Critique of tax policy  

Dr. Ikramul Haq

Fiscal consolidation should be as growth-friendly as possible. In general, tax base-broadening reforms are identified as growth-oriented reforms. To the extent that they reduce distortions to economic decisions on work, saving, investment and consumption, they should increase output and improve social welfare—Choosing a Broad Base–Low Rate Approach to Taxation, OECD Tax Policy Studies No. 19 

Fiscal consolidation is one of the daunting challenges faced by Pakistan. Successive governments have failed to end harmful tax policies and reduce wasteful expenses. No serious effort has been made by any government to broaden the tax base through lowering of rates and effective enforcement. It is an undisputed fact that Federal Board of Revenue (FBR) has miserably failed to tap the real tax potential despite imposing all kinds of oppressive taxes. Whenever there is a demand or debate about simplification of tax codes and improvement in tax administration, the worst resistance comes from top officials of FBR, who think they are the ultimate wizards and nobody else has a right to talk about tax base-broadening reforms aimed at accelerating economic growth, promote investment, boost up savings and to ensure fiscal consolidation. These self-acclaimed wizards must read ‘OECD Tax Policy Studies No. 19’, crux of which is quoted above.

An in-depth analysis of Year Book 2017-18 of FBR exposes the tall claims of expanding tax base, extraordinary growth in collection and improving tax-to-GDP ratio to a satisfactory level (9% in FY 2013-14 to 11.2% in FY 2017-18). The reality is known to all—higher (sic) collection was due to exorbitant sales tax on POL products, due to over 65 withholding income tax tax provisions and enhancement of their rates, blocked refunds of billons and by taking advances from taxpayers. It appears that the sordid story of collection through withholdings and advances will continue even under the government of Tehreek-i-Insaf (PTI) as it took no corrective measure in the two supplementary finance bills, presented in the Parliament after coming into power.    

FBR has been single handedly destroying Pakistan’s business climate, especially between 2013-18 when the then Finance Minister, Ishaq Dar, now a proclaimed offender of the Accountability Court, gave free hand to tax officials to block bona fide refunds, take huge advances, use negative measures like raising illegal and exorbitant demands and freezing bank accounts even before appellate orders. Exporters and other taxpayers are still waiting for refunds and PTI Government like its predecessors is delaying the same. Had Ishaq Dar and others concentrated on growth of 7% and above, as done by China, India and Bangladesh in the region, we could have avoided the present fiscal and economic mess—taxes are a byproduct of growth and harsh taxation only hampers expansion and discourages fresh investment and expansion of existing businesses.     

The main reliance of FBR since 1991-92 has been on indirect taxes, even under the Income Tax Ordinance, 2001 that contains over 65 withholding tax provisions, many of which constitute full and final tax liability. Out of total collection under withholding provisions of Rs. 1047 billion in FY 2017-18, the element of full and final taxation (indirect tax in substance) was 64 percent!

For the fiscal year, 2017-18, revenue target was Rs. 4013 billion that was later revised downward to Rs. 3935 billion. FBR collected only Rs. 3842 billion. It is an undeniable fact that FBR has failed to get due tax from the rich and mighty and thus its main emphasis is on withholding taxes (WHT). FBR’s Year Book 2017-18 concedes that “WHT contribute “a major chunk i.e. 65% to the total collection of income tax”. It adds that “the WHT collection during FY 2017-18 has been Rs. 1047 billion against Rs. 944 billion indicating a growth of around 10.9%”. The actual contribution of WHT is 68.5% that is 3.5% more than what FBR has claimed in Year Book 2017-18.  

FBR’s own efforts (collection on demand) yielded only Rs. 102.82 billion (6.7%)—from arrears Rs. 17.69 billion (1.2%) and from current demand Rs. 85.13 billion (5.6%). It confirms negligible share on the part of FBR to tap the actual tax potential as it would have been hurtful to the rich, majority of which are non-filers, despite having substantial undeclared, untaxed wealth and the audacity of ruling this country as a matter of right. They are ready to pay additional tax at source as non-filers but are not inclined to file tax returns.

The total revenue collection in 2016-17 was Rs. 3368 billion. FBR missed the original target by a wide margin of Rs. 250 billion. In 2015-16, FBR, despite imposing additional taxes of Rs. 360 billion, allegedly blocking over Rs. 220 billion refunds and taking Rs. 30 billion as advance failed to meet the third-time revised target showing shortfall of Rs. 222 billion vis-à-vis original target of Rs. 2810 billion, which was first reduced to Rs. 2691 billion and then to Rs. 2605 billion.

FBR has a long history of overstating revenue collections by manipulating figures through blocking bona fide refunds and taking enormous advance payments from banks and other large taxpayers. Way back in 1999, ‘revenuecracy’ (term borrowed from Dr. Pervez Tahir) inflicted shame on the country by gross misreporting of data to the IMF. Subsequently, a commitment was made to the IMF to review fiscal data from financial year 1989-90 onwards. The data compiled for financial years 1994 to 2000 confirmed that tax revenues were inflated by billions of rupees. The tax collectors—data manipulators is a more appropriate term for them—showed higher tax collections through fudging of figures and the nation had to pay a heavy cost for it (not only in terms of fine paid to the IMF) but by further the image of the country tarnished in the international community that nothing is transparent here.

The persistent manipulation of revenue collection figures has been a serious, but neglected matter. Time and again independent analysts and foreign institutions have expressed their indignation over this malpractice, but the successive governments have never ordered any inquiry into the matter. Never ever has FBR disclosed in its collection statements how much undisputed and established refunds remained unpaid on the closing date of the fiscal year, which must be subtracted from the gross revenue receipts to portray the correct net revenue collection. It only mentions the actual refunds issued, whereas accrued and ascertainable liability of refunds should also be taken into account to reflect the true picture of net revenue realised during a financial year. Mr. Asad Umar, who claims to believe in transparency, has also not made public the true facts for 2013-18?

According to a report of Groupe Speciale Mobile (GSMA), there were 90 million unique mobile users in 2017-18 that had been paying advance adjustable income tax of 12.5%. However, about only 1.81 million filed income tax returns. 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 substantial number of return-filers since 2007 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 happier to pay more by way of advance tax rather than file returns! 

This year, despite spending huge money on media campaign “threatening non-filers” and extending the deadline for filing income tax returns from September 30, 2018 to April 30, 2019, the FBR until 15.04.2019 received merely 1.81 million returns. If this is an “impressive” increase then one can only lament and laugh at FBR’s performance. The position of returns filed from 2007 to 2018 is as under:

Income Tax Return Filers (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	1.52
2014	1.46
2015	1.12
2016	1.02
2017	1.81
2018	+1.80 ( Exact figure is yet not disclosed by FBR as date for  filing returns has been extended to April 30, 2019)

On February 22, 2019, the Government of PTI published two tax directories—‘Parliamentarians Tax Directory’and ‘Tax Directory for the year ending 30 June 2017’ (these have been tabulated from returns filed manually and electronically till February 21, 2019 for tax year 2017). As per previous practice, these could have been published by the end of February 2018. However, the last government of Pakistan Muslim League (Nawaz) delayed it without any valid reason.

The PTI Government could have published consolidated directories for tax year 2017 and 2018. The delay of one year gave a chance to the PTI Government to include all the returns filed for tax year 2017 till February 21, 2019—much after the last date of filing of returns for all categories of the taxpayers, namely, companies, Association of Persons (AOPs) and individuals. According to Active Taxpayers’ List (ATL) updated by Federal Board of Revenue (FBR) on March 1, 2019, total number of returns filed for tax year 2018 was 1,596,340. The figure for tax year 2017 was 1.81 million. The PTI Government extended the date of filing of returns to April 30, 2019, hoping that it will receive two million returns, but till April 15, 2019, the figure is not even 1.85 million.

It is strange that FBR in its annual year books does not give total number of income tax filers and total number of registered sales tax persons on the closing date of every financial year for which it highlights its performance. For the sake of transparency, they must give on website historic and current up-to-date data of return filers and sales tax registered persons as early as possible. Hopefully, the Finance Minister, Asad Umar, and State Minister for Revenue, Hammad Azhar, will take note of it.

As per provisional results of 6th population and housing census-2017, total population in 2017 was 207,774,520. Out of total population, 60% were in the age group of 20-24 years and 60million were below the age of 15 (dependents). 30 million were chronic poor earning less than two dollars a day. Our labour force, tenth largest in the world, was around 65 million, out of which 56.5 million were employed. Rural labour force of 55.5 million was earning below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance, 2001.  Reading all these facts together, total persons liable to income tax could not be more than 5 million whereas FBR has been extorting income tax at source from over 95 million active/unique mobile users alone—a step that was stayed by the Supreme Court in a suo muto case!

At present the entire taxable population and even those having below taxable incomes are paying income tax at source, yet FBR is engaged in a vicious propaganda that people of Pakistan are tax cheats and that our tax base is narrow! This is highly lamentable on the part of FBR and PTI Government should take note of it, rather than playing in the hands of Revenuecracy—a term coined by Dr. Pervez Tahir.

All commercial electricity users pay advance income tax under section 235 of the Income Tax Ordinance, 2001 with their bills, and tax paid up to annual bill of Rs. 360,000, is treated as minimum tax with no claim to a refund! In the presence of this section, read with section 181AA, was there any need to impose tax on banking transactions by non-filers?

A report, ‘Doing away with the transactional tax’,Business Recorder, October 30, 2018, says: “The idea of the transaction tax was two folds—one was to increase the tax revenues and the other was to incentivise the non-filers to file by penalising them. But the adverse impact of documentation was not well thought of. Spanning over three years, neither the tax revenues increased significantly nor the tax filing enhanced meaningfully. On the flip side, the informality in the economy increased disproportionately”.

Why FBR wants tax returns from even those who have no taxable income? This is against the supreme law of the land—Article 4(c) of the Constitution which says:   “no person shall be compelled to do that which the law does not require him to do”. More “filers” mean more “speed money”, more earnings for unscrupulous tax advisers —majority comprising lower staff (working evenings with unscrupulous consultants) and even some high-ranking officers of FBR.

In Pakistan, the ultra-rich are avoiding tax obligations whereas millions having no income or incomes below taxable limit have been forced to pay advance tax. It is gross violation of their fundamental rights. Why should poor people engage a tax adviser to file return and pay money to get some refund? FBR owes an open apology to the people of Pakistan for criminal negligence in reporting incorrect figures regarding income taxpayers in Pakistan. Out of total income tax collection during 2016-17, the percentage of withholding taxes and voluntary payment is 90%. It proves beyond any doubt that blame shifted to business houses, especially SMEs, for alleged non-payment of taxes, is just an eyewash.

The crumbling, inefficient and corrupt tax apparatus is the root cause of the present scenario. Tax officials persistently squeeze and penalize existing taxpayers on the one hand but on the other, join hands with and protect big tax evaders—massive over and under invoicing is not possible without their connivance. Small business houses, already heavily taxed through withholding tax mechanism are victims of their highhandedness. It is high time that FBR should check its own working and stop malicious propaganda against the people in general and business community in particular.

It is FBR’s own failure to enforce provisions relating to filing of returns by people having taxable income, for which it cannot blame the public at large. Are the people of Pakistan responsible for this pathetic performance? The responsible officials of FBR should be taken to task for this gloomy state of affairs. It is high time that FBR should put its own house in order and enforce tax laws across the board rather than blaming the already over-taxed people of Pakistan for its own managerial fiascoes and established record of protecting the rich and mighty. It must be remembered by all that non-collection of tax where due is as detestable as its collection, where it is not due.

The prevailing tax system is unjust, outmoded and unproductive with high taxes, yielding low revenues and operationally complex, time-consuming and costly. It is not taxing the people according to their ability to pay but relies mainly on indirect taxes that are regressive, as these take a much larger percentage of income from low-income families than from high-income earners. For implementation of fundamental structural reforms and fixing the ailing tax system, there is a need for political consensus, three-core stakeholders (tax administration, taxpayers and policymakers) to be on board, parliamentary commission to evolve broad national consensus, and need to strengthen fiscal analysis capacity at FBR and Revenue Division of Ministry of Finance along with twin-track improvement mechanism of tax policy and tax administration.

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The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS).