Reluctant return filers

Huzaima Bukhari & Dr. Ikramul Haq

“FBR has until 10.10.2018 received 482,275 Income Tax returns for the Tax Year 2018, which are 170,208 more than the 312,067 Income Tax returns received for Tax Year 2017 by the same date, registering an impressive increase of 55%—Press release of October 11, 2018 by FBR.   

“Total income tax return filers stood at 1.238 million as of February 15, 2018 of the current tax year 2017 compared to 1.391 million in 2016. This shows that about 152,789 people have slipped from the FBR’s already narrow tax base. These numbers are inclusive of the salaried class—From tax year 2013-17: Except for salaried class, number of tax return filers shrink, The Express Tribune, February 21, 2018

“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, imprudent rulers and their handpicked crony policymakers introduced higher withholding tax rates in the case of ‘non-filers’, hoping that it would force them to file returns or identification would be made to issue them notices. After five years, the number of filers has decreased and the burden on withholding tax agents has tremendously increased. Every time, they have to verify whether a person whose advance tax is to be deducted or collected is mentioned in the active taxpayers’ list or not.  

The unsound and illogical, in fact, unconstitutional provisions related to creating apartheid culture of filers and non-filers, have failed to improve compliance but has further encouraged informal economy as elaborated in detail in ‘Doing away with the transactional tax’,Business Recorder, October 30, 2018. The Federal Board of Revenue (FBR) is reaping the fruit of over 65 withholding taxes that yield Rs. 1047 billion in fiscal year 2017-18 out of total income tax collection of Rs. 1528 billion. Due to continuous increase in the number of withholding provisions and enhancement of their rates, FBR has managed to show “impressive growth” in revenue, but the reality is otherwise [‘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 continuously declining [see Table A] as compared to what we had in 2007 (2.1 million). In 2018, till the end of October 31, 2018, total number is as low as 1.1 million.

People have become so indifferent that they are deliberately avoiding registering themselves with FBR knowing very well that once they do so, the officials will make their lives miserable through unlawful orders, illegal demands, freezing of accounts, blocking of refunds and inhuman attitude. They lack faith in tax officials as well as in the tax justice system. They are wary of long and expensive bouts of litigation that culminate as a result of high-handedness of revenue authorities. They suffer immensely due to inefficient, incompetent, costly and corrupt tax appellate system. In High Courts, they have to wait for years to get decisions.

According to a report, there were 90 million unique mobile users that paid advance adjustable income tax of 12% in the fiscal year 2016-17. However, only 754,254 individuals filed income tax returns till February 15, 2018 [see Table B]. According to FBR’s own admission, it received 1,391,695 returns for Tax Year 2016 till February 15, 2018 and only 1,238,906 returns in 2017. This decrease of 152, 789 returns expose FBR’s tall claims of increase in return filers. 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 decade despite prescribing higher withholding tax rates for non-filers. The data shows that the non-filers are quite happy to pay more by way of advance tax than filing returns!! It speaks volumes about our tax system that is not friendly at all. 

Table A: Income Tax Returns (2007 to 2018)

Tax Year	Returns (in millions)
2007	2.1
2008	1.57
2009	1.72
2010	1.64
2011	1.57
2012	1.69
2013	0.94
2014	1.10
2015	1.26
2016	1.39
2017	1.24
2018	1.13 as of 30 October 2018

FBR has been claiming success in broadening the tax base, but reality is that it has even failed to regain its lost return filers of over one million. 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 2013 to 2016 shows less than 50% registered corporate bodies file tax returns, yet FBR is not taking any action. Out of 86,900 registered companies, about 34,000 filed tax returns for Tax Year 2017.

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 mortals.

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 successive governments instead of cutting corners in its expenditure, incentivizing economic growth, conveniently picking on the poorest of the poor to satisfy their insatiable greed for more and more revenue! Will, like its predecessors, the government of Pakistan Tehreek-i-Insaf (PTI) that has been speaking of providing justice and equality to all citizens, also strip the poor and the needy for the luxury of elites—militro-judicial-civil complex, public officeholders and men in power? So far, it has not shown any contrary action, proving that the intention remains that of earlier governments.

______________________________________________________________________

The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).

Table B: Sector-wise returns* (2013 to 2017)

Sr.	Sector	2013	2014	2015	2016	2017
1	Asset Management	15	15	14	14	13
2	Autos	1,796	1,694	1,630	1,579	1,429
3	Banking	115	115	113	109	98
4	Beverages	145	132	132	129	115
5	Building Construction	1,140	1,127	1,115	1,043	885
6	Capital	11	11	10	10	9
7	Cement	105	99	98	91	80
8	Chemical	1,302	1,249	1,243	1,210	1,104
9	Electronics	1,285	1,213	1,211	1,163	1,038
10	Fertilizers	84	73	64	59	51
11	Food Products	5,187	4,660	4,562	4,408	3,910
12	Foundation	458	459	450	422	360
13	Fund Management	215	215	213	194	185
14	Hotels	605	532	525	531	485
15	Insurance	828	749	735	727	649
16	Investment	112	107	109	106	103
17	Iron & Steel	1,448	1,357	1,331	1,294	1,180
18	Leasing	1,649	1,581	1,537	1,482	1,324
19	Leather	1,188	1,127	1,090	1,053	983
20	Modaraba	29	30	30	30	27
21	Oil & Gas	1,239	1,180	1,136	1,107	988
22	Others	633,250	720,469	787,380	863,859	754,254
23	Paper	1,699	1,616	1,564	1,515	1,326
24	Pesticides	117	120	119	120	105
25	Pharmaceuticals	1,286	1,242	1,221	1,192	1,081
26	Plastics	1,593	1,467	1,423	1,381	1,228
27	POL	968	939	910	869	801
28	Power	356	357	347	339	310
29	Salary	242,153	326,129	423,014	474,521	436,812
30	Securities	264	269	268	263	234
31	Services	23,065	22,168	21,174	20,196	18,006
32	Sugar	104	100	100	99	86
33	Telecom	809	786	755	718	616
34	Textile	10,052	9,465	9,173	8,832	8,159
35	Tobacco	96	87	91	90	75
36	Trusts	1,008	1,005	980	940	797
		935,776	1,103,944	1,265,867	1,391,695	1,238,906

*The numbers for each tax year represent the returns filed till 15 February 2018.

*For tax year 2017, the number of returns filed was for 8 months (1-07-2017 till 15-02-2018)

*For tax year 2016, the number of returns filed was for 20 months (1-07-2016 till 15-02-2018)

*For tax year 2016, the number of returns filed was for 8 months (1-07-2016 till 15-02-2017)