Huzaima Bukhari and Dr. Ikramul Haq
The Federal Board of Revenue (FBR) is in for criticism for inefficiency and indiscipline. It has failed on all fronts: collection targets, widening of tax base, countering tax evasion and avoidance, recovery of arrears, voluntary compliance, reform process and what not.
At the end of the five-year Tax Administration Reform Project (TARP), the tax-to-GDP ratio dipped to 8.2 percent from 10.6 percent. The borrowed funds of millions of dollars were ruthlessly wasted. The standing committee of parliament on finance must conduct a thorough probe in the matter and seek the assistance of tax experts to determine the amount of loss caused to national exchequer by the FBR stalwarts during the last two decades.
Despite an expensive media campaign, FBR could not make 25 million potential taxpayers to file tax declarations by the extended date — 25 January 2010. The majority of non-filers are rich and mighty bureaucrats, corrupt politicians, and unscrupulous businessmen. FBR has not only failed to tap the actual tax potential — not less than Rs4 trillion — but is also guilty of shifting tax burden from the rich to the poorer segments of society. According to FBR, on admission, 1,916,300 income tax returns and statements were received from July-January of the current fiscal year (2009-10) as compared with 1,797,000 returns and statements in the same period of last fiscal year (2008-09). Total number of income tax returns received up to 25 January 2010 is only 755,671, the rest are statements under section 115(4) — last year 642,777 returns were received — indicating an increase of 112,849 returns. According to the FBR Press release as of January 25, 2010, FBR has received 16,281 corporate sector income tax returns as against 14,903 returns in the same period of last fiscal year, projecting an increase of 1,378 returns.
Firms — registered and unregistered — filed just 41,863 returns. Salaried persons filed 114,495 returns for tax year 2009 as against 119,759 last year showing a decline of 5,264. Non-salaried individuals filed 583,032 returns compared to 481,961 filed last year. Salary certificates received are 18,828 as against 20,745 filed last year. Number of employees covered in statements under section 115(4) are 1,053,708 this year as compared with 1,055,954 last year. Number of importers who filed their statements is 12,262 whereas some 11,510 importers filed their statements last fiscal year. By January 25, 2010 some 8,473 exporters filed their statements as against 8,050 exporters in the same period of last fiscal year. Some 13,332 retailers having up to Rs5 million annual turnover filed their statements during July-January 2010 period of this fiscal year as compared with 18,272 retailers in the same period of last fiscal year. 581 retailers having over Rs5 million annual turnover filed their statements this year as against 830 such retailers in the last fiscal year. 24,378 contractors and suppliers filed statements during this year as against 24,030 during the last year.
It is admitted by FBR that even after "great efforts" less than 2 million Pakistanis have filed income tax declarations for tax year 2009. FBR has failed to implement law even in Islamabad as out of 43000 commercial and residential rental properties in Islamabad, only 7000 owners are filing returns. In Pakistan, the number of mobile users alone, who pay more than Rs100,000 as annual bill, is about 25 million. Why have they not been compelled to file returns? FBR is taking credit of extra 119,300 declarations filed this year. However, it is completely silent about its failure to expand the tax net — we have at least 25 million persons earning taxable income, but who are not filing tax declarations.
For a long time now, FBR has been apologetic (specifically before the IMF and the World Bank) that total income tax payers (referring to registered only) in Pakistan are just 2 million in a population of 170 million. This is a myth. The reality is that since July 1, 1992 all commercial electricity consumers (including about 3.2. million retail outlets in urban areas), irrespective of whether their income is chargeable to tax or not, are paying minimum income tax of Rs60 per month.
The total number of persons earning interest on bank deposits is not less than 30 million. They pay 10 percent mandatory withholding tax irrespective of their quantum of income. Total number of mobile and land-line telephone users, subjected to withholding tax, in the country, is in excess of 60 million — yet FBR claims that our tax base is narrow. The reality is that FBR is incompetent as a result of which it has failed to book/register a majority of these taxpayers. Had it been done, we could today have boasted of nearly 25 million registered taxpayers. Even a petty village shopkeeper (whose total income is much below the minimum taxable limit of Rs100,000) is paying tax as high as Rs720 per annum. On the contrary, big absentee landlords, earning millions by merely leasing out orchards/lands, are not paying even a single penny as personal income tax.
Out of total population of Pakistan, 43.1 percent are below the age of 15 years. The overwhelming majority of them will not have taxable income. Rural labour of 40 million earns meagre income. Thus, the total income tax paying population having taxable income of Rs100,001 can safely be around 25 million. The FBR is not only taxing all of them but even many of those whose incomes fall below taxable limits. The poor are paying not only indirect taxes but also income tax at source under various provisions of the Income Tax Ordinance, 2001 — section 148 to 156A, sections 234 to 236. Thus in reality the people — except the ruling trio — are over-taxed. In return they get nothing.
It was the duty of FBR to allot National Tax Numbers (NTNs) to all those who paid tax under sections 148,149,150,151,152,153,154,155,156, and 233, 234 and 235 of the Income Ordinance, 2001. Had the FBR just issued notices for filing of return to all commercial electricity consumers, mobile and land-line users (paying bill of Rs100,000 or more) and vehicle owners, today we would have over 25 million registered taxpayers. The FBR did not bother to prepare a database of such persons though millions of rupees were spent (rather wasted) on so-called automation.
FBR is guilty of criminal negligence in not taxing persons having taxable income, but extorting money from many who earn below taxable income. It has been misreporting the figures regarding income taxpayers in Pakistan. Its performance is abysmal in achieving a satisfactory tax-to-GDP ratio. It is just thriving on withholding taxes and voluntary payments — constituting 92 percent of total collection. The contribution of field officers [collection on demand through investigation or audit] is just 8 percent of total collection proving beyond any doubt how unproductive this organisation is.
The small business houses and salaried persons, already heavily taxed through withholding tax mechanism, are victims of highhandedness. It is high time that the FBR should put its own house in order and tax the rich and mighty tax evaders.
The writers, tax lawyers, are members of Adjunct Faculty of Lahore University of Management Sciences (LUMS).
According to FBR, it has finally decided to bring all the persons earning taxable income in the tax net through its tax intelligence system. The Chairman of FBR referred to various proposals such as:
Tax legislation will be introduced for installation of electronic cash registers at the retail outlets. Prime Minister has agreed to provide free of cost electronic cash registers to retailers to document their sales.
Political support/will is requested for taxing black economy and brining informal sector into the tax net. Most of the housing schemes are involved in selling of files of plots. There is proposal to tax transfer of plots through sale of files that would be instrumental in generating additional revenues.
Under new Value Added Tax (VAT) regime retailers having annual turnover of Rs7.5 million would be registered—only essential food items and life saving drugs would remain exempt and 15 percent VAT would be imposed on all other goods from July 1, 2010.
The professional service providers e.g. doctors, lawyers, engineers and architects would also be brought under VAT from July 1, 2010. The implementation of the broad-based VAT would generate around Rs150-200 billion in next fiscal year. The revenue generation from VAT implementation would reach to around Rs600 billion in coming years.
The importers, wholesalers and big retailers are paying Rs125 billion, which is below the actual potential. In most of the cases they deposit withholding tax collected from the consumers and do not declare their actual income, thus presumptive tax regime will be abolished.