Non-collection of tax where due, is as detestable as its collection, where it is not due- CIT Companies, Lahore v State Cement of Corporation (Pvt) Ltd, Lahore 2002 PTD 1603 The persistent negative propaganda campaign by the Federal Board of Revenue (FBR) of "low tax base" and ongoing media campaign by Research and Advocacy for the Advancement of Allied Reforms (Raftaar) that only 1% of the population pays income tax is nothing but deplorable dishonesty. Obviously, they are ignoring distinction between 'payers' and 'filers.' Millions of Pakistanis by virtue of over 70 types of withholding taxes, both adjustable and non-adjustable, imposed under the Income Tax Ordinance, 2001, are paying advance income tax. These income tax payers include not only persons liable to tax, but millions having either no income (eg students, wage workers, unemployed etc) or their incomes fall below taxable limit. Unfortunately, even after paying billions as advance income tax, Pakistanis are labelled as tax cheats.
The other day while speaking at 'Pakistan Business and Economic Summit', organised by Nutshell Forum and Corporate Pakistan Group in association with the Overseas Investors Chamber of Commerce and Industry (OICCI) and Pakistan Business Council (PBC), Special Assistant to the Prime Minister on Revenue, reportedly said that "Pakistanis' attitude towards paying taxes is the main reason why the country's tax base remains low" and FBR is not responsible for it!! This is the same narrative that is skilfully orchestrated by FBR and NGOs like Raftaar.
Millions of Pakistanis, not earning taxable income, pay advance income tax. They are not required to file income tax returns/statements but our stalwarts sitting in FBR and their political masters want them to do so. In other words, they are being compelled to be exploited by unscrupulous officials and advisers!! This is blatant violation of Article 4(c) of the Constitution which says: no person shall be compelled to do what law does not require him to do.
Malicious propaganda campaign, a lamentable act, against millions of Pakistanis who pay advance income tax though not liable to tax must stop. They are contributing to national kitty though law does not require them to do so. Withholding provisions are unconstitutional in the case of those who are not earning taxable income. Since our rulers and tax bureaucrats wage baseless and unfounded campaigns and spread false impression that "our tax base is extremely narrow", institutions like International Monetary Fund (IMF), World Bank and Asian Development Bank (ADB), Department for International Development (DFID) etc join the bandwagon promoting this narrative in utter disregard of facts that are quite the opposite.
There are over 50 million income-tax payers in Pakistan. However, according to latest disclosure by FBR, return filers up till now are only 1.1 million. It is pertinent to mention that in 2011 this number was 1,443,414. Jorge Martinez-Vazquez and Musharraf Rasool Cyan in their book, 'The Role of Taxation in Pakistan's Revival', mentioned at page 676 [Figure 36] that 2.1 million Pakistanis (individuals) filed income tax returns in 2006-07. This shows that FBR has lost one million return-filers since 2006-07. FBR needs to conduct a study to find out what has gone wrong. Where have one million return filers vanished? Obviously, this is the worst that can happen to any tax machinery, but FBR is getting kudos and bonuses from the Finance Minister and Special Assistant to Prime Minister on Revenue for such disastrous results!!
According to Pakistan Telecommunication Authority (PTA), in August 2016, total mobile users in Pakistan were 133,908,192 (prior to biometric verification, there were 140,022,516 mobile users which number fell to 114,658,434 in 2014-15). During the financial year 2015-16, this number soared to 133,241,465. This implies that not less than 60 million mobile users (if we exclude multiple and inactive subscribers), paid both 14% income tax and 19.5% sales tax during fiscal year 2014-15, but about 1.7% of mobile users (individuals) filed income tax returns. FBR did not bother to utilise the data available with the telecommunication companies to detect individuals having taxable income and force them to file tax returns. On the contrary, it resorted to ill-advised actions of imposing many more withholding taxes even on those who have no incomes or whose incomes fall below taxable limit and that too at higher rates.
Majority of the mobile users do not have taxable income, hence, are not legally required to file tax returns. If they do so only to claim refund due, they fear exploitation and excesses from tax officials. They also fear exploitation by unscrupulous tax advisers, who in connivance with corrupt officials may fleece them. In any case, the cost to reclaim withheld amount would be much higher than the actual amount of refund involved. It is an established fact that majority of the ultra-rich do not bother to file tax returns-they are happy with the withholding provisions as these take away only a fraction of their mammoth incomes confirming beyond any doubt the ineffectiveness and incompetence of FBR. The Special Adviser to Prime Minister on Revenue should concentrate on these rich and mighty rather than accusing ordinary Pakistanis of not paying taxes or filing tax returns. Why he wants the poor and middle class individuals to be victim of highhandedness of tax machinery whereas the rich enjoy immunity from probe under section 111(4) and he is allegedly one of them [Policymakers also benefit from foreign remittances, The News, September 4, 2015].
Pakistan's real dilemma is that the rich and mighty are not paying taxes according to their ability. In 2014 and 2015, less than 4000 persons paid tax between Rs 1,000,000 and Rs 10 million. In 2014 just 3,663 declared tax of over Rs 10 million and this position worsened in 2015 as per Tax Directory 2015, recently released by FBR. In Pakistan, the ultra-rich are avoiding tax obligations but millions having no income or incomes below taxable limit are being forced to pay advance income tax in gross violation of Article 4 of the Constitution assuring that the State cannot force a person to do what the law does not require him to do.
Why should people not liable to tax engage a tax adviser to file returns and pay money to get refund? The extreme injustice in the present tax system demands a widow to pay 10% non-adjustable withholding tax on her income of Rs 300,000 [taxable limit is Rs 400,000] from an investment made with national savings centre, from the funds she had received from pension/gratuity on the death of her husband. From the same source, a rich person pays only 10% tax on income of Rs 2 million, whereas he should be taxed in the highest slab of 35%. Over 75% taxes collected by the federal and provincial governments are indirect in nature, the burden of which is borne by the poor and middle-class with scanty resources and no ownership of assets.
By the end of 2015, our population, according to Economic Survey of Pakistan 2015-16, was 195.4 million, out of which 77.93 million constituted urbanites while 117.48 million lived in rural areas. The dependent population of children under the age of 15 years was 35.4 percent whereas 4.2 percent people were above 65 years. Out of total population, 30 million were below poverty line earning less than two dollars a day. Our labour force, among the tenth largest in the world, was around 61 million, out of which 57.42 million were employed. Rural labour force of 42.3 percent was earning below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance, 2001. Reading all these figures together, the total persons liable to income tax could not be more than 10 million whereas the government is extorting income tax in the form of withholding tax from over 50 million active mobile users alone!
At present entire taxable population and even those having below taxable incomes are paying income tax at source, yet FBR and Raftaar are engaged in a vicious propaganda that people of Pakistan are tax evaders! This is highly lamentable on the part of the apex revenue authority especially when millions of mobile users, salaried persons, importers, exporters, bank account holders, investors in government saving schemes and all traders using commercial electricity connections are paying advance income tax under various provisions of the Income Tax Ordinance, 2001.
All traders pay advance income tax with electricity bills under section 235 of the Income Tax Ordinance, 2001, and if monthly bill is up to Rs 30,000, tax paid is treated as minimum tax with no claim to a refund! In the presence of this section, read with section 181AA, was there any need to impose tax on banking transactions by non-filers? Even the affluent domestic electricity users are subjected to withholding tax if bill amount is Rs 75,000 or above [the limit was Rs 100,000 prior to July 1, 2015]. Why does FBR want tax returns from even those who have no taxable income? More "filers", more "speed money", more earnings for unscrupulous tax advisers (sic)-majority comprising lower staff and even some high-ranking officers of FBR who have independent chambers or deal with various tax advisers for referrals.
It is an undeniable fact that FBR has miserably failed to get due tax from the rich and mighty and thus its main emphasis is on withholding taxes. FBR Year Book 2014-15 concedes that in fiscal year 2014-15 withholding taxes constituted 63.2% of total income tax collection of Rs 1094.284 billion. 26.3% came from voluntary payments, advance tax and tax with returns. FBR's own efforts (collection on demand) yielded only 10.6%. It confirms negligible efforts on the part of FBR to tap the actual tax potential as it would be hurtful to the rich, majority of which are non-filers, despite having undeclared, untaxed wealth and the audacity of ruling this country as a matter of right.
Pakistan's tax potential at federal level alone is Rs 8 trillion. According to Household Integrated Economic Survey (HIES) 2011-12 conducted by Pakistan Bureau of Statistics, 5 million individuals have annual taxable income of Rs 1.5 million. If all of them file tax returns, income tax collection from them at the prevalent tax rates would be Rs 1650 billion. If income tax collected from corporate bodies, other than non-individual taxpayers and individuals having income between Rs 400,000 to Rs 1,000,000 is added, the gross figure would not be less than Rs 4500 billion-FBR in 2015-16 collected only Rs 1216.9 billion as direct taxes (which includes almost 40% of indirect taxes in the garb of income taxation).
FBR Collection: 2014-15 & 2015-16 Income tax collection in fiscal year 2014-15 was Rs 1033.7 billion and projection for 2015-16 was Rs 1307 billion. The actual collection, reported by FBR, is Rs 1216.9 billion-showing shortfall of Rs 90 billion. Collection of sales tax in 2014-15 was Rs 1088 billion and projection for 2015-16 was Rs 1230.3 billion. By raising sales tax on POL products from 17% to 30-50%, the government managed to collect Rs 1357.1 billion in 2015-16. Customs collection in 2014-15 was Rs 306 billion and projection for 2015-16 was Rs 348.5 billion. After levying regulatory duty on over 300 items, it was increased to Rs 401.2 billion in 2015-16. Collection of Federal Excise (FED) in 2014-15 was Rs 162 billion. Against projection of Rs 200.9 billion, actual collection for 2015-16 was Rs 191.6 billion.
The common man is presently subjected to exorbitant sales tax and FED-in many cases tax incidence is as high as 35% to 40% on finished imported goods after applicable customs duty, sales tax, federal excise, mandatory value addition and income tax-as these are ultimately passed on them as end consumers.
In a country where billions of rupees are concentrated in a few hands and profits of millions are made by a few individuals on daily basis at stock exchanges and in real estate through speculative transactions, tax-to-GDP ratio is pathetically low just over 10% in fiscal year 2015-16]. Yet the Government is least bothered to crack down on undocumented economy and benami (name-lender) transactions because the mighty sections of society are engaged in these transactions and the government has no inclination to annoy them.
The present tax policies are detrimental for economy, social justice, business and industry. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa but the system should be flat, simple and certain as suggested by us in a recent study, 'Towards Flat, Low-rate, Broad & Predictable Taxes', published by Prime Institute, a public policy think tank.
The corporate sector is the worst sufferer of FBR's acrid policies and widespread corruption-top management of FBR has a myopic outlook as evident from over-emphasis on withholding taxes. With low tax rates we could have promoted corporate growth. On the contrary, in 2015 FBR imposed 'Tax on undistributed reserves' [section 5A of Income Tax Ordinance, 2001] ignoring the fact that reserves are created from already taxed income. Minimum taxation on service sector companies was another wrong move. In 2014, FBR imposed 'Alternative Corporate Tax' [section 113C of Income Tax Ordinance, 2001]. Such erratic, arbitrary and extortionary taxation only retards the corporate sector discouraging industrialisation, growth and employment.
Millions are paying advance income tax under sections 148,149,150,151,152, 152A, 153, 153A, 154,155,156, 156A, 156B, 231A, 231AA, 231B, 233, 233A, 233AA, 234, 234A, 235, 236, 236A, 236B and 236C, 236D, 236F, 236G, 236H, 236I, 236J, 236K, 236L, 236M, 236N, 236P, 236Q, 236R, 236S, 236U, 236V of the Income Tax Ordinance, 2001. It is FBR's duty to enforce filing of tax returns under section 116 and/or tax statements under section 115(4) of the Income Tax Ordinance, 2001, as the case may be. Had FBR done this in the past by just obtaining the names and particulars of PLS account holders of banks, commercial and industrial electricity consumers, mobile and landline users (paying tax with bills) and vehicle owners, Pakistan would have over 50 million income tax return filers by now.
Instead of admitting its failure to enforce provisions relating to filing of returns by people having taxable income, FBR has opted to penalise those having no taxable income and public at large through onerous, obnoxious, enormous and cumbersome withholding tax provisions with excessive tax rates for non-filers.
Of course the people of Pakistan are not responsible for the pathetic performance of FBR. It is high time that FBR should put its own house in order and enforce tax laws across the board rather than blaming the already over-taxed people of Pakistan for its own managerial fiascoes and established record of protecting the rich and mighty. It must be remembered by parliamentarians as lawmakers and tax collectors as functionaries of State and civil servants that non-collection of tax where due is as detestable as its collection, where it is not due.
(The writers, lawyers and partners in HUZAIMA IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).)