Table B and Table C show the level of compliance of tax laws in Pakistan. There are only 118,214 sales tax registered persons, out of which non-filers are 33,906. Out of 84,380 filers in September 2012 only 14,778 pay any amount of tax. Out of 120 million mobile users (active users are about 75 million and post-paid connections are 25 million), who are subjected to 10 percent withholding of income tax and 19.5 percent levy of sales tax, overwhelming majority do not bother to file tax returns. About 90 percent of them may be below taxable limit of Rs 400,000 - they can get back their income tax withheld at source if file returns.
They have not been encouraged or facilitated by FBR to file returns and get refunds, so billions withheld from them are shown as collection by FBR, which in fact is refundable! There are around 10 million mobile users that not only spend more than Rs 12,000 per annum for this utility but also own motor vehicles having engine capacity of exceeding 1000c - they are required to file tax returns mandatorily as per section 114(1)(vi) of the Income Tax Ordinance, 2001. The FBR has failed to enforce this provision of law as evident from Table B.
The FBR is projecting the figure at 3.8 million to be targeted in the proposed iamnesty scheme [iiInvestment Tax Scheme 2012]. This shows the shallow understanding of the existing law and facts available on the part of high-ups of the FBR, who claimed to be "all knowing" and having all the modern IT tools at their command! Pakistan should have at least 20 million return-filers, if not more, on the basis of available data, but FBR after failed to bring them on tax roll is begging for a few thousand rupees from each of them in return for foregoing tax of billions of rupees and decriminalizing their act of tax evasion as well as source of earnings. The proposed law says that no proceedings would be taken against them by FIA or NAB. If the National Assembly passes the proposed bill, approved by the Federal Cabinet, it will be equally guilty of protecting the criminals, besides the point would be well-established that they also have self-interest in the matter that is to get billions whitened, kept benami (in the name of others at home and abroad).
The government is not making any effort to revive economy, improve productivity and concentrate on economic growth leading to creating new jobs. Resultantly, Pakistan is facing a dilemma: neither can it afford to give any meaningful tax relief package to the common people, trade and industry [due to huge fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to retrogressive tax measures]. This is a vicious circle in which our policymakers are trapped. Time and again in these columns we have presented ways and means to come out of this tangle; to make Pakistan a place where economic growth takes place with development for all and not just a handful few and it will lead to better revenues. Revenues are byproducts of growth and productivity.
Table B: Total number of returns/statements received in 2011
================================
Nature Number
================================
Business returns 513,044
Salary returns 160,903
Employees' statements 769,467
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Total 1,443,414
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The total amount of income tax collected for financial year 2011-12, according to FBR, was Rs 716 billion. If we subtract tax collected at source on goods and services, contracts and supplies and other items which being full and final discharge is in substance, indirect levy, the real income tax collection comes to Rs 425 billion. After this adjustment, direct tax-to-GDP ratio for 2011-12 is only 2.04%, which is pathetically low - FBR has wrongly claimed share on direct tax as 39 percent in total tax collection. In reality, 77.5 percent collection is indirect. It proves beyond any doubt that the tax system is directly contributing to rising poverty as people who possess enormous income and wealth are not being subjected to income taxation in Pakistan. Thus the very purpose of redistribution of wealth as the main object of taxation is being defeated. It is pertinent to mention that in 2011, the government of Sweden collected taxes at 50 percent of GDP, almost twice as high as the total tax revenue of America and Japan, with both collecting around 25 percent of GDP. In the Euro area, tax revenue, on average, reaches 40 percent of GDP.
It hardly needs any further evidence to show that regressive taxation, non-realisation of actual tax potential and wastage of whatever is collected is our real dilemma. The existing unfair and unjust taxation is not only destroying Pakistan's trade and industry, but contributing significantly to sharply rising poverty as well as destroying the moral fabric of society through so-called amnesty schemes and promoting money power that controls the politics and vital state institutions. Economy, business climate and social order are being destroyed by:-
---- levying exorbitant sales tax, compelling importers to forced value addition even before actual sales take place;
---- imposing indirect taxes on goods and services under the presumptive tax regime in the garb of Income Tax Law, which is violative of Constitution of Pakistan;
---- imposing withholding tax obligations without any facilitation and then taking punitive action or using the same as revenue collection tool;
---- blocking undisputed refunds under one pretext or the other;
---- making excessive tax demands which in 99 percent cases do not stand the test of appeal;
---- resorting to all kinds of negative tactics and highhandedness to meet budgetary targets;
---- introducing money whitening schemes in the garb of tax amnesties, which are unlawful and disastrous, inter alia, for the following:
(i) favour tax evaders and puts the honest taxpayers at a disadvantage;
(ii) violate Article 25 of the Constitution;
(iii) promote and protect unscrupulous and criminal elements;
(iv) encourage tax evasion, rent-seeking and money laundering;
(v) have pernicious effect on the general moral fabric of society;
(vi) put integrity at a discount;
(vii) place a premium on vulgar and ostentatious display of wealth; and
(viii) shatter the faith of the common man in the dignity of honest labour and virtuous living.
The above actions of the government and tax machinery are detrimental for democracy, economy, social justice, business and industry. If a given amount of revenue is needed to finance public services, then each taxpayer should contribute in line with his ability-to-pay taxes. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa. Article 3 of the Constitution categorically holds that "the State shall ensure the elimination of all forms of exploitation and the gradual fulfilment of the fundamental principle, from each according to his ability to each according to his work". Instead of fulfilling this constitutional obligation, the government is benefiting the rich and mighty and taxing the poor.
It is tragic that in a country where state property worth billions of rupees is grabbed by the mighty men and then sold to the private parties at exorbitant prices, tax-to-GDP ratio is just 9.1 percent. These mighty sections of society - the real rulers - are not discharging their tax liability under section 13(11) of the Income Tax Ordinance, 2001 and the Parliament instead of taking note of this gross violation of law, is itself engaged in extending tax amnesties and asset whitening schemes to the rich and mighty.
It is now for the voters to pressurise their elected representative to fulfil the pledges made in Articles 3, 37 and 38 of the Constitution of Islamic Republic of Pakistan. The taxpayers should have statutory assurance that taxes should be collected and spent for the purposes enshrined in these Articles. The citizens shall be protected from higher and unjust taxes and there must be definitive limits on the government spending except when popular vote says otherwise. If the legislators truly represent aware and politically conscious voters, they can improve country's budgets, taxes and economy. Not only the citizens should have protection from arbitrary and unjust taxation, but there should be laws to specify the percentage of tax collection that should be spent for the welfare of general masses, providing them what is promised in Article 37 and 38 of the Constitution, like clean drinking water, health, education, housing and transportation. The voters' approval should be made mandatory for any federal, provincial or local levy of taxes above and beyond inflation and population growth.
It is criminal that billions from national exchequer (taxpayers' money) are wasted by the state functionaries and political masters while the poor are dying of hunger and shelter. Tax-evaders are buying plots and luxurious bungalows in various Defence Housing schemes and elsewhere paying cash in millions, but the high-ups of FBR express their helplessness in taxing them and begging before them through amnesty schemes to pay just a few thousands and get everything whitened. The definition of 'business' under section 2(9) of the Income Tax Ordinance, 2001 covers speculative transactions legally termed as "adventure in the nature of trade" and yet the apex revenue authority is sitting idle causing colossal loss to the national exchequer by not taxing buying and selling in real estate as adventure in the nature of trade. They are also not recovering tax due from beneficiaries of allotment of state lands under section 13(11) of the Income Tax Ordinance, 2001. Our tax-to-GDP ratio can rise to 25 percent in one year if we tax colossal agricultural income of absentee landlords, real estate developers, beneficiaries of state lands invoking section 13(11) of the Income Tax Ordinance, 2001, and confiscate all assets created out of untaxed money by deleting section 111(4) of the Income Tax Ordinance, 2001.
i Official documents presented before the Federal Cabinet on November 14, 2012 says that "a significant segment of Pakistan's economy is undocumented. The growing size of the underground economy is not only depriving the exchequer of its due share but also acting as a hindrance to economic planning and development. A large number of business and individuals who are regularly filing their Income Tax returns are avoiding their legal obligations by either under-declaring or not correctly declaring their assets and/or income. On the other hand, a large number of businesses and individuals who are required to be registered with the FBR and to regularly file their Income Tax returns are avoiding their legal obligations. The FBR along with NADRA has data about the multiple bank accounts, travel, assets and other details of these non-filers. Based on this data two tax incentive schemes are being proposed by FBR. The past attempts by FBR to register them failed as the FBR field units unfortunately compromised the data. Tax Registration Enforcement Initiative, 2012, has been devised to attempt, through a simple scheme to be administered through banks along with NADRA under proposed section 120B of Income Tax Ordinance 2001, to register and bring into tax net non-filers of tax returns. A fixed tax is proposed and provides cover to undeclared income/assets up to Rs 5 million. Investment Tax Scheme, 2012 is being proposed to be enacted under the authority given in section 120A of Income Tax Ordinance 2001, which will attempt, through a simple scheme, to provide a mechanism and cover to registered filers in addition to non-filers of income tax returns to declare undeclared income assets/expenditure up to the value of Rs 5 million by payment of token tax and additional assets/income by payment of investments tax as per proposed slab. The scheme will be administered through establishing special counters with the help of banks along with NADRA. Both the schemes may not be taken as a safety net for those who have not complied with tax laws but as a trampoline which will provide buoyancy to the national economy and deepen and broaden the tax base. The persons availing the schemes shall also have immunity under the National Accountability Bureau Ordinance 1999, Federal Investigation Agency Act, 1974, Compliance Ordinance 1984 and Foreign Exchange Ordinance 2002. These schemes have been fine-tuned based on discussion and feedback from Tax Bar Associations and trade bodies and the field units of the FBR. The success of the schemes is heavily dependent upon its publicity, accordingly, it is planned to launch an organised campaign to bring it to the notice of the potential declarants and field units will also be assigned defined targets to publicise the schemes and enroll the declarants. Up to five per cent of tax revenue through the schemes is proposed for expenditure on the publicity and advertisement for the launch of the schemes, in accordance with prescribed procedure of PID and the Federal Government and 1.5 per cent of the revenue receipts from the Tax Registration Scheme is proposed as share of the NADRA".
The Money Bill which will be introduced in the National Assembly is as follows:
WHEREAS, a major segment of the national economy is undocumented and a large number of persons who are required to file their income tax returns are persistent non-filers and are depriving the national exchequer of its due share;
WHEREAS, the existing scheme of the tax laws provides mechanism for bringing potential taxpayers into the tax net and to enforce compliance to the tax laws, in view of the hitherto prevailing culture of massive non-reporting it is expedient to provide a one-time opportunity to the unregistered persons and non-filers to regularise their tax affairs by adopting a simplified procedure;
WHEREAS, it is also expedient to give an overriding effect to the relevant provisions over the provisions of the National Accountability Ordinance, 1999, Federal Investigation Agency Act, 1974, Companies Ordinance 1984 and Foreign Exchange Ordinance, 2002 in respect of voluntary declaration initiatives made under section 120A and 120B of Income Tax Ordinance 2001;
WHEREAS, it is also expedient to provide benefit of non-recognition provision to non-resident Pakistani citizens;
WHEREAS, it is also expedient to provide an effective alternative dispute resolution mechanism to settle the protected legal disputes;
It is hereby enacted as follows: Short title, extent and commencement.- (1) This Act may be called the Finance (Amendment) Act, 2012.It extends to the whole of Pakistan. It shall come into force at once.
Amendment of Customs Act, 1969.- In the Customs Act, 1969, in section 195C, In sub-section (1), the words and comma "except in the cases where first information reports (FIRs) have been lodged under the Act or criminal proceedings initiated or where interpretation of question of law having larger revenue impact in the opinion of the Federal Board of Revenue is involved", shall be omitted: and for the sub-section (4), the following shall be substituted, namely:-
"(4) The Board within forty-five days of the receipt of the recommendations of the Committee shall pass an order accepting the recommendations or rejecting the recommendations recording therein the reasons for rejection.
Amendment of Sales Tax Act, 1990,- In the Sales Tax Act, 1990, in section 47A. In sub-section (1), in clause (e) the words and comma "except in the cases where first information reports (FIRs) have been lodged under the Act or criminal proceedings initiated or where interpretation of question of law having larger revenue impact in the opinion of the Federal Board of Revenue is involved", shall be omitted; and for the sub-section (4), the following shall he substituted, namely:
"(4) The Board within forty-five days of the receipt of the recommendations of the Committee shall pass an order accepting the recommendations or rejecting the recommendations recording therein the reasons for rejection".
Amendment of Ordinance XLIX of 2001 In the Income Tax Ordinance, 2001 (XLIX of 2001), the following further amendments shall be made namely: In section 79, in sub-section (2) after the words "non-resident" the following shall be added "non-Pakistani".
In section 120A, in sub-section (4), in clause (ii), after the figures "2001" the full stop "." shall be substituted by a semicolon ";" and the following new clauses shall be added, namely:-
"For the purposes of execution and implementation of the scheme made under this section, besides Income Tax Authorities as defined in section 207 of the Income Tax Ordinance, 2001, National Database and Registration Authority (NADRA) and Banks shall also be authorised to accept declaration registration tax, issue receipts and NTN as per the scheme; and for the purpose of this scheme, the Board in national interest may grant immunity to the declarant under the Income Tax Ordinance, 2001, the National Accountability Ordinance, 1999, Federal Investigation Agency Act, 1974 and Foreign Exchange Ordinance, 2002 except Narcotics Substance Act, 1997 and Anti Terrorist Act, 1997."
After section 120A, the following new section shall be added, namely: "120B. Registration Tax.- (1)Notwithstanding anything contained in this Ordinance or any law for the time being in force, the Board may make a scheme of registration on payment of registration tax in respect of registered and unregistered non-filers.
Where any person being an individual opts to regularise his income tax affairs under sub-section (1) in accordance with the scheme to be made by the Board and avail of the concessions made available therein, he will be required to pay registration tax as may be prescribed under the scheme.
Where a person has paid tax in accordance with the scheme and the rules, he shall not be liable to file any return for any previous tax year(s); and pay any further tax, charge, levy, penalty or be subject to prosecution or any proceeding in respect of declaration made under the scheme.
Any claim for tax already paid, collected or deducted under the Income Tax Ordinance, 2001 shall not be admissible unless regular return of income is filed by the taxpayer and in such a case provisions of the scheme shall be not apply. Any person who does not opt to pay the Registration Tax required to be paid under the scheme made under sub-section (1) shall be liable to finalisation of provisional assessment under section 122C and all the provisions of the Ordinance shall apply accordingly. During the pendency of proceedings under section 122C and the resultant recovery proceedings the person shall be liable to suspension of his or her CNIC, placement of his or her name on the Exit Control List (ECL), freezing of his or her bank accounts and blocking of his or her mobile phone SIMs after being provided an opportunity of hearing.
For the purposes of this section, "Registration tax" means tax payable under the scheme under sub-section (1) and shall be deemed as tax as defined in clause (63) of section 2 of the Income Tax Ordinance, 2001;
"Registered non-filer" means any person who has been allotted an NTN and (a) has not filed a return of income for three tax years out of any of the five completed tax years;
(b) has never filed a return of income; or (c) has filed a return of income for any of the tax year prior to five completed tax years. "Unregistered non-filer" means an individual who does not have an NTN or has never filed a return of income;
For the purposes of execution and implementation of the scheme made under this section, besides income Tax Authorities as defined in section 207 of the Income Tax Ordinance, 2001, National Database and Registration Authority (NADRA) and Banks shall also be authorised to accept declaration, registration tax, issue receipts and NTN as per scheme; and
For the purpose of the scheme made under this section, the Board in national interest may grant immunity to the declarant under the Income Tax Ordinance, 2001, the National Accountability Ordinance, 1999, Federal Investigation Agency Act, 1974 and Foreign Exchange Ordinance, 2002 except Narcotics Substance Act, 1997 and Anti Terrorist Act. 1997.
In section 134A in sub-section (1) the words "except where prosecution proceedings have been initiated or where interpretation of question of law having effect on identical other cases" shall be omitted; and for the sub-section (4), the following shall be substituted, namely: "(4) The Board within forty-five days of the receipt of the recommendations of the Committee shall pass an order accepting the recommendations or rejecting the recommendations recording therein the reasons for rejection".
Scheme "As a policy decision, FBR is providing this last concessionary voluntary tax compliance opportunity and is reposing a lot of trust in persons who are regularly filing their returns of income and also providing opportunity to unregistered non-filers, registered non-filers to regularise their income tax affairs by making a true and correct declaration of their undeclared income and assets and expenditures.
In case persons do not take advantage of this opportunity, strict action of penalty and prosecution as per the provisions of Income Tax Ordinance 2001 would be initiated. With increase in tax base and improved tax collections, the government would be in a position to lower the tax rates in future years, the documents added.
Therefore, in exercise of the powers conferred under sections 120A of the Income Tax Ordinance, 2001, the Federal Board of Revenue is pleased to introduce this consolidated voluntary compliance scheme for the regularisation of the Income Tax affairs by filers and non-filers of tax returns by way of payment of "Investment Tax" as under:
In exercise of the powers conferred under sections 120A of the Income Tax Ordinance, 2001, the Federal Board of Revenue is pleased to introduce this consolidated voluntary compliance scheme for the regularisation of the Income Tax affairs by filers and non-filers of tax returns by way of payment of "Investment Tax" as under:
TITLE AND SCOPE OF THE SCHEME: This Scheme shall be called "Investment Tax Scheme 2012" (ITS 2012). The Scheme shall apply to the following: Unregistered non-filers who have made declaration under Tax Registration Enforcement initiative (TREI) 2012;
Registered persons who have not filed their returns of income for the tax year 2011 and who have made declaration under Tax Registration Enforcement Initiative (TREI) 2012; and Registered taxpayers who have already filed their return of income for the Tax Year 2011.
DEFINITIONS For the purposes of this Scheme, "Declaration" means declaration made on the prescribed form annexed to the Scheme (Annex-I) "Declarant" means a person, as defined under section 80 of Income Tax Ordinance, 2001, who files declaration under the Scheme;
"Investment Tax" means investment tax as defined in section 120A(4)(ii) and as per rates given of paragraph 3(ii) and paragraph 3(iii) of this scheme; "Registration Tax" means Registration Tax as defined in section 120B (4)(i) and as per rates given in the Tax Registration Enforcement Initiative (TREI) 2012;
"Registered non-filer" means any person who has been allotted an NTN but has not filed a return of income for the tax year 2011 and who has made declaration under Tax Registration Enforcement Initiative (TRE1) 2012; "Undisclosed income" means any income/expenditure or asset which was chargeable to tax but could not be so charged under Income Tax Ordinance, 2001 for any tax year(s) ended on or before 30th day of June, 2011 and includes deemed income under section 111 or any other deemed income under the Ordinance(s);and "Unregistered non-filer" means unregistered non-filer as defined in section 120B (4)(iii) and who have made declaration under Tax Registration Enforcement Initiative (TREI) 2012.
3. CHARGE OF INVESTMENT TAX
(i) Un-registered non-filers and registered non-filers who have made declaration under Tax Registration Enforcement Initiative (TREI) 2012 and desire to declare undisclosed income/assets/expenditure with declared value exceeding Rs 5 million shall be required to pay in addition to Registration Tax, an investment tax on the declared value of the assets/income/expenditure exceeding Rs 5 million at the following rates given in para (ii) of this section. First month, rate of investment tax, 1.00% Second month, rate of investment tax, 1.25% Third month, rate of investment tax, 1.50% .
(ii) An existing taxpayer who desires to declare undisclosed income/ assets/ expenditure up to the declared value of Rs 5 Million shall file a declaration under this scheme by payment of token Investment Tax of Rs 100 and (iii) An existing taxpayer who desires to declare undisclosed income/ assets/ expenditure with a declared value exceeding Rs 5 Million shall pay Investment Tax at the rates provided in paragraph above. VALUATION OF INCOME AND ASSETS For the purpose of this scheme, valuation of undisclosed income/assets/ expenditure declared by the declarant shall be accepted as such.
PROCEDURE FOR PAYMENT OF TAX UNDER THE SCHEME A person opting to avail the scheme shall be required to pay the amount of Investment Tax at rates provided in paragraph 3(ii) and 3(iii) above in any designated branch of BANK/ NADRA after producing his original CNIC/ NTN at the special counter for this purpose or under special arrangement made by NADRA to file his declaration on-line and making a declaration in the form. The NADRA/ Bank shall issue receipt. The said acknowledgement receipt shall deem to have been delivered to the Commissioner Inland Revenue and all the provisions of ITS 2012 shall apply.
INCORPORATION OF UNEXPLAINED INCOME/ASSETS IN BOOKS OF ACCOUNTS Where any person has paid Investment Tax on his undisclosed income/assets in accordance with this scheme, he shall be entitled to incorporate such undisclosed income/assets/expenditure in his books of accounts. Persons who have filed their return of Income for Tax Year 2012 can incorporate such undisclosed income/assets by revising their return of income and wealth statements as the case may be.
DEPRECIATION ALLOWANCE No depreciation allowance in respect of building plant and machinery or other depreciable assets declared under the Scheme shall be admissible for any tax year prior to the tax year commencing on or before the 1st day of July, 2011.
FINALITY OF PROCEEDINGS UNDER THE SCHEME All declarations filed under the Scheme shall be subjected to preliminary examination as to correct tax calculations; Where a declaration in respect of undisclosed income/assets/expenditure has been properly made and the tax due on such undisclosed income/assets/expenditure has been fully paid, such declaration shall stand accepted by Commissioner of Inland Revenue without any further proceedings and no questions will be asked.
Where any mistake in calculation of tax is noticed and tax has been short paid, the income/expenditure and assets to the extent of the tax paid will stand accepted and no other aspect of the declaration will be questioned. CLARIFICATIONS: The Board may issue clarifications at later date(s) relating to the scheme and they shall be and form integral part of the scheme.
IMMUNITY Where a person has paid tax on his undisclosed income/assets or unexplained expenditure in accordance with the Scheme, he shall not be liable to any further tax, charge, levy, penalty or prosecution in respect of such undisclosed income/asset/expenditure under the Income Tax Ordinance, 2001.
The contents of a declaration shall remain confidential and shall not be disclosed. The provisions of section 216 of Income Tax Ordinance 2001 shall be fully applicable to the declarations made under TREI & ITS 2012.
Furthermore, nothing contained in any declaration shall be admissible in evidence against the declarant for the purposes of any proceeding relating to imposition of tax/charge/penalty for the purposes of tax/charge/proceedings/penalty/prosecution including any of the following Acts/Ordinances."
ii The proposed scheme, approved by the Cabinet on 12 November 2012, is aimed at protecting the plunderers of national wealth and tax evaders. It is termed by experts and opponents of government as 'financial NRO' as the government intends to give immunity to the beneficiaries from questioning by National Accountability Bureau (NAB) and Federal Investigation Agency (FIA). National Assembly cannot pass it as Money Bill [titled Finance (Amendment) Bill 2012] because it intends to amend many laws that are not fiscal in nature. If it is approved by the National Assembly, it will be a blatant violation of Constitution of Pakistan as held by the Supreme Court in Mir Muhammad Idris v Federation of Pakistan PLD 2011 SC 213 and Sindh High Court Bar v Federation of Pakistan PLD 2009 SC 789.
(Concluded)
(The writers, lawyers and partners of HUZAIMA & IKRAM (Taxand Pakistan: http://www.taxand.com/our_locations/pakistan), are Adjunct Professors at Lahore University of Management Sciences (LUMS)
Table C:
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Total number of sales tax returns received in September 2012
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Total Return Non-filers Filers Refunds Payment
registered filers admitting claimers filers
persons nil liability
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118,214 84,380 33,906 27,911 41,612 14,778
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