxes, under-invoicing at the import stage and concealment of income are causing cumulative losses in billions of rupees on daily basis.
The proposal to impose lower rate of 3-5 percent income tax surcharge on the tax deducted from the salaried class would only result in heavy taxation on the already overburdened taxpayers. It has been apprehended that the tax evaders might be able to avoid payment of surcharge, as they are operating out of the tax net. In the absence of an authentic database to check revenue leakage, such kinds of income tax surcharge and flood import duty would only burden the honest taxpayers.
Sources said that the most disturbing aspect of surcharge is the imposition of some additional taxes on those already paying taxes. On the other hand, the potential persons are operating under the undocumented regime, which is contributing nothing to the national exchequer.
The imposition of surcharge has never resulted in broadening the tax base, but only helped in generating revenue. The same persons who are already paying taxes would be liable to pay surcharge. There are 2.75 million National Tax Number (NTN) holders, out of 160 million population, which is only 1.6 percent of the total population of the country. Out of the NTN holders, the return filers are only 2 million. Despite this low share, when compared to population, the share of taxpayers belonging to non-corporate sector is close to 99 percent of the total return filers.
On the other hand, the corporate sector that contributes around 66 percent in the total income tax collection has a share of only 1 percent in income tax. Presently, there are over 50,000 companies registered with the Securities and Exchange Commission of Pakistan (SECP), while NTN holders with FBR are around 24,000. The returns received were around 20,000. With such a low compliance rate, the focus is on salaried class and withholding taxpayers, who would be subjected to income tax surcharge, if imposed.
Sources said that if the current level of non-compliance would have been improved to some reasonable level, the tax authorities could have generated revenue which might have averted situation for imposition of surcharge.
The situation of compliance by the sales taxpayers is evident from the fact that the tax department has maintained a database of only 0.161 million registered persons with the sales tax department. Out of 0.161 million persons having sales tax registration numbers, around 60 percent registered persons are dormant (inactive) taxpayers, de-registered persons, blacklisted units and suspended companies. A large number of persons, who have obtained sales tax registration numbers are dormant, which are registered taxpayers, but showing no business activity. On the other hand, 70,000 to 80,000 are active taxpayers filing sales tax and federal returns.
Sources said that the consecutive non-filing of sales tax and federal excise returns is a major concern for the tax department. Nearly 80,000 units are filing sales tax and federal excise returns electronically. Out of nearly 80,000 sales tax returns, approximately 25,000 are paying no tax by declaring nil income. In case of 15,000 to 20,000 registered persons, they show nominal business transactions or limited business activity. Only 20,000 to 25,000 taxpayers are paying nominal amount of sales tax, as first 1000 taxpayers are paying over 90 percent of the total sales tax.
In best tax administrations, the department is maintaining authentic database of the taxpayers, documenting each and every transactions on regular basis. The FBR has maintained sketchy data of taxpayers with incomplete profiles of the registered persons. Despite claims of maintaining database by tax department, the tax machinery has totally failed to document potential persons, including service providers, into the tax net. So far, the FBR has failed to set up a National Data Warehouse under reforms to maintain an authentic database of taxpayers.
According to sources, some of the best tax administrations have effectively handled the natural disasters without burdening the existing taxpayers. The Inland Revenue Service (IRS) of USA provides disaster assistance and emergency relief for individuals and businesses. Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area.
Depending on the circumstances, the IRS may grant additional time to file returns and pay taxes. Both individuals and businesses in a federally declared disaster area can get a faster refund by claiming losses related to the disaster on the tax return for the previous year, usually by filing an amended return. The special tax law provisions may help taxpayers recover financially from the impact of a major disaster in their location.
Sources said that Sri Lanka had imposed income tax surcharge as well as special tax after tsunami to generate additional revenue. The HR Revenue and Customs of UK said that when an accident, disaster or other misfortune happens, people offer practical assistance. They may contribute or raise money to help those affected persons, the injured or bereaved. These notes are to help people organising such appeals. Where a number of people are likely to benefit, the appeal funds will normally need to be held in a trust. The donations of money to the appeal will be completely free of income tax and capital gains tax, it added.
The Canada Revenue Agency has provided relief to taxpayers by giving special consideration when they are unable to meet their tax obligations due to natural disasters. The CRA's taxpayer relief provisions use a balanced approach to assist taxpayers in resolving tax issues due to circumstances beyond their control. Under these provisions, taxpayers can apply to the CRA to have interest and/or penalties waived or cancelled in situations where they are unable to file a tax return and/or make payments on time because of a natural disaster or other circumstances.
As far as 'flood surcharge' is concerned, it is always inflationary on the indirect taxes side as the burden of the tax is passed on to the consumers. On the other hand, 'flood surcharge' would also have inflationary impact on the direct taxes sides where it is applicable on the payable tax.
The exact inflationary impact of the 'flood surcharge' could be ascertained after enforcement of the law. In case 5 percent 'flood surcharge' is imposed on the salaried class earning taxable income, it would put extra burden of 5 percent on the already deducted tax. This would have serious impact on the salaried class already overburdened due to inflation and inflated utility bills. The inflationary impact of surcharge on the salaried class could be avoided by targeting sectors having huge turnover and earning extraordinary profits. If 'flood surcharge' is extended to the manufacturing sector, it would increase their cost of doing business due to extra levy on their tax payable.
Presently, tax exemption is only available to donations made to the non-profit organisations, NGOs approved by the Federal Board of Revenue (FBR). However, the FBR has notified specific relief funds to exempt donations made to them. The facility of tax rebate is also available to the donations made by the taxpayers under the income tax law.
It is important to mention that the government, instead of opting for flood surcharge, should withdraw tax exemption allowed to powerful lobbies, reduce cabinet size at federal and provincial levels, and control corruption in public sector organisations.