The National Assembly was informed by Federal Finance Minister Dr Abdul Hafeez Sheikh that the number of income tax filers has reduced from 1.6 million in 2009 to 810,000 this year. The State Minister for Finance Salim Mandviwalla stated before Senate Committee on Finance that tax evaders not availing amnesty schemes could face major penalties such as inclusion of their names on the Exit Control List (ECL), cancellation of their passports and identity cards and seizure of bank accounts. Mandviwalla also claimed that as against 3.17 million National Tax Numbers (NTNs) issued only 1.5 million people paid taxes. Further, he said that a large number of businesses and individuals are understating their incomes and assets and thus avoiding legal obligation.
The paradox inherent in this issue is quite formidable. Tax avoidance through acquisition and mergers under a plan is a legitimate undertaking. But non-filing of tax returns, as required by law or hiding income and assets is unlawful. According to various studies, the tax gap in Pakistan is anywhere from 50 to 100 percent of the tax paid. This gap is estimated on existing rates under existing laws. It covers leakages due to administrative failures and tax maladministration. This tax gap cannot be reduced to zero. But it can be significantly narrowed. However, this requires strong political will to make the tax collection system in the country effective. Suspension of Section 153-A of Income Tax Ordinance 2001 until June 30, 2013 by FBR clearly shows where this country stands as of date. Section 153-A requires registered manufacturers whose sales are above a certain amount to their wholesalers, distributors and dealers to charge 0.5 percent over and above the cost of goods sold and deposit it as adjustable tax of their sale agents. The law was aimed to force these traders to register with the tax authorities - if they wanted to adjust the withheld/deposited advance tax. In case some of them are prone not to be on FBR's radar - they will not get the refund or adjustment. This circuitous route was adopted because of the failure of FBR to collect the due tax from the trading class. Obviously, it was unfair for trades where the commission was very low compared to the cost of goods such as in POL and vehicles where the tax liability is less than one percent of the sale value. All FBR had to do was reduce the rate of withholding for these sectors. Representative bodies of various traders campaigned against Section 153-A. Both Ministry of Finance and FBR kept assuring these trade bodies that the matter has been referred to Ministry of Law, whether abolishing Section 153-A required going back to the parliament - as the Act was part of the Finance Bill 2012. Some tax experts chose then to approach the Federal Tax Ombudsman (FTO) to intervene. While others claimed that FTO ruling forced FBR to suspend Section 153-A or whether FBR itself failed to resolve the issue is debatable. The net result is that under sub-section (2) of Section 53 of Income Tax Ordinance 2001 powers were used by FBR to suspend the provisions of 153-A for all manufacturers till June 30th, 2013. Now FBR claims that from July 1, 2013 Section 153-A will apply.
Will the major industrial sectors like sugar, textile, leather, electrical appliances, etc, next time agree to implement Section 153-A? Certainly not. The trade in these major sectors is totally undocumented and these manufacturers would not like to extend helping hand to FBR to document their trading arms. Only organised sectors enjoying monopolistic position or multinational - making consumer products with a strong brand image - have been implementing Section 153-A from July 1, 2012; whereas major sectors dominated by local business refused to comply with and are confident that the government could be successfully persuaded that it is unrealistic to force its will on them.
We got into this unholy mess with our eyes open. Withholding tax regime was introduced in the 1980s to compensate for maladministration and other weaknesses in FBR's collection mechanism as a temporary measure - to obtain documentation of the economy. Its continuation, for over three decades, has compromised the effectiveness of system. The tax collector now uses it as a crutch to lean on. Imposing minimum tax on companies making losses goes against the very principle of taxing profit. No meaningful reform is possible until the availability of expenditure data of both the individuals and companies can be collated from various sources in a seamless manner with backing of law. This has not happened. Instead, various circuitous proposals are adopted time and again by FBR forcing everyone to act as tax collection agent since the political system does not look favourably on tax collection system. Our legislators are more worried about violations of confidentiality of their tax returns instead of making it mandatory by law for all elected officials to make public their income and assets for scrutiny by their constituents. This is the fundamental tragedy Pakistan faces today. A state which cannot collect the tax it imposes on its citizens cannot function for long - as it cannot pay for expenses that are needed to protect the life and property of its citizens. People rightfully question whether the CNIC-based tax collection scheme can be enforced to expand the tax base - after the registration of amnesty declarations. If not, then it would once again turn into a whitener scheme for tax evaded income and assets. That will be highly unfair to honest taxpayers. The attitude towards tax payment needs to be changed and more co-operative stance adopted by all to help in tax collection.