Of all the federal government institutions, Federal Board of Revenue (FBR) is, rightly or wrongly, considered as the most incompetent, inefficient and corrupt. Even if it is merely a perception and not reality, it must change. Let us hope that Tariq Bajwa, the new Chairman of FBR, succeeds in changing the image of FBR by making it a transparent, corruption-free, efficient and effective organisation, capable of performing the assigned duties diligently within four corners of law. It is heartening to know that he has already taken some positive steps to streamline FBR - reportedly the entire staff is classified in 'GREEN' and 'RED' - with no shade of 'AMBER'. 'GREEN' is clean and 'RED' is corrupt. Tariq Bajwa, in the very first meeting of Board-in-Council chaired by him, made it clear that he would not accept corruption in FBR. At senior positions and sensitive posts, he vows to appoint 'GREEN'. Recent appointments at key positions in FBR and field formations testify to it. His real test, however, would come when more appointments are made in Karachi where mafias enjoying political patronage rule the department.
A leading tax consultant from Karachi, Abid Shaban, asked us the other day, "Let us help him [new Chairman] clean up FBR if not 100% at least 60%". Cleaning up of FBR at operational level should no doubt be number one priority. But at the same time, it is imperative to remove dichotomies, discretions and distortions at policy level that have been destroying the system at the core - for example the infamous Statutory Regulatory Orders [SROs], the main root cause of may ills. The top people sitting in FBR, claim to be experts, are not capable of designing and running a modern tax system, which is dynamic and efficient. They are neither educated for this nor they have inclination for the same. The people from Tax Services-Inland Revenue and Customs-like status quo that gives them unbridled and unfettered discretionary powers. They are change resistant because of vested interests. It is, therefore, important to diagnose what actually ails the system in totality, otherwise it would be impossible to reform and re-engineer the existing processes and make the organisation vibrant, effective and people-friendly. Voluntary tax compliance cannot be achieved without an effective system of deterrence. Even after wasting funds of millions of dollars under Tax Administration Reforms Programme (TARP), FBR still lacks an automated Tax Intelligence System (TIS) that can effectively counter tax evasion and avoidance ['Resource Mobilisation: Tax Intelligence System', Business Recorder, February 25, 2011]. There prevail many serious misconceptions about our tax system that need to be removed and corrected. It is oft-repeated stance of FBR and many others that "our tax base is narrow", whereas the reality is otherwise-millions are paying income tax at source but are not filing returns as required by the law. The real problem is non-enforcement of provisions relating to filing of tax returns on the part of FBR. The new Chairman must comprehend this and other issues related to law, administrative weaknesses and capacity building. All-out efforts are required to fix the system that is outdated, ineffective, unfair and unjust. The people never accept a system that favours the delinquent and penalises the dutiful-where the dishonest are rewarded through immunities, amnesties and concessions but the honest are made to pay beyond their ability. The taxes due should be collected from all and system should be free of any kind of discrimination. Presently, the privileged classes are enjoying enormous tax-free benefits ['Politics of plots and perks', Business Recorder, July 12, 2013] and poor have been compelled to pay exorbitant indirect taxes for the luxuries of State Aristocracy (Riasti Ashrafiya). A tax system extending unprecedented benefits to State Aristocracy and imposing unprecedented excessive taxes on the poor can never succeed ['An elitist Pakistan', Business Recorder, July 26, 2013]. FBR is continuously engaged in a vicious propaganda that only a handful of Pakistanis pay income tax - this is the worst example of maladministration. The reality is exactly the opposite. The total number of income taxpayers is in millions - eg mobile subscribers paying adjustable income tax both for prepaid and post paid connections. The ex-Chairman Ali Arshad Hakeem, whose appointment was declared unlawful by Islamabad High Court, while talking to Associated Press of Pakistan (APP) on February17, 2012, made a totally fallacious assertion that "only 0.9 percent of the population of the country pays income tax". He could not make a distinction between taxpayers and return filers. There is a difference between a "taxpayer" and "return filer" ['The tax base', Business Recorder, November 2, 2012 and 'Ailing tax system', Business Recorder, November 16, 2012]. There are at least 50 million income taxpayers in Pakistan but returns filers are less than 1.45 million. Till the end of 2012, FBR issued 3.9 million National Tax Numbers (NTNs) constituting 2.1 percent of population-but return received in 2012 were just 0.7% of total population. It was failure on the part of FBR to enforce sections 114 to 116 of the Income Tax Ordinance, 2001 and nothing else. The study ('Taxation without Representation') released by the Center for Investigative Reporting in Pakistan (CIRP) on December 12, 2012 revealed that nearly 70% of members of Senate and National Assembly having taxable income of Rs 500,000 in tax year 2011 failed to comply with section 116(2) of the Income Tax Ordinance, 2001 by not filing tax returns, wealth statements and personal expenses. Instead of admitting their default and making it good, they accused FBR for "illegally" (sic) disclosing data. FBR also obliged them by not taking action under the law, rather assured them of 'full co-operation in identifying the persons who leaked data". This shows the efficacy of FBR. It is a fact that 82 percent of entire sales tax and federal excise duty comes from top 100 companies. It is shocking but true that from 2009-2012 less than 300,000 individuals filed returns admitting any tax liability, while 3.1 percent of the government's total tax revenue was collected from the income tax on salaried individuals. Pakistan is sixth most populous country in the world with an estimated population of 184.35 million in 2012-2013, out of this the working population is 110 million which is 60 percent of total population - Economic Survey 2012-13. But everybody is not working. Arshad Ali Hakeem in his interview with APP wrongly assumed that approximately 10 million Pakistanis-about 9 percent of the country's workforce-earn enough that is liable to income tax. In 2011, 769,467 salaried persons filed salaried statements and only 160,903 filed returns. Out of total returns of 1,443,414, 70% paid income tax less than Rs 30,000! Out of total business returns of 513,044, less than 2000 people declared income exceeding Rs one million! It confirms utter failure of FBR to enforce tax laws - Pakistan ranks 23rd from the bottom of a list of 176 countries. Near home in India 4.7 percent individuals contribute towards income tax and for Canada ratio is as high as 80 percent.
Income tax collection from the individuals declined from 1.5 percent of GDP in 2000-2001 to less than one percent in 2010-11. At present the ratio of individual return filers is only 0.5 of total population. In 2012, only 4143 people showed income of Rs 5 million or above. In 2011, only 6,152 individuals showed personal income tax liability exceeding Rs 5 million. If the figure for imports is excluded, since most of the goods are headed for other parts of the country, 37.8 percent of all taxes are collected from Karachi while 37.5 percent of all taxes are collected at the two sea port in the country. Rs 650 billion is the cost of the exemptions and concessions from taxation granted in just last five years under various Statutory Regulatory Orders (SROs). This is the system that Tariq Bajwa is to fix! Indeed a great challenge is ahead. The NTN Master Index maintained by FBR lacks essential data of the taxpayers like addresses of 525,892 Association of Persons (AOPs), companies and business individuals as well as invalid Computerised National Identity Cards (CNICs) numbers of 584,926 business individuals and salaried individuals. According to the joint presentation of Samad Khurram, ex-Advisor to FBR Chairman and Michael Best of London School of Economics at the International Workshop on "Accelerating Tax Reforms" organised by FBR, taxpayers' index lacks essential data which makes it extremely difficult for the officials to cross check reported tax liabilities. "The inconsistency in data is evident from the fact that it makes it difficult to calculate the exact number of individuals paying taxes. There are cases where CNICs are invalid or addresses of the return filers or NTN holders are not available in the FBR database", they pointed out. This data analysis, first of its kind, revealed that a total 245, 0911 AOPs, companies and business individuals were maintained by FBR, but addresses of 525,892 were non-existent. The FBR was maintaining data of 3,828,654 business individuals and salaried individuals. Out of this, 584,926 had invalid CNICs. Therefore, only 3,243,728 business individuals and salaried individuals could be traced as per FBR data index. Out of 1,585,824 salaried individuals, 212,918 had invalid CNICs. Out of 2,242,830 business individuals, 372,008 had invalid CNICs. It was further revealed that out of 154,112 AOPs, the addresses of 56 percent (85,873), were not available. Out of 53,969 companies, the addresses of 19,936 were missing - only date of 37 percent of the companies was thus maintained by FBR through NTN Master Index. FBR had addressees of only 34,033 companies. Out of the 2,242,830 business individuals, addresses of 420,083 were not available. Out of 503,837 income tax return filers for 2012, 7,003 CNICs were missing on returns and master index. The analysis of return filers during 2012 also disclosed that 1,191 return filers had invalid CNICs. Thus, out of 503,837 returns filed in 2012, only 495,704 returns were traceable. In 2011, out of 676,699 returns filed, CNICs of 11,401 persons were missing on returns as well as Master Index. There were 1,137 invalid CNICs as compared to 676,699 returns filed during 2011. The employer statement record showed that 602,267 statements were filed in 2012 as compared to 549,351 filed in 2011. In 2012, the CNICs of 11,466 employers were missing on statements and Master Index. There were 7,840 invalid CNICs as per employer statement record during the period, whereas, CNICs of 78,518 persons were missing on the employer statements filed during 2011. There were 7,840 and 509 invalid CNICs for 2012 and 2011 in case of employer statement record maintained by the FBR. All this confirms beyond any doubt why FBR has miserably failed for increasing the number of return filers.
Notwithstanding the above irrefutable facts, it must also be kept in mind that an overwhelming majority of our population is paying income tax at source, though they earn much below the taxable threshold [presently Rs 400,000]. In most of the cases, the tax withheld is the full and final discharge of liability and they are not required to file tax return (for example 10% tax withheld on interest income from banks and national saving centres) as envisaged in section 115(4) of the Income Tax Ordinance, 2001. Since only a fraction of income taxpayers file returns or statements, a myth prevails that our income tax base is narrow. The fact is that in Pakistan millions pay income tax under various withholding provisions, but do not file returns or statements. The total number of income taxpayers, in reality, is in millions. According to Pakistan Telecommunication Authority (PTA), Pakistan crossed the figure of 125 million mobile users in June 2013. A huge population, not less than 50 million (if we exclude multiple and inactive subscribers), is paying 15% adjustable income tax from 1st July 2013 for using this facility in addition to 19.5% sales tax - both pre-paid and post-paid customers bear enormous tax burden of 34.5%. In 2012, about 55 million mobile subscribers paid 10% adjustable income tax, but only 1,443,414 filed income tax returns. FBR did not bother to issue notices to those who paid substantial amount, say Rs 30,000 or more on this single utility by acquiring information from the telecommunication companies. One wonders how FBR can be absolved from such sheer 'iniquitous negligence'! Majority of the mobile users have income below taxable limit. They would not bother to claim the refund of tax withheld by filing tax returns - primarily because it would have cost more than the amount withheld and secondly for refund claim one has to file application electronically - imposing such conditions for many illiterate Pakistanis by FBR shows its mind set of highhandedness which is highly deplorable. On the contrary, majority of the rich and mighty representing State Aristocracy just pay a fraction of income tax by way of withholding tax on their salaried incomes (sic) but possess colossal assets. They never bother to file returns and wealth statements - in 2011 and 2012 as per admission of the FBR 70% of parliamentarians did not file tax returns and wealth statements! Can FBR tell the nation how many judges, generals and high-ranking civil servants filed tax return in the last five years along with wealth statements as their annual income was certainly more than Rs 500,000? The above confirms beyond any doubt the ineffectiveness and incompetence of FBR. Our tax base is not narrow as nearly 50 million persons are paying income tax at source, but the rich and mighty are not paying taxes on their enormous incomes and assets - look at the figure of money stashed in Swiss banks alone ['No will to tax the rich', Business Recorder, June 14, 2013 and 'Swiss 'Return of Illicit Assets Act': we can get billions back', Business Recorder, October 1, 2010]. Unfortunately, the high-ranking officials of FBR have not been speaking the truth. They intentionally hide the fact that where our actual problem lies. They have been more interested to give amnesty to the rich political masters, rather than taking them to task. Our tax base is distorted - system protects the tax avoiders and plunderers of national wealth as well as forgoes revenues of billions of rupees through exemptions, amnesties, concessions and immunities - most of time using the wicked device of SROs - for the benefit of State Aristocracy (Riasti Ashrafiya). Though measuring actual tax potential of Pakistan is a difficult task as size of informal economy is enormous. Yet it can safely be assumed that we have 6 million individuals (half salaried and half self employed) having taxable income of Rs 1.5 million - total income tax collection from them, according to tax rates for tax year 2014, comes to Rs 627.5 billion. If super-rich about 0.2 percent of population (368,000) are taxed properly, tax collection from them would be around Rs 150 billion. If we add income tax due from corporate bodies, non-individual taxpayers (AOPs) and individuals having taxable income up to Rs 1,500,000, the gross figure would be nearly Rs 3000 billion. FBR collected around Rs 715 billion as income tax in fiscal year 2012-13. Similarly, due to rampant corruption in sales tax, federal excise and custom duties, the total collection is not more than 30% of actual potential. In fiscal year 2012-13, FBR collected Rs 830 billion under the head sales tax. Estimates for customs and excise duties are Rs 235 billion and Rs 120 billion respectively. The total indirect collection of just Rs 1,185 billion was pathetically low. It should have been at least Rs 3500 billion. If prevalent tax gap is bridged, the total revenue collection would be around Rs 6500 billion without imposing any new taxes or raising existing tax rates as has been done by Ishaq Dar in the Finance Act 2013. FBR has been apologetic, specifically before the IMF and the World Bank, that total income taxpayers in Pakistan are less than 1.5 million in a population of 184 million. This is not the reality. The truth is that since July 1, 1992 all commercial electricity consumers (including about 5 million retail outlets in urban areas) are paying income tax whether their income is chargeable to tax or not. In 2007, this tax was converted into minimum tax, except for companies and from 2008 with the threshold of Rs 20,000. Any business outlet receiving electricity bill of exceeding Rs 20,000 is to pay 10% as advance income tax. The total number of commercial and industrial electricity consumers in Pakistan is more than 20 million. It means that during the tax year 2012, the total number of persons who paid income tax under section 235 of the Income Tax Ordinance, 2001 alone was not less than 20 million. The FBR in its Quarterly Report (April-June 2012) admitted that tax collection from telephone/mobile and electricity users during the financial year 2011-12 was Rs 36.92 billion and Rs 14.63 billion respectively. It is worthwhile to mention that total number of mobile and land-line telephone users, subjected to withholding tax, in this period was in excess of 40 million and yet FBR says that our tax base is narrow! In fact, FBR is hiding its own failure of not forcing the rich and mighty to file returns - on the contrary for the powerful segments of society concessions and exemptions worth billions of rupees have been granted in the Second Schedule of the Income Tax Ordinance, 2001 and Sixth Schedule of the Sales Tax Act, 1990 and additionally through innumerable SROs. If these were not given, total collection could have easily surpassed the figure of Rs 3000 billion in fiscal year 2011-12 and 2012-13. The same is true for fiscal year 2013-14 - it will be difficult to meet revenue target of Rs 2475 by FBR unless exemptions are withdrawn and SRO culture is disbanded once for all. The FBR must move a Bill for this through the Ministry of Law. The above facts and figures negate the claims made by FBR that Pakistan's tax base is narrow. It is a great pity that FBR's top slot has been spreading lies about Pakistanis. One hopes that Tariq Bajwa will not be trapped in this unsightly game of tax bureaucrats. The poor people of this country are being accused of not paying income tax; whereas the reality is that even a small shopkeeper in a village or town (whose annual total income is much below the minimum taxable limit of Rs 400,000) is paying minimum income tax of Rs 960-3600 per annum along with his commercial electricity metre. On the contrary, the absentee landlord of his village or town, who is earning millions by leasing his fruit orchards, is paying negligible amount, if at all, as agricultural income tax. This shows the real dilemma faced by Pakistan - a poor widow pays 10% income tax on meagre bank profit but rich agriculturist and industrialist declares losses for tax purposes! Out of total population of 184.35 million, according to Economic Survey of Pakistan 2012-13, population in the group (children between 0 to 14 years of age) is 62.83 million. This group is economically unproductive and cannot be taxpayer. They need food, clothing, education and medical care for which State is totally indifferent. Pakistan has the 9th largest labour force in the world. According to the labour force survey 2010-11, the total labour force in the country was 57.24 million. Out of this labour force, 3.40 million people are unemployed and 53.84 million people are employed. Most of the labour force (75.4%) works in rural areas where agriculture is the dominant activity. Majority of them cannot be income taxpayers. Out of remaining 14.3 million non-agricultural labour force, the income tax paying population of individuals having taxable income of Rs 400,000 cannot be more than 6-7 million, yet over 50 million individuals paid income tax as mobile users alone. Thus entire taxable population and even millions having below taxable incomes are already paying income tax at source, yet FBR is engaged in a malicious propaganda that majority of Pakistanis is not paying income tax and that our tax base is narrow! The new FBR Chairman should study the above facts and tell us how much tax was paid by the rich 1% of Pakistanis - judges, generals, bureaucrats, parliamentarian, politicians, professionals, industrialists and traders, during the last 5 years? He must explain to the nation how these wealthy classes had accumulated collossal assets without paying due taxes. Can FBR explain to the citizens what prevented it to issue notices to the rich and mighty who received free plots and paid no tax under section 13(11) or section 39(1)(j) of the Income Tax Ordinance, 2001? The people have a right to ask why FBR is reluctant to issue notices to all tax delinquents sitting in parliaments having taxable income but failed to file tax returns and wealth statements under the law. In fact, FBR should enforce section 114, 115 and 116 of the Income Tax Ordinance, 2001 across the board, without any hesitation and force the people who qualify to file tax returns or statements to do so or be ready for penal actions prescribed in the law. It is simple that if FBR uses data of banks, PTCL, WAPDA, DHAs, telecommunication companies, provincial excise departments - just to mention a few - it can identify millions of potential income taxpayers. It has not done it so far, but for its incompetence, inefficiency, lethargy and inactions, it should not blame others. FBR will have to demonstrate through its actions that it means business and no person who is liable to tax would be spared. Unless it is done, tax compliance cannot be ensured. It is high time that FBR enforces tax laws without any fear or favour and stops extending unprecedented exemptions and concessions to the rich and mighty segments of society through SROs. If new Chairman is really sincere in his endeavours to increase the number of income tax filers and enhance tax-to-GDP ratio, he must take stringent action against the richest 0.2 million about whom Ali Arshad Hakeem informed the Senate Standing Committee on Finance that no amnesty scheme would be extended. What has been done about them so far is not visible at all. The real test for the new FBR Chairman is how to deal with these spoilers of the system.
(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Faculty at Lahore University of Management Sciences)