Accelerated tax collection

Abdul Rauf Shakoori & Dr. Ikramul Haq

“No government can exist without taxation. This money must necessarily be levied on the people, and the grand art consists of levying so as not to oppress“—Frederick the Great

Governments around the world operate with the responsibility to provide necessities to their citizen, which include food, healthcare, housing, education, and better infrastructure. The fulfillment of which is directly dependent on generating revenue through an efficient taxation framework that works as a lifeline for the economy.

In Pakistan, the Federal Board of Revenue (FBR), the apex authority at the federal level, works to collect revenue for the federation. The two major components of federal receipts are direct and indirect taxes. The main components of direct taxes are income tax collected from both corporate and individuals and capital value tax, whereas indirect taxes include general sales tax, federal excise, and custom duties. In an economy with an equitable taxation system, the share of direct taxes in total tax collection is always higher than indirect taxes—in underdeveloped and developing economies the reliance on indirect taxes is higher as is the case for Pakistan according to data available in FBR’s Year Book for fiscal year 2020-21. Advanced industrial countries like the United States, Belgium, Sweden, Japan, Austria, Germany, the Netherlands, France, Norway, and Switzerland are examples where the share of direct taxes is more than 60% of total tax revenues. In emerging economies like Turkey, Mexico, Brazil, and Korea, the contribution of direct taxes is gradually increasing and has reached around 45%. However, in Pakistan, according to official data, the share of direct taxation is around 39%—it has increased from 18% in the early 1990s to around 38% in 2019-20.

Successive governments in Pakistan have been striving to improve tax collection. However, none of the governments has introduced simplified tax legislation and improved tax administration, which are the main hurdles in efficient tax collection.  These steps alone can make the tax system progressive and create a business-friendly environment leading to an increased tax-to-GDP ratio. In recent years, FBR has undertaken multiple steps to meet the objective of maximizing tax revenues and safeguarding economic activities. The focus remained on documentation of economy by engaging sectors like real estate, wholesale, and retail to maximize the share of direct taxation. To add further ease of operations, FBR is working hard for automation of processes starting from registration to self-assessment. Digitization and transparency-related measures like track and trace, point of sale (POS) integration of retailers with FBR’s system, electronic appeal filing are major steps.  Currently, FBR is working towards personal income tax (PIT) reforms, reducing dependency of withholding taxes, removal of anomalies, preferential treatments and exemptions, sales tax harmonization so that revenue mobilization is achieved at a faster pace.

The first two years of the present coalition government of Pakistan Tehreek-i-Insaf (PTI), fiscal year (FY) 2019 and 2020 ended with low performance showing revenue growth of -0.4 % and 4.4%. However, revenue collection recorded a growth of 18.4% during FY 2021. In the current financial year, FBR has successfully maintained the momentum of its growth trajectory and achieved collection beyond its assigned targets. FBR collected Rs. 444 billion in February 2022. On a collective basis, net revenue collection from July 2021 to February 2022 is Rs. 3,800 billion which is more than Rs. 269 billion as compared to collection for the same period in the corresponding fiscal year. When compared to corresponding months of the previous year, increase in net revenue is Rs. 883 billion, depicting a strong growth of 30.3%. This was recently praised by the Prime Minister, Imran Khan.   

The figures of tax collection for eight months of the current fiscal year show substantial growth in tax collection that can be attributed to multiple factors such as depreciated exchange rate and higher imports as compared to the previous year. Most analysts criticize the government due to its unfriendly taxation policies and argue that the government has collected major taxes by taking away various exemptions available under the Sales Tax Act, 1990. The recent staff report, released by International Monetary Fund (IMF) while approving installment of US$ one billion highlights that the government under the plan should step up tax revenue collection efforts, and avoiding new preferential tax treatments or exemptions and reforming tax policy. In a recent mini-budget through Finance (Supplementary) Act 2022, the PTI government has introduced taxation measures of about Rs. 375 billion including uniform sales tax rates of 17% for different items.  

However, the significant increase in tax collection by FBR, on the one hand will offset the shortfall under non-tax revenues, which was mainly due to lower petroleum development levy, and increased spending, including on subsidies and grants to mitigate pandemic-related impacts, and on the other hand it would impact various businesses and common man due to rise in prices.

Despite written assurance to the IMF regarding the offering of subsidies, the PTI government has announced another subsidy to further increase its tax collection and bring the un-taxed under the net of taxation and interestingly, through Income Tax (Amendment) Ordinance, 2022. This is the third amnesty scheme offered by PTI government since it assumed power in August 2018. The government believes that this will help in boosting industrial activity and revival of ‘sick’ industrial units which are becoming a burden for the national economy. The amendment excludes sectors such as sugar, aerated beverages, cigarette manufacturing, explosives, arms manufacturing, etc. As per Income Tax (Amendment) Ordinance, 2022, a minimum investment of Rs. 50 million may be made in new industries on a ‘no questions asked’ basis from assets not declared up to the tax year 2021 by paying 5% tax thereon and the information furnished would be kept confidential irrespective of the provisions of the National Accountability Ordinance, 1999, Federal Investigation Agency Act, 1974. Through such measures documenting of the economy is compromised—it shows inability of the officials of law enforcement agencies responsible to investigate tax evasion related issues. Moreover, these steps also discourage honest taxpayers and citizens who have been regularly and honestly discharging their national duty of paying taxes and conveying the message that the system is inclined towards those who breach and disrespect the tax system.

In the last few years, Panama Leaks to Swiss Secrets, hundreds of Pakistani nationals were part of these offshore papers. The government of Pakistan was under obligation to think to improve their mutual cooperation with concerned governments for tracking down the offshore bank accounts of Pakistani nationals. Moreover, despite opting for membership of the Organization for Economic Cooperation and Development (OECD), a Multilateral Convention on Mutual Administrative Assistance in Tax Matters aimed at curbing growing tax evasion. Unfortunately, we have failed to utilize this avenue as well which on the one hand improves our greater international cooperation and can ultimately help in tightening up efforts against tax evaders and on the other hand can have a visible impact on maximizing the revenue.  It is not too late. The government needs to approach the concerned jurisdiction, sign mutual cooperation treaties with them and catch tax evaders.  These financial data leaks can be of great help in straightening our affairs and can be used as an initial step in combating financial crimes including tax evasion.

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Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. Dr. Ikramul Haq, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions, with Huzaima Bukhari.