FBR, tax potential & enforcement

Huzaima Bukhari & Dr Ikramul Haq

The Federal Board of Revenue (FBR) has achieved the target of first eight months [July 2020 to February 2021] of the current fiscal year, which is commendable, especially when the economic growth is extremely slow in the wake of Covid-19 endemic and there is contraction in imports as FBR collects bulk of taxes at the time of clearing of goods and through numerous withholding tax provisions. FBR also suffers from multiple institutional shortcomings, for example, lack of modern tools and trained staff to enforce the various anti-avoidance provisions in all the tax laws it administers—Income Tax Ordinance, 2001, Sales Tax Act, 1990, Customs Act, 1969 and Federal Excise Act, 2015.

In the previous articles [‘There’s need for new tax model’, Business Recorder, February 26, 2021 and ‘Restructuring the tax system’, Business Recorder, January 22-24, 2020], it was highlighted that the existing tax system needs complete restructuring to tap the actual tax potential and at the same time help economy to absorb the financial toll of Covid-19 and grow at a rapid pace.

The most critical area pointed out in ‘Restructuring the tax system’, Business Recorder, January 22-24, 2020 was:

There are over 5,000 effectively traded tariff lines and 2,448 tariff lines (33% are under 20% slab). In fiscal year 2019-20, additional customs duty (ACD) was charged on 5,521-tariff lines. On 2,075 tariff lines, regulatory duty (RD) was charged. The heavy taxation at import stage (50% of FBR revenue is collected at import stage) provides an incentive for smuggling, undervaluation, misreporting, mis-declarations and tax evasion. The SRO-based customs policy has rendered the actual tariff different from the standard tariff. As a result of this, customs tariff has multiple rates and several exemptions, and various “conditions and requirements” are to be fulfilled to avail those exemptions. This creates opportunities for the discretionary use of powers by officials, raising the cost of doing business and incentivising malpractices and mis-declarations for evading duties. Recognizing these problems, this simplified tax model proposes that there should be a single slab for all imports to end these undesirable practices.          

In response to the above, Dr. Manzoor Ahmad, ex-member Customs, FBR and Pakistan’s Ambassador and Permanent Representative to the World Trade Organization (WTO), responded as under:

“With all the powerful lobbies, this is never going to happen. However, if it ever happens, Pakistan will be a different country. Our exports will diversify, multiply and productivity will increase substantially. Chile experienced this after bringing all rates to 10% in the 1970s”.

It is pertinent to mention that Dr. Manzoor Ahmad has extensive experience in Customs, international trade, and trade policy issues. As Pakistan’s Ambassador to WTO, he chaired the WTO TRIPS [Trade-Related Aspects of Intellectual Property Rights] Council (Special Session), WTO dispute panels, and the WTO Committee on Balance-of-Payment Restrictions. He also served as Deputy Director at the World Customs Organization (WCO), Brussels. He has also been a member/leader of Pakistan’s negotiating teams in various trade liberalization and facilitation forums in South Asia and Central Asia including South Asian Association for Regional Cooperation (SAARC), Economic Cooperation Organization (ECO).

It is hoped that all those engaged in the recently established Tax Policy Unit in Finance Division, taken away from the Revenue Divisions, headed by Chairman/Chairperson of FBR as Secretary in Grade 22, will give due weightage to the proposal given by Dr. Manzoor Ahmad.   

The FBR was also approached with the above question, responded by Dr. Manzoor Ahmad, but till the writing of these lines no response was received. However, under the able leadership of Chairman FBR, all members have performed impressively, and who promised that Member Policy (Customs) will soon update on this. The retirement of the incumbent Chairman is due in April, 2021 and at the best he may get extension till June 30, 2021.  He will be remembered as an outstanding officer, who contributed not only in meeting revenue targets of all months of the current fiscal year but also took many innovative measures, like E-Katcheri, tax awareness educational sessions and new complaints redressal forum [Circular 10 of 2021 issued by Member Operation (IRS) on March 1, 2021] and such others highlighted in FBR performance under the spotlight, Business Recorder, February 5, 2021.

It was conveyed to all those who matter in tax policy and enforcement that when Customs staff commit leakages, the national kitty suffers heavily as bulk of the sales tax, excise duty and income tax are collected at source. A question was posed: Can Inland Revenue Service (IRS) do audit of Customs as of any other withholding agent? They have never done this though law permits them. Trade with China alone has gap of average $6 billion a year. Even exempt items, under section 148 they are required to be treated as if not exempt and then calculate and recover advance income tax with GD. If rate is say 20% but due to Free Trade Agreements (FTAs) or exemption otherwise provided in the Customs Act, 1969 or through any statutory regulator order (SRO), the Customs officials clearing any consignment need to collect tax after applying the rate as provided in section 148(5) of the Income Tax Ordinance, 200: 

Advance tax shall be collected in the same manner and at the same time as the customs-duty payable in respect of the import or, if the goods are exempt from customs-duty, at the time customs-duty would be payable if the goods were dutiable.   

The FBR in a Press release issued February 28, 2021 highlighted its various achievements as under:

“According to the provisional information, FBR has collected net revenue of Rs. 2916 billion during Jul-Feb period, which has exceeded the target of Rs. 2898 billion. This represents a growth of about 6% over the collection of Rs. 2750 billion during the same period last year. 

The net collection for the month of February was Rs.343 billion against a required target of Rs.325 billion, representing an increase of 8% over last February and 106% of the target. When finalized after book adjustments, the collection figures are likely to improve further.

On the other hand, the gross collections increased from Rs.2823 billion during this period last year to Rs.3068 billion, showing an increase of nearly 9%. The amount of refunds disbursed was Rs.152 billion compared to Rs.79 billion paid last year, showing an increase of 97%. This is reflective of FBR’s resolve to fast-track refunds to prevent liquidity shortages in the industry. 

The improved revenue performance is a reflection of growing economic activities in the country despite facing the continued challenge of second wave of COVID-19. During March-June 2021, it is expected that this revenue performance would be improved substantially compared to 2020 when economic activities were disrupted. 

Meanwhile, FBR’s efforts to broaden the tax base are expanding apace. Early signs suggest such efforts are bearing fruits. As on 28-2-2021, income tax returns for tax year 2020 have reached 2.62 million compared to 2.43 million last year, showing an increase of 8%. The tax deposited with returns was Rs.49.6 billion compared to only Rs.31.0 billion, showing an increase of 60%. It may be recalled that last year the final date for submission to returns was 28th February. FBR’s decision to adhere to 8th December as the last date has been vindicated as more returns and higher tax payments have been recorded during the tax year 2020 compared to 2019.

Besides, FBR has issued notices to nearly 2.1 million taxpayers who were supposed to file return, or have filed a nil return, or mis-declared their assets or have not been filing return for sales tax to comply with their legal obligations. The exercise is eliciting encouraging response. However, those who are not complying would be pursued diligently until compliance is achieved.

FBR has also released the information about Tier-I retailers who have been integrated with POS system. According to the information, 9952 sales points have been integrated with Point of Sales Linked Invoicing System.

Pakistan Customs has initiated a focused counter-smuggling drive. During February 2021, smuggled goods worth Rs. 4.08 billion have been seized while in February 2020; smuggled goods worth Rs. 3.02 billion were seized, thus showing a monthly increase of 35.18 %. Similarly, during last 8 months (July 2020-Feb 2021) of current financial year smuggled goods worth Rs. 39.52 billion have been seized as compared to Rs. 25.10 billion from July 2019 to February 2020 of the last financial year thus showing an increase of 57.45 %. Moreover, the value of seized goods of Rs. 39. 52 billion in 8 months of current FY has crossed the total value of seized goods of last year. In FY 2019-20, smuggled goods worth Rs 36 billion were seized”. 

In another Press release issued on March 2, 2021, FBR conveyed the following:

“Federal Board of Revenue (FBR) has uploaded the Active Taxpayers List (ATL) for Tax Year-2020 on 1^st March, 2021. The ATL is available on the official website of FBR. Number of Income Tax Returns for Tax Year-2020 had reached 2.62 million on 28^th February, 2021 as compared to 2.43 million for Tax Year-2019 as on 28^th February, 2020. The amount of tax paid with returns for Tax Year-2020 at Rs. 49.6 billion is 60 % more than tax paid with returns for Tax Year-2019 up to 28^th February, 2020.

FBR has added that 509,039 filers have not been included in this year’s ATL as they could not file their tax returns within due date or the date extended by the respective commissioners and ATL surcharge had not been paid by them. FBR has clarified that such taxpayers can get themselves automatically included in the ATL if they pay the necessary ATL surcharge. The amount of ATL surcharge for companies is Rs. 20,000, Association of Persons Rs. 10,000 and ATL surcharge for individuals is Rs. 1000. FBR encourages such taxpayers to pay respective amount of ATL surcharge and take benefits of ATL.

Similarly, those taxpayers who could not file their returns for Tax Year-2020 till now, are also urged to avail benefit of ATL by filing their returns along with ATL surcharge”.

In a Press release, issued by the FBR, on December10, 2020, it was claimed:  “A total of nearly 1.8 million returns have been filed together with an amount of about Rs. 22 billion. Last year at this time, 1.73 million returns were filed while about Rs.13.5 billion was deposited as income tax. Comparatively, the returns are higher by 4% and the tax deposited is higher by 63%”.

In 2019, FBR in a Press release issued after the extended date of filing of returns (December 31, 2019), claimed that 2,446,294 income tax returns for Tax Year 2019 were received showing  increase by “45% compared to 1,687,000 returns filed in Tax Year 2018”. 

The figure given for Tax Year 2018 of 1,687,000 in Press release is different from FBR’s  Year Book 2018-19 [page 11, Table 7] showing total number at 2,666,256, claiming growth of 42.4% vis-à-vis total returns received for tax year 2017 at 1,797,903. In the latest FBR’s Year Book (2019-20), there is no mention of total income tax returns received for tax year 2019. FBR’s Press release of December 9, 2020 also mentions returns for Tax Year 2019 received till December 8, 2018.

The figures released by FBR needs to be authentic and to avoid any doubts must be updated weekly on its website. The Spokesperson of FBR, in response to a Press story [Number of active taxpayers falls 30%, The Express Tribune, March 2, 2021] quoting him that “around 500,000 persons who filed returns last year did not file the tax returns this year”, clarified as under:

“Total returns filed till 1st March (YTD): Tax Year 2019: 2,485,136 and Tax year 2020: 2,636,255. The statistics of Active Taxpayers List (ATL) are:

• ATL Count based on 2019: 3,077,498 as on 28-02-2021
• ATL count based on 2019: 2,529,447 as on 01-03-2020 (date of filing of return was extended till 28-02-2020)

• ATL Count based on 2020: 2,111,682 as on 01-03-2021 (including new filers in 2020: 76,553)

Total who filed returns for tax year 2020 after due date and no surcharge is paid: 509,039 and balance is difference of non-filers”.

The reporter of the story, when asked to comment on the above, responded:

“Sir I have a fundamental issue with FBR approach that looks backwards instead of having forward looking approach. It’s matter of shame that there are 6.7 million NTN holders and only 2.2 m are on ATL. Whatever FBR says is meaningless, if it’s not backed by ATL. Regards”. 

The following facts have been mentioned in the above report that refuted by the FBR:

“The filing of income tax return is the legal obligation of every person, earning taxable income of more than Rs400,000 a year, having at least one 1,000cc car or owning a home.

In October 2019, the traders got major concessions from the government on the intervention of PTI’s former secretary general Jahangir Khan Tareen. The government increased the exemption limit for sales tax registration of traders and allowed that only those paying up to Rs1.2 million annually in electricity bills and owning a 1,000-square-feet shop would be required to get registered.

Earlier, any shopkeeper whose annual electricity bill was above Rs600,000 was treated as a class-I trader and subjected to 17% sales tax.

The FBR claimed on Saturday that its efforts to broaden the tax base were “expanding apace”. It added early signs suggested such efforts are bearing fruits. As on February 28, 2021, income tax returns for tax year 2020 have reached 2.62 million compared to 2.43 million last year, showing an increase of 8%.

However, the ATL 2021 showed only 2.18 million filers, which are about 17% less than what the FBR claimed in its handout. The FBR has again made a disputed claim that the tax deposited with returns was Rs49.6 billion compared to only Rs31.0 billion, showing an increase of 60%. But the FBR’s documents and publicly available reports showed that the tax paid was 1.3% less than the last year.

The FBR said that it issued notices to nearly 2.1 million taxpayers who were supposed to file return, or have filed a nil return, or mis-declared their assets or have not been filing return for sales tax to comply with their legal obligations. The exercise is eliciting encouraging response. However, those who are not complying would be pursued diligently until compliance is achieved.

The FBR is also going to miss its annual tax collection target by a wide margin and the International Monetary Fund (IMF) has agreed to reduce the target by about Rs263 billion, said the sources”.

The same reporter on December 10, 2020 in a report revealed that “FBR has also failed to bring all 6.5 million Pakistanis who have valid National Tax Numbers (NTNs) in the tax net in tax year 2020”. This report further mentioned: “In tax year 2019, the FBR had received a total of 2.975 million income tax returns…..FBR said that at least 300,000 taxpayers had sought extension in the date for filing returns, thus taking the number of potential returns to 2.1 million. But the 2.1 million return filers will still be 870,000 or 29% less than the tax year 2019”.

The real significance is quantum of the incremental tax received due to growth in number of tax filers. FBR inYear Book 2018-19 [page 10] claims that theincome tax returns were just 1.5 million in Tax Year 2016 but crossed the mark of two million for “the first time in the history of FBR”. It further says that during Tax Year 2017, the number of income tax filers reached to 1.9 million and in Tax Year 2018, 2.2 million. In Tax Year 2018, it says the number of return filers increased by 17.1%. It candidly admits: “The performance in terms of number of returns is satisfactory but payment with returns has a meager growth of 3.0%, which is the matter of concern”. It is thus clear that numerical increase in return filers for Tax Year 2019 showed negligible growth in revenue. Almost the same position exists for Tax Year 2020 as elaborated in detail in the various independent sources.

The World Bank in its Project Information Document (PID) of April 22, 2019, reported: “While people and firms unregistered as taxpayers… pay income tax withheld on their transactions (e.g., by banks, telecom, and utility companies), the number of taxpayers who file tax returns….remains very small at 1.52 million, while those who declared incomes above the taxable threshold amounted to only 1.12 million in FY2017/18.”

The figure quoted by World Bank for returns filed for tax year 2018 at 1,522,627 against the registered taxpayers with FBR at 4,786,743 does not match with what FBR showed in its Year Book 2018-19 and in its Press release (https://www.fbr.gov.pk/pr/no-further-extension-in-date-of-filing-income/152284).

In FBR’s Year Book 2018-19, total income tax returns received for tax year 2018 were shown as 2,666,256. However, in ‘Tax Directory of all Taxpayers for Tax Year 2018’ as well as in ‘Tax Directory Analysis for Tax Year 2018’,total number of income tax returns received till September 14, 2020 for tax year 2018 are shown at 2,852,349. The increase in tax revenue from new filers is not revealed, despite repeated requests. This is a clear violation of Article 19A of the Constitution, which says: “Every citizen shall have the right to have access to information in all matters of public importance subject to regulation and reasonable restrictions imposed by law”.

It is pertinent to mention that in fiscal year 2019-20, out of total collection of income tax at Rs. 1523 billion, the contribution of 10 top withholding taxes was Rs. 943.6 billion while remaining 56 was Rs. 147.9 billion (total Rs. 1091.5 billion). Advance tax paid was Rs. 351 billion and with returns Rs. 61 billion. FBR collected only Rs. 61 billion (arrears of Rs. 14 billion and out of current demand Rs. 47 billion), which is only 4% of total collection. The major contributors under withholding tax regime are: Contracts (Rs. 237.4), Imports (Rs 199.6 billion), Salaries (Rs. 129.4 billion), Bank interest & securities (Rs. 128.1 billion), Dividend (Rs. 55 billion), Telephone (Rs 54.6 billion), Electricity (Rs. 45.4 billion), Technical Fee (40.1 billion), Exports (Rs. 38.4 billion) and Cash withdrawal (Rs. 15.1 billion)—Table 10, Page 15 of Year Book for 2019-20.

The challenge before FBR is to enforce the law and get returns from all the taxable persons. According to Special Assistant to the Prime Minister (Minister of State) on Revenue, Dr. Waqar Masood, “around 7.4 million potential tax evaders have been identified”. In a telephonic interview published on October 27, 2020 by a leading English daily newspaper, he said: “These are potential taxpayers”. He further said: “On transactions worth billions of rupees”, citizens paid withholding tax e.g. on the purchase of properties, vehicles, and other luxurious items “but refuse to come into the tax net”. He added: “We have a very large population of prospective taxpayers in our database. We get 2.7 million returns of which one million are filing nil returns.” By triangulating the data of those filing returns from other databases, he said we “aim to ferret out millions of more taxpayers”. According to Dr. Waqar Masood: “Household and income expenditure survey shows 21 million individuals with annual household income of Rs. 400,000 or more, which is in the taxable limit, we have 6.4 million  NTN holders, which also shows a huge population of potential taxpayers, 5 million people are paying withholding taxes every year”.

Dr. Waqar Masood revealed that FBR had served “very polite” tax notices to 70,000 biggest asset holders excluding salaried persons. In clear terms, he admitted the extreme weakness in enforcement wing of FBR. The real potential of income tax filers, as claimed by Dr. Waqar Masood, can be judged from the following:

• 250,000 individuals out of one million filers declared NIL income but were found to have paid Rs. 20 billion in withholding taxes, which means their “transactions are worth over Rs. 200 billion”.
• The database of 7.4 million NTN holders showed that only 2.7 million filed tax returns while 3.7 million did not file returns for the last five years. It was detected that they paid Rs.100 billion in withholding taxes indicating that they were conducting transactions worth billions of rupees. 
• Data obtained from land authorities etc. showed 8.9 million individuals, out of which 7.4 million potential taxpayers are not filing returns. 
• 168,000 out of 272,000 registered sales tax establishments were filing income tax returns.
• Out of over 100,000 companies, only 45,000 filed returns.

The above portrays a pathetic situation about voluntary filing of tax retunes. It was mentioned in ‘There’s need for new tax model’, Business Recorder, February 26, 2021 that the poorest of the poor pay 12.5% advance income tax to FBR and 19.5% sales tax on services to provinces as mobile users but in return do not get even basic facilities of health, education, clean drinking water etc. from federal and provincial governments. According to latest data available on the website of Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on as on January 31, 2021 is 178 million (83.09% teledensity), out of which 93 million are 3G/4G subscribers (44.50% penetration), 2 million basic telephony users (1.3 teledensity) and 95 million broadband subscribers (44.6% penetration). At present, the entire taxable population and even those having no income or income below taxable limit are paying income tax at source as mobile users, yet FBR, lender/donors/media are engaged in a vicious propaganda that people of Pakistan are tax cheats. This is highly lamentable.

The above also reflects sadly on the failure of FBR to tax the rich and mighty despite having information confirming willful default and tall claims to take them to task. The coming days will show whether FBR succeeds or fails to get income tax returns and due tax from them. In the past as well huge numbers were mentioned time and again showing tax gap, but then the successive governments extended amnesties to the evaders and avoiders (for which FBR cannot be blamed), rather than punishing the delinquents and recovering due tax from them. The PTI Government has extended two amnesties since coming into power against its contrary claims to nab them. It is, thus, unfair to only blame FBR for the present sorry state of affairs. The real culprits are so-called legislators supporting the tax evaders and avoiders. Many of them stashed assets worth billions abroad and ex-chairman FBR coming from private sector has been supporting it as “legitimate” even till today.        

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