Pakistan lacks political will to collect personal taxes from the rich and mighty as out of total population of 180 million - some suggest it is not less than 200 million - only a few thousands returned income exceeding Rs one million. It is an ugly joke when one looks at the level of affluence enjoyed by the top 5 percent rich of Pakistan.
About one million rich individuals alone should be paying income tax of at least Rs 3 trillion according to the prevalent rates - non-collection of tax from them proves ineffective of FBR. It is all due to a lack of enforcement plus corruption and nothing else. The existing tax laws, if properly implemented and enforced, can generate twice as much as what is presently being collected by FBR.
According to estimates submitted to the Economic Co-ordination Committee (ECC) of the Cabinet on July 24, 2012, the total net tax collection was recorded as Rs 1881 billion (excluding SRB collection of Rs 25 billion plus) against the assigned target of Rs 1952 billion for fiscal year 2011-12.
In real terms, after taking into account the inflation rate, this represents a nominal growth. The Finance Minister, however, insists that "the federal tax collection has shown a 20.8% growth in 2011-12". This is true but he never mentions that our actual potential is much higher than what FBR has collected and that he has failed to formulate a rational fiscal policy. He has also failed to check corruption in FBR.
Last year, FBR collected Rs 1558 billion against the fixed target of 1580 billion. Criminality was committed at the highest level showing "exceeded targets" through figure fudging, but even after exposure by media no action was taken against the culprits. This year, even at the time of writing this column, after one month of close of fiscal year 2011-12, FBR's official spokesperson is still "unsure" about the collection figure! FBR's website is silent about the last quarter "achievement" (sic).
A Press reports says: "for the last financial year 2011-12, the FBR's figures have not yet been reconciled as the State Bank of Pakistan is insisting upon collection of Rs 1902 billion but FBR authorities say that after book adjustments collection would touch Rs 1,908 billion after finalising revenue numbers".
The stance of government before the EEC was different; FBR gave an estimate of Rs 1881 billion after excluding collection by SRB. Now, the federal government again wants to include the figure of SRB, for reasons best known to it. The "statistical jugglery" should stop now - enough is enough! No nation can live on lies. Brave and progressive nations have to face the facts and then only is there a possibility to take corrective measures. Our rulers keep on telling lies.
The reality is that in fiscal year 2011-2012 as in the past, the FBR blocked bona fide refunds, raised illegal demands and collected advance tax ahead of time yet failed to achieve a paltry target of Rs 1952 billion whereas real tax potential of Pakistan is around Rs 6 trillion, if not more, as we have shown time and again with facts and figures in these columns.
The chart presented before the ECC of the Cabinet contained no details of payment of refunds and rebates and what was due but not paid till the 30 June 2012. If we subtract refunds due, appeal effects entailing refunds not given till 30 June 2012, amounts received from taxpayers that were actually not collectable, the real tax collection of FBR would be around 1800 billion or even less. This can be established through forensic auditing of FBR's accounts, for which the new Chairman should opt for immediately if he intends to formulate a rational strategy for collecting Rs 2381 billion during the current fiscal year.
In 2011-12, direct taxes collection is just Rs 731.9 billion (last year it was Rs 602.5 billion). This shows that compared to indirect taxes that amounted to Rs 1149 billion (last year's collection was Rs 955.7 billion) how little direct tax we are collecting.
In his budget speech, the Finance Minister announced collecting at least an extra Rs 250 billion as income tax from the rich after bringing them into tax net. The nation was told that data had been collected from NADRA, at that time headed by now FBR's Chairman, and banks and that no rich would be spared no matter how mighty he could be.
All efforts aimed at broadening of tax base - even after opening new units in all the RTOs - have failed. No reasons are available as to why known tax evaders could not be subjected to prosecution. In income tax, total increase is just over Rs 100 billion which is due to normal growth and not because of any enforcement measures against the rich and mighty. Can FBR enlighten the nation by disclosing the total tax paid by the rich sons and son-in-laws of politicians (especially illustrious siblings of Gilani and Raja Ashraf for example), Riaz Malik of Bahria's fame and his siblings who claimed to have allegedly paid millions to Arsalan Iftikhar, son of Chief Justice of Pakistan?
Can we ever know how much tax was paid by Arsalan and many of his likes, who made business fortunes (sic) in a short span of time? Can they justify their enormous wealth with their tax declaration? This is true for most of the politicians, high-ranking officials and judges. Public has no access to their asset and tax declaration. They are not ready to make them public voluntarily so that nation gets inspiration and starts paying taxes diligently. Lawmakers will never pass any such law, as majority of them is the worst offender when matter comes to paying of taxes.
They will even go to the extent of getting fatwas (edicts) from certain Muftis that taxes are haram (forbidden). Hypocrisy is prevalent everywhere as religious parties and groups collect millions from the faithful, but pay no tax on these donations - even do no bother to present audited accounts to those who sympathise with them!
The general sales tax (GST) collection has been recorded at Rs 809.3 billion during fiscal year 2011-12 against the collection of Rs 633.4 billion in 2010-11, showing an increase of 27.8%. But again, this growth is not due to any enforcement measures or better tax management or increasing the number of registered taxpayers. The simple factor was over 47% contribution of POL products.
This depicts a complete failure of FBR to collect sales tax from various sectors, as due to collusive arrangements substantial amount of GST collected from the customers never reaches the government treasury. The federal excise duty collection amounted to Rs 122 billion in 2011-12 as compared to collection of Rs 137.4 billion in the last fiscal year 2010-11, showing a decrease of 11.2%. The Customs duty collection has been recorded at Rs 218.2 billion in 2011-12 against collection of Rs 184.9 billion in 2010-11.
It is disturbing reality that containers - both inbound and outbound - are not scanned in Pakistan. In importation, the collector-businessman mafia deprives the nation of billions of rupees in the form of evaded duties - Customs, Sales Tax and Federal Excise Duty, wherever applicable. These goods then remain outside the purview of income taxation as well. This is the main cause of generation of underground economy.
Customs mafia is not ready to accept simple technological reforms of scanning of all the containers and baggage. The new Chairman has worked in Customs (17th CTP, earlier entered in Civil Services in Accounts Group through 15th CTP). Expectations are high that he would increase collection of Custom duties - these would automatically lead to better collection of GST, FED and income tax - through the use of modern IT technology that he employed as Chairman Nadra and which was his business after resigning from FBR.
In February 2012, when the International Monetary Fund (IMF), in a report, projected a shortfall of Rs 29 billion in the revenue target of Rs 1952 billion for fiscal year 2011-12, tax bureaucrats rejected it with contempt and expressed their determination to bypass it.
A report in Business Recorder of 26th July 2012 suggests that one of the reasons for failure was the experiment to re-designate posts of FBR Member Enforcement and Accounting as FBR Member Enforcement and Withholding Taxes and FBR Member Administration as FBR Member Admin and Sales Tax Input Adjustments failed to recover withholding taxes or plug illegal input tax adjustments of Rs 100-150 billion till June 30, 2012.
Sources told Business Recorder that "the posts were re-designated as FBR Member Enforcement and Withholding Taxes and FBR Member Admin and Sales Tax Input Adjustments with the objective to generate additional revenue by the end of June 2012. The policy decision was taken by former FBR Chairman Mumtaz Haider Rizvi which failed to achieve the desired results".
According to the report, restructuring by the Chairman proved counterproductive as it affected the regular work of the line members. Mumtaz Rizvi re-designated two top posts for the recovery of over Rs 150 billion arrears of wrongfully claimed input tax adjustment on sales tax side and recovery of withholding tax withheld by the banks but failed to deposit in the national kitty.
However, there was no major recovery from withholding tax as well as wrongly claimed input tax adjustment. Tax collection that was reported to the Ministry of Finance on July 25, 2012 was Rs 1915 billion including Rs 25 billion of Sindh Revenue Board (SRB). Obviously, FBR has no mandate to account for tax collected by SBR.
The failure of FBR has serious economic repercussions. Due to burgeoning fiscal gap, the government is forced to borrow more and more domestically and from foreign sources. As of April 2012, foreign exchange reserves stood at $16.4 billion while the amount of public and publicly guaranteed foreign loan at $53.74 billion including $8.07 billion from the International Monetary Fund (IMF). In a written reply, Finance Minister Dr Abdul Hafeez Shaikh informed the National Assembly on 25 July 2012 that the loan from IMF stood at $8.07 billion. He admitted that FBR collected net sales tax of only Rs 630.997 billion during the financial year 2010-11, which is less than income tax. It means wrong figure of Rs 803 billion was conveyed to EEC just a day before on 24 July 2012.
Dr Hafeez conceded the failure of FBR and stressed that "it has to boost the collection of sales tax as well as expand the tax base by facilitating the taxpayers". He said the exemption regime was rationalised and sales tax exemptions were withdrawn from fertilisers, pesticides and agricultural tractors leading to additional inflow of Rs 11 billion. However, he was unable to say how much negative impact these measures would have for the agricultural sector and in raising the prices of eatables.
The Finance Minister said that tax concession on sugar with respect to assessable value was withdrawn resulting in revenue gain of approximately Rs 3.50 billion. Reduced rate of sales tax at 4 percent and 6 percent (now 5 percent) were levied on local supplies of five zero-rated sectors (textile carpets, surgical goods, leather and sports) resulting in reduction of refund claims in these sectors. Similarly, he said sales tax exemption was withdrawn on the import of plant, machinery and equipment not manufactured locally as well as on locally manufactured machinery. He added that New Regional Tax Offices (RTOs) were set up at Bahawalpur and Sargodha. Besides, two additional RTOs were established at Karachi and another one at Lahore.
Dr Hafeez told the Assembly that "special efforts are being made to identify persons claiming inadmissible inputs and necessary investigations and criminal proceedings were initiated against such culprits. Major improvements were brought in e-filing of sales tax returns by streamlining its operations". In reply to another question, the minister said the FBR did not levy tobacco cess because the levy falls within the domain of Pakistan Tobacco Board. He said federal excise duty was levied @ Rs 10 per kg on un-manufactured tobacco which was one of the major inputs in the manufacturing of cigarettes. The registered manufacturers of cigarettes can adjust this FED (Rs 10/kg) paid on un-manufactured tobacco against FED payable on cigarettes.
The Finance Minister claimed that there was no net payment of FED on un-manufactured tobacco by the registered manufacturers of cigarettes. However, in case of unregistered manufacturers of cigarettes who do not pay any FED on cigarettes, cannot adjust FED paid on un-manufactured tobacco. Thus, the reason for levy of FED on un-manufactured tobacco is to collect indirectly FED on cigarettes from unregistered manufacturers of cigarettes who do not pay any FED on cigarettes.
The Finance Minister, however, did not tell the Assembly what effect short collection by FBR would have in increasing already horrifying fiscal deficit and downward revision in the target of Rs 2340 billion fixed for fiscal year 2013. The National Assembly did not take him to task for perpetual failure in meeting revenue targets. The worthy members did not take note of the fact that Dr Hafeez Shaikh has been accused of approving illegal amnesty schemes in May and June 2012 and asking FBR to collect Rs 505 billion in these two months even using illegal methods including attachment of bank accounts before decisions by appellate authorities. Even after using all kinds of negative and illegal tactics and issuing amnesties against the law and public policy, there was huge shortfall in tax target resulting in widening of fiscal deficit to nearly unmanageable level.
FBR, during the last two decades, has been headed by "political favourites" - incompetent men lacking leadership qualities and modern techniques of revenue administration. The result is utter failure to tap the real potential which is not less than Rs 8 trillion. In April 2012, FBR collected Rs 158 billion, missing the target by Rs 30 billion and in March 2012 the shortfall was even higher, Rs 32 billion. Major portion of these figures comprised collection from higher POL prices and withholding taxes. What made the situation really ludicrous was the fact that FBR kept on claiming that it was maintaining over 23% growth in collection, yet was unable to achieve "fixed targets".
All said and done, the main reason of low revenue collection is weak fiscal management, corruption, inefficiency and policies of appeasement towards tax evaders. We have one of the lowest tax-to-GDP ratios in the world. There is general unwillingness to pay taxes, due to poor public service delivery and because of perceived unfairness in the tax system. And then governments keep on appeasing the rich and mighty through various amnesty schemes.
FBR high-ups were jubilant on collecting Rs 964 billion in the first seven months of the fiscal year 2011-12. We warned them through these columns that collection of Rs 988 billion in remaining months with an average collection of Rs 197.6 billion per month would not be so easy as collection of future advance tax beforehand, blocking bona fide refunds, raising excessive arbitrary tax demands and windfall gain by enhancing POL prices would not always be a workable strategy.
For a sustainable reduction in fiscal deficit of over one and a half trillion now, a consistent growth in tax revenue collection is required. This does not appear to be the agenda of the government as evident from the fiasco in implementing reformed General Sales Tax (RGST), which could have generated additional revenue up to 3% of GDP.
Our real revenue potential is much higher than low targets assigned to FBR. In these columns we have given concrete suggestions supported with figures on how to raise revenues to the tune of Rs 6-8 trillion in the next three years. For tapping our actual potential, there is an urgent need to make FBR an autonomous body on the pattern of State Bank of Pakistan, bring undocumented economy in the tax net, bridge tax gaps and distribute the incidence of various taxes judiciously amongst all the segments of society.
A close examination of FBR's performance would show that it has shifted the burden of collecting taxes to withholding agents, who are performing the essential State function of tax collectors without any reward, what to talk of getting reimbursement of exorbitant expenses incurred for performing this onerous task. It is an undeniable fact that about 90% of taxes are being collected through withholding tax mechanism and advance tax regime, a tool employed by the British raj to make up deficit of World War II but sin is continuing somehow till today.
It is sad to note that the government has enormously widened the scope of collection/deduction of taxes through withholding agents through many amendments in tax laws. The corporate houses in general and banks in particular have virtually been converted into 'FBR Collection Houses'.
Withholding agents incur substantial cost for complying with tax collection provisions on behalf of Government (man-hours, infra-structure use and stationery, just to mention a few). There is no provision in tax laws for any collection charges for rendering these services, making it "forced labour", which is forbidden under Article 11(3) of the Constitution. Adding insult to injury, they face proceedings under section 165/205 of the Income Tax Ordinance, 2001 where officers raised irrational demands to meet budgetary targets.
FBR keeps telling lies before the Standing Committees of Parliament - National assembly and Senate - about the correct number of income tax payers in the country. They think that only those who file returns are taxpayers. In fact, the total number of taxpayers is over 50 million - mobile users who pay 10% income tax on amount of use, but do not file tax returns.
As on 30 May 2012, we have nearly 118.3 million mobile users and if we subtract people having more than one subscription and idle accounts, the total number of those paying income tax would be around 50 million or little more under one utility alone. Of the 50 million, those paying Rs 25,000 or above as single user, could be issued notices for filing of tax returns. But FBR is just sleeping and complaining about non-co-operation from people! This is a sickening attitude, shifting own responsibility on the others.
The figure of 1.2 million given by FBR is only that of return filers and not taxpayers. In the income tax realm, every account holder of a bank, who receives any amount of interest, is subjected to 10% withholding tax and is thus a taxpayer. It is worthwhile to note that in their case, except in the case of companies, tax deducted at source is full and final discharge under section 169 of the Income Tax Ordinance, 2001.
They are merely required to file a simple statement under 115(4) of the Income Tax Ordinance, 2001 ie if they do not have any other source of income. Had FBR allotted all of them National Tax Numbers (NTNs), it could proudly be claimed that there were over 50 million registered taxpayers in Pakistan in fiscal year 2011-2012. But nobody gives a serious consideration to this proposal presented by us many a times in these columns.
Our tax base is not narrow, but FBR's arithmetic and approach are fallacious. They cannot justify recovery of tax from the rich and mighty while levying 16% tax on the items used by the poorest of the poor. Banks, Wapda, PTCL and mobile companies are fully computerised and can collate the total number of people on whose behalf these organisations collect and deposit income tax in the government treasury. Their combined figure of such persons would be not less than 50 million. But FBR has failed even to collect taxes from much-publicised high-profile 700,000 people - projection was to collect Rs 20 billion from them during fiscal year 2012 whereas actual collection is even less than Rs 250 million.
It is a very ugly joke with the people of this country! FBR's own efforts (sic) in tax collection is only to the extent of 10% of total collection. Honest taxpayers and withholding agents are victims of the highhandedness of government's unjust tax policies while evaders enjoy amnesties - immunity extended to stock exchange mafia testifies to this bizarre practice which has no ending in Pakistan.
It is high time that FBR should put its own house in order and stop bluffing and harassing the already oppressed nation, suffering on account of their rulers' sins, and undoubtedly most heavily-taxed in the entire South West, but getting nothing in return.
(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Professors at Lahore University of Management Sciences)