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Dr. Ikramul Haq
While speaking at the one-day conference, ‘Doing Taxes Better: Shifting the Paradigm of Tax Policy and Administration’, organised by Pakistan Institute of Development Economics (PIDE) on March 11, 2020, Ms. Teresa Daban Sanchez, the Resident Chief of International Monetary Fund (IMF) in Islamabad, said that “Pakistan’s tax collection is 62 percent below than its potential but this level of FBR collection is equivalent compared to peer regional economies”.
Tax gap of a country is measured by the amount of tax that remains uncollected due to non-compliance with tax laws. In 2008, a study, ‘Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology’, was jointly undertaken by the Federal Board of Revenue (FBR) and Andrew Young School of Policy Studies at Georgia State University. It provides existing gaps in various taxes relating to fiscal year 2004-05. Since then no empirical study has been done to quantify year-wise tax gap vis-à-vis efforts to bridge the same. The same is true for multiple tax agencies working at provincial levels.
Ms. Sanchez pointed out that FBR has “excessive reliance of tax collection on imports because that are easy to collect”. She said: “The country collects around 50 percent revenues at import stage including Customs Duty, Withholding Tax, GST, Additional Customs Duty and Regulatory Duty”. According to her, “The complexity and distortions into tax system are making the tax structure complicated”.
The issues raised by Ms. Sanchez and other speakers have been highlighted frequently in these columns. The fact of underperforming and main reliance on withholding taxes is even admitted by FBR in FBR Year Book 2018-19: “Higher reliance on withholding taxes and within withholding taxes a high concentration on few items makes the income tax revenues vulnerable”.
Undoubtedly, the prevailing tax system is unjust and unproductive: high taxes, yielding low revenues, made worse by complex, time-consuming and costly operational procedure. It is not taxing the people according to their ability to pay but relying mainly on withholding and/or indirect taxes, taxing even those transactions that have no nexus with income, sale of goods and rendering/providing of services. There are numerous indirect taxes levied under Income Tax Ordinance, 2001 (presumptive/minimum regimes etc). Resultantly, the incidence is higher on low-income groups than on the high-income earners, who also keep on getting amnesties, asset-whitening schemes, waivers, concessions and exemptions. Even millions having none or below taxable income are paying advance income tax @ 12.5% as mobile phone users.
The tax system not only favours the rich but huge chunk of collection funds unprecedented benefits available to the militro-judicial-civil complex and politicians in power, whereas common citizens do not get essential social services. Thus, the main cause of ever-increasing budgetary gap is not revenue inadequacy but monstrous size of current expenditure. While the rich evade/avoid tax obligations (avail amnesties instead), the rulers waste enormous funds on perks/benefits, non-productive projects, instead of improving human capital and infrastructure for growth and prosperity.
The faulty tax policies, highlighted at PIDE’s conference, are not only retarding growth but also making our economy, especially exports, uncompetitive. Regressive taxes, while increasing miseries of the downtrodden, encourage concentration of wealth in a few hands. What makes the situation more painful is the fact that common citizens are deprived of even basic entitlements guaranteed under the Constitution and Universal Declaration of Human Rights.
It is a fact that successive governments, instead of nabbing tax evaders, facilitated them through amnesties. Tax Directories of Tax Year 2013 to 2018 show that less than 50% registered companies file tax returns. For tax year 2019, 40,988 companies filed returns by February 28, 2020 as FBR’s own admission, whereas those registered with SECP, liable to file returns for tax year 2019, were 1,02,864. This high non-compliance rate of corporate sector was almost the same in early years, but FBR failed to punish defaulters for open defiance of section 114 of the Income Tax Ordinance, 2001!
The majority of parliamentarians, though enjoying luxurious living, just show remuneration from the State as their only source of income. FBR has evidence of their assets/expenses but never probe/audit their tax affairs. The income/expenditure/asset declarations of judges/military-civil high-ups, who enjoy unprecedented tax-free benefits, concessions and exemptions, are not made public, even though citizens have fundamental right under Article 19A of the Constitution to access the same.
FBR has miserably failed to bridge the tax gap, registering all business houses, property owners, checking leakages and rampant corruption within their ranks. At present, millions having below taxable incomes or no income are paying income tax at source, yet FBR is engaged in a vicious propaganda that people of Pakistan are tax cheats! This is highly lamentable, especially when small traders using commercial electricity connections are paying advance income tax under section 235 and about 95 million mobile users [total subscribers were 167 million by end December 2019] under section 236 of the Income Tax Ordinance, 2001. It is an undeniable fact that FBR has miserably failed to get due tax from the rich—its main emphasis is on withholding taxes that is borne even by millions having incomes below taxable limits.
It is not FBR’s inefficiency alone that Pakistan has failed to tax massive untaxed/undeclared wealth, stashed at home and abroad, as the Governments of Pakistan Muslim League (Nawaz) and Tehreek-i-Insaf (PTI) both gave amnesties to evaders, causing loss of billions of rupees. If they were taxed as per law, collection could have been Rs. 6 trillion, even more than original target of Rs 5.5 trillion (now reduced to Rs. 5.2 trillion) for the current fiscal year.
Pakistan is quite capable of collecting Rs. 8 trillion at federal and provincial levels provided systems are fully automated, all tax agencies are merged into single National Tax Agency (NTA), leakages are plugged and all exemptions/concessions to the privileged classes are withdrawn. The banks, mobile companies and entities preparing utility bills that collect advance taxes on behalf of FBR are fully computerised. By using their database, FBR can easily determine fair tax base and recover taxes due from the defaulters/evaders/avoiders.
A fully automated NTA, manned by All Pakistan Unified Tax Service, can effectively collect taxes levied at federal and provincial levels to be distributed as per constitutional scheme. Autonomous NTA must be equipped with modern data collection/mining tools, competent staff that acts as facilitator but makes collection justly/firmly, based on evidence and not on conjectures. Simplified harmonised sales tax on goods and services at 10% can fetch about Rs. 5 trillion. In 2018-19, FBR collected Rs. 1.45 trillion sales tax on goods and all provinces collectively less than Rs. 500 billion on services. Customs collection faces issues of smuggling/under-invoicing/mis-declarations etc—causing huge loss to exchequer/hurting open markets. Viable solutions were suggested at PIDE’s conference and if the coalition Governments of PTI in centre and in three provinces and PPP in Sindh are serious to generate sufficient resources to make Pakistan prosperous, they must consider these seriously—already we are suffering by not undertaking long-overdue/much-needed reforms in all areas of governance, and taxation is no exception.
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The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS).