EDITORIAL: There are 7.6 million registered direct taxpayers in the country, according to FBR (Federal Board of Revenue), of whom 3.6 million file their income returns; and of them 2.2 million are tax filers while 1.4 million are those who file zero returns. FBR reports that a mere 13,958 people paid 75 percent of the direct taxes in 2022. One may question the need for a 20,000-strong FBR force when such a tiny share of 250 million people is paying income tax (fewer still are filing returns).
The inability of FBR to generate direct taxes compels policymakers to use desperate measures to collect taxes in the short term without taking into account the implications of such measures in the medium to long term. One such proposal is taxing the distributable reserves of listed and unlisted companies.
There is no doubt that at a time when debt servicing is higher than the federal government’s net revenues, the government has to quickly raise tax collections. However, it should not be happening at the cost of the economy at large. The proposal to levy advance tax on future dividend income may be able to generate additional revenues but would have a devastating impact on capital formation and economic activities in the corporate sector.
This would result in shifting the corporate to non-corporate and formal to the informal segments of the economy; as a result of which, the entire purpose of boosting tax revenues would be undermined. Moreover, this will be counterproductive as enhancing the tax base is an objective that FBR has miserably failed to achieve and continues to do so, requiring it to keep its manpower intact.
Some argue that having an advance tax on the reserves is to benefit the minority shareholders as this tax lures companies to pay higher dividends. Well, that is a flawed argument. First, not all the companies sport a strategy of paying high dividends. The growth-oriented companies usually keep retained earnings for future expansion. And in the process, capital formation takes place and the value of the company increases and that is then reflected in the share price or prices to benefit the minority shareholders.
And if the minority shareholders desire dividends, they can easily exit from the company by selling shares and buying shares of the companies paying regular dividends. Secondly, the tax is higher at 7.5 percent on unlisted companies where the number of shareholders is limited and there is no benefit for the minority shareholders. Thus, by having advance tax on unlisted companies and that too at higher rate implies that the objective is to raise taxes.
With this proposal circulating, numerous listed companies have called the meetings of their directors and shareholders with a view to increasing the authorised capital to avoid this tax. Some may be paying higher dividends at the cost of future expansion while others will be issuing bonus shares. Not only would it successfully thwart government’s or tax machinery’s higher tax collection plans, it would also create systemic taxation anomalies in medium and long term.
Thus, without debating the legitimacy of this tax, this may on paper generate certain revenues, but in essence, the collection would be limited. This is rather compelling the documented and formal businesses to enhance the shades of grey. Already, the number of formal businesses is on the decline. The listing on the stock exchange is limited and there are incidents of private companies moving towards partnerships and sole proprietorship. Such moves would only accelerate this process.
And this is extremely dangerous at a time when the formal businesses are already finding it difficult to import raw materials while those operating in informal sector are using hundi and hawala. The government should revisit the drawing board and muster the required political will to bring those who don’t pay their fair share of taxes into the tax net.
In other words, it must stop squeezing the limited pool of direct taxpayers. Another proposal under consideration of the government is Minimum Asset Tax (MAS). Immovable properties have already been taxed under the ruse of ‘deemed income’ and foreign assets declared under the tax amnesty schemes are being milked under the Capital Value tax (CVT) levied under the finance act. Both these imposts have been challenged in courts and the litigation is ongoing.
That leaves Savings and Business capital that reportedly would be taxed under MAS. As it is, our national savings rate is the lowest in region and we continue to lament this low rate. The economy demands that we as a nation save more so that we have to borrow less for investment and development. To tax business capital in the formal sector would only drive businesses to the informal sector.
Are we prepared to do this? This quest for revenue maximization from existing taxpayers by taxing assets created from tax paid income would be devastating for the documented economy and have a deleterious effect on investor sentiment. We hope that the government would reconsider imposing such measures and consider the linkages within the economy and the effect of one on the other within the economy as whole as defined by the principles of economics rather than proceeding on the basis of an accounting exercise that has been fraught with dangers and difficulties right from the start or since the return of finance minister Ishaq Dar to ‘Q Block’ of Islamabad Secretariat.
Copyright Business Recorder, 2023