"Pakistan's tax revenue remains very low relative to comparator developing countries and the tax effort expected for the country's level of development. This reflects narrow tax bases, overgenerous tax concessions and exemptions, weak and fragmented revenue administrations, and structural features of the economy"-Unlocking Pakistan's revenue potential, Ms. Serhan Cevik, Country Report 16/2 (January 2016), IMF.
In 2014, our imprudent policymakers introduced higher withholding tax rates for in the case of 'non-filers' hoping that it will force them to file returns or identification will be made to issue them notices. After three years, the number of filers has decreased and the burden on withholding tax agents has tremendously increased. They have to verify whether a person whose advance tax is to be deducted or collected is mentioned in the active taxpayers' list.
The illogical, rather unconstitutional provisions, have not improved compliance but Federal Board of Revenue (FBR) is reaping the fruit. Due to continuous increase in the number of withholding provisions and enhancement of rates, it is showing over 15% increase in revenue in the current fiscal year [see details in Truth behind revenue growth, Business Recorder, February 2, 2018]. Our policymakers have failed to realise that these measures are actually back-lashing. Due to their short-sightedness, the number of income tax return filers is rapidly declining with each passing year.
People have become so indifferent that they are intentionally avoiding to register themselves with FBR knowing very well that once they do so, the officials will make their lives miserable through unlawful orders, illegal demands and inhuman attitude. They lack faith in the tax officials as well as the justice system. They are wary of long and expensive bouts of litigation that culminate as a result of high-handedness of revenue authorities as well as the appellate system.
According to latest report of Groupe Speciale Mobile (GSMA), there are 90 million unique mobile users that are paying advance adjustable income tax of 12%. However, about only 1.23 million filed income tax returns till February 15, 2018 [see Table]. According to FBR's own admission, it received only 1.39 million returns in 2017. An earlier disclosure by FBR confirms that return filers in 2016 were 1.02 million. It is pertinent to mention that in 2011 this number was 1.57 million. 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 during the last 10 years despite prescribing higher withholding tax rates for non-filers. FBR needs to conduct a study to find out what has gone wrong after penalizing non-filers (sic) who are happy to pay more by way of advance tax instead of filing returns!! Source: Dawn, January 7, 2017: https://www.dawn.com/news/1306870
The Express Tribune, February 21, 2018: https://tribune.com.pk/story/1640236/2-tax-year-2013-2017-except-salaried-class-number-tax-return-filers-shrinks/
February 14, 2018: https://tribune.com.pk/story/1546446/2-number-income-tax-return-filers-drops-less-half/
FBR has been claiming success in broadening the tax base, but reality is that it has even failed to regain its lost return filers. FBR stalwarts need soul-searching to find out what has gone wrong and where these taxpayers have vanished. Wrong policies, especially excessive reliance on withholding taxes, are showing devastating effects. High indirect taxation and excessive burden of withholding taxes are proving detrimental for economic growth. Now there is defiance on mass scale as evident from decreasing number of filers and massive tax evasion in withholding tax regime.
The real issue of taxation in Pakistan is appeasing the rich and mighty and lavish spending on comforts of elites which are the main cause of huge budgetary gap. Such wrong policies are responsible for continuous increase in the miseries of the people. Nearly 20 percent of Pakistan's population now lives below $1.25 per day, which is categorised as extreme poverty.
It is a fact that FBR is not interested in nabbing big tax evaders. Tax Directories of Tax Year to 2013 to 2016 show less than 50% registered corporate bodies file tax returns, yet FBR is not taking any action. The majority of parliamentarians, though enjoying luxurious living, just show remuneration from State as their only source of income. FBR has evidence of their assets and huge expenses but never goes for audit of their tax affairs. The income and expenditure declarations of judges of higher judiciary and military-civil high-ups show extraordinary tax concessions and exemptions that are not available to ordinary immortals. FBR has miserably failed to increase the number of tax filers, bridging the obnoxious tax gap, registering business houses and properties, checking leakages and rampant corruption within their ranks. The government instead of cutting corners in its expenditure, incentivizing economic growth, conveniently picks on the poorest of the poor to quench its thirst for more and more revenue! What kind of a government strips the needy for the luxury of elites-militro-judicial-civil complex, public officeholders and men in power?
Income Tax filers (2008 to 2018) in Pakistan
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Tax Year Returns (in millions)
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2008 1.57
2009 1.72
2010 1.64
2011 1.57
2012 1.69
2013 1.52
2014 1.46
2015 1.12
2016 1.02
2017 1.39
2018 1.23 as of 15
February 2018
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(The writers, lawyers and partners in HUZAIMA, IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences)