Rashid Ibrahim, Chairman, the Institute of Chartered Accountant of Pakistan (ICAP) Taxation Committee Thursday disclosed that the share of the black economy is increasing day by day in Pakistan as according to rough estimates the size of undocumented economy is 70 percent as compared to 30 percent formal economy. Sharing budget proposals of ICAP for 2016-17, he informed media here on Thursday that the recorded economy is only around 30 percent whereas un-recorded economy stood at 70 percent.
The size of the black economy is increasing day by day as the Federal Board of Revenue (FBR) is unable to document potential sectors like retail, wholesale, agriculture business and other potential sectors. At the same time, harsh methods of recovery of taxes have also created harassment among the taxpayers.
Rashid Ibrahim disclosed some astonishing facts about issued being faced by taxpayers including no check and balance on assessment orders issued by assessing officers, non-existence Commissioner Appeals, humiliating attitude of tax officials towards withholding agents etc and increased corruption in the tax department. He said that nowadays the FBR has adopted harsh ways for recovery of the tax. Bank accounts have been attached without fulfilment of legal formalities. Despite harsh methods of recovery of tax, the corruption in the tax machinery has been increased in the field formations.
There is no crime to setup offshore companies aboard by Pakistanis under the law. The FBR should restore the original status of section 111(4) of the Income Tax Ordinance 2001 prior to 2010 so that the cases can be reopened beyond the period of 6 years. He said that the multinational companies are transferring profits from Pakistan through Transfer pricing methods. However, the FBR has yet not developed the capacity to check the phenomenon of Transfer Pricing by the multinational companies. He said that the Voluntary Tax Compliance Scheme has miserably failed due to lack of political will.
To a question, he said that the Commissioner - Appeals should be brought under the administrative control of Federal Ministry of Law and the Appellate Tribunal under the control of the High Court of the respective jurisdiction and establishment of Tax courts against the decision of ATIR to avail speedy process of justice with the learned judges of High Court being member of Tax Courts. These steps are necessary to improve the confidence of the taxpayer on the taxation system in Pakistan. Habib Fakhruddin former FBR Member said that the VTCS was launched on the request of a specific traders group. Traders should also be required to pay tax under normal regime and those not paying taxes should be penalised under the law.
Former FBR Member said that the complexity of the tax laws is of the reasons for non-compliance in Pakistan. The tax laws are difficult to understand in Pakistan. The unmanageable withholding tax regime is also due to the complexity of the tax laws. The ways and means of conducting businesses are being changed in the global like new concept of e-commerce.
To a query on legality of the tax avoidance in Pakistan, Habib Fakhruddin former FBR Member said that the tax avoidance is the legal right of every taxpayer within the parameters of the law. There is no harm in avoiding taxes within the laid down tax laws.
Habib Fakhruddin added that Pakistani tax system is based on resident and non-resident basis and not on the basis of nationality. Pakistanis, who are not resident in Pakistan, are not subjected to local tax laws.
Habib Fakhruddin also explained in detail that the section 111 (4) (a) of the Income Tax Ordinance though promotes inflow of foreign exchange remittances towards the country; however, the same provision is being largely misused to incorporate the untaxed income. Moreover, the provision is also refraining persons from being enrolled/included in the tax net and making true and fair declaration of income. It will be appreciated that why would someone like to pay tax at the rate of 30% to 35%, when this permanent route of amnesty is available at a nominal cost of around 3% to 4%. The section 111(4)(a) of the Ordinance should be abolished; or alternatively the applicability of Section 111(4)(a) should be made conditional ie, remittances by an overseas non-resident Pakistani to a relative as defined in Section 85(5) without any threshold. However, remittances by others may be subjected to tax scrutiny if it exceeds the limit prescribed by the State Bank of Pakistan which is currently $10,000. Alternatively, until this provision is abolished, this kind of remittance should be restricted solely for the purpose of investment in industrial undertaking in Pakistan.
Whitening the untaxed money is abusing various provisions of the law such as 'inward foreign remittance' By virtue of clause (a) of sub-section (4) of Section 111 of the Ordinance a taxpayer does not have to offer explanation about the nature and source of any amount of foreign exchange remitted from outside Pakistan through normal banking channels. Improvement of tax base essentially requires abolition of any discrimination between taxpayer with adequate penalties for the delinquents but in Pakistan the situation is to the contrary. Further, restricting these kind remittances for the purpose of investment in industrial undertaking in Pakistan will provide job opportunities and increase in economic activities in Pakistan, he added.