EDITORIAL: Atif Ikram Sheikh, President of Federation of Pakistan Chambers of Commerce and Industry (FPCCI) and Chairman of the Anomaly Committee Federal Board of Revenue (FBR), Gohar Ijaz, while addressing a joint press conference recommended a 30 percent tax on bank deposits of non-filers under the tax reform agenda, claiming that 90 percent of the money of non-filers in banks is black money.
Three observations are in order. First, attempts in the past to widen the tax net through levying a higher withholding tax in the sales tax mode on non-filers as opposed to filers was not successful as the non-filers filed returns on behalf of those members of their families who were not eligible to pay taxes; for example, those who had reached retirement age, or widows or students.
Thus, while the number of filers has increased significantly over time yet unfortunately the actual tax collections have not. A rise in total revenue collected by FBR is attributable to higher taxes as well as bringing more items under the tax net and inflation, which has hovered well above 20 percent for the past two years.
Second, whenever the government considered forcibly taxing any non-filer’s bank deposits the country’s cash economy got a major boost. As matters stand today Pakistan has a parallel illegal economy, which will be strengthened in the event that FBR forcibly takes taxes without following laid-down procedures directly from banks. And finally, it is a distinct possibility that those affected may contest the government’s decision to forcibly impose 30 percent tax on non-filers in courts – litigation that could well take years to reach the final verdict.
A tax reform agenda must contain out of the box solutions for effectiveness and sadly FPCCI and Anomaly Committee of the FBR’s formula is not a new one. There have been repeated attempts by FBR in the past to somehow leverage bank account holders’ details for tax collection but have run into a brick wall because of the secrecy aspect enshrined in the law.
To make a difference two major decisions need to be immediately implemented. First, all provinces must begin to tax agricultural income/profits (above a certain minimum income and/or profits) at par with the rate payable by the salaried class. There is overwhelming evidence that the salaried persons are among the major contributors to income tax, a tax that is based on accruing of actual profit/income and the ability to pay principle and which requires to be widened.
The FBR instead has imposed withholding and advance income tax in the sales tax over and above the sales tax (GST). These are all factored in as elements of cost and passed on in the sale price, leading to increase in the price of goods and services and fuelling inflation.
The incidence of this mode of taxation is greater on the poor than on the rich, which has sustained the elite capture in terms of sources of government revenue; and dishonestly credited it under direct taxes, pointed out by the Auditor General a few years ago but patently ignored by the FBR, which explains why Pakistan’s poverty levels have risen to a high of 41 percent.
And secondly, the federal government needs to slash its current expenditure – a policy that was clearly not under consideration with respect to the budget 2024-25 as current expenditure has been budgeted to rise by a whopping 21 percent over the revised estimates of the outgoing year.
Therefore, it is time to proactively go after the non-filers, including all those categories that under the law are required to file income tax returns but do not and also those that under-file their incomes and evade billions of rupees in tax.
Unless the government goes after all those who continue to remain outside the net such as those that are in retail and wholesale trade and also those that do not file their returns correctly, be they influential people or not, the menace of money laundering and placing the onus of tax revenue on the relatively poorer sections of society is unlikely to bring in any dividends.
Copyright Business Recorder, 2024