Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan has one of the world’s lowest tax ratios, stemming from five main weaknesses: complexity, a narrow tax base, low compliance, inefficient tax administration, and low and declining provincial tax revenues. Complexity provides scope for discretion and corruption. A narrow tax base and low compliance are the outcomes of inequitable exemptions and preferential treatments, low tax registration or filing, and massive tax evasion by potential taxpayers that prefer to stay informal. Provincial taxation is low and declining. For its part, nontax revenue is also declining—Pakistan Policy Note 16: Mobilizing Revenue, Jose R. Lopez-Calix and Irum Touqeer, The World Bank
The Federal Board of Revenue (FBR), despite “extraordinary” (sic) efforts has failed to meet the half-yearly target of Rs. 3.65 trillion for the current fiscal year. It is not something new—except for the previous fiscal year [2021-22] FBR rarely achieved the originally-assigned targets. In fact, FBR could not even achieve the revised targets in many years resulting in more than anticipated fiscal gap by the budget makers.
It is worthwhile to mention that FBR never reveals data of determined refunds not issued (deliberately blocked is better connotation) during a fiscal year. In other words, to that extent, collection is overstated—this aspect is highlighted repeatedly in these columns but till date no independent audit is conducted to this effect by the Auditor General of Pakistan, even though it is a constitutional responsibility.
There exists a national consensus about huge tax gap in Pakistan partly because of weaknesses in enforcement and partly due to bad tax policy. On January 2, 2023, FBR’s website showed a total of 3,925,497 persons on Active Taxpayers List (ATL)—updated every Monday. It may be noted that December 31, 2022 was the last date for filing returns for all categories of taxpayers in Pakistan. The data available on ATL show individuals return filers at 3,707,957 and only 211,211 returns filed by companies, firms and association of persons (AOPs) combined. Unfortunately, till the time of writing these lines, FBR did not convey (though requested), the total returns filed for tax year 2022, tax paid with returns and refund claimed. Hopefully, these statistics will be made public by FBR soon—to know such information is the fundamental right of every citizen under Article 19A of the Constitution.
In a Press release issued on December 31, 2022, FBR claimed: “….demonstrated a remarkable revenue collection performance…collected Rs. 3428 billion for the first six months against Rs. 2929 billion collected in the corresponding period of last year depicting an increase of 17%. FBR collected Rs. 740 billion for the month of December 2022 against Rs. 599 billion in the same month last year showing an impressive growth of almost 24% as compared to the same month last year. This performance is despite huge import compression and zero rating on petroleum”.
FBR is required to collect 21% more taxes than the last year to meet the target of Rs. 7.47 trillion whereas growth rate mentioned in the Press release is 17%. The gap in monthly tax collection conceded by FBR is Rs. 225 (December 2022 target was Rs. 940 billion whereas provisional collection is shown as Rs. 740 billion). It is further claimed in FBR’s Press release: “…Direct taxes collection for the first six months has also registered an unprecedented growth of 49%. This was achieved despite the fact that certain policy interventions having revenue impact of Rs. 250 billion introduced through Finance Act 2022 could not be implemented as these are subjudice in the courts. Target for the month of December was Rs. 965 billion which could not be achieved due to the aforementioned reason”.
The comments on extraordinary growth of 66% claimed by FBR in direct tax collection during the month of December 2022 (49% in six months) will be made when bifurcation is given of income tax collected under various withholding provisions, advance income tax, and amount paid with returns, for which request was lodged with FBR on January 3, 2023. It is worthwhile to mention that according to a Press report, “Of Rs1.1 trillion that the FBR collected, on account of income tax during the July-November period, Rs734 billion were collected by those who are not employees of the FBR. The amount paid as advance income tax by taxpayers is over and above this collection”.
The real performance of FBR in direct tax collection should be judged on the basis of new taxpayers added and recovery out of current and arrear demands. It appears from figures quoted in the Press report that overwhelming portion of income tax collection is still coming through withholding provisions, advance tax and tax paid with return voluntarily. The report further claims: “According to details, the phenomenal increase in income tax rates in the budget has turned out to be the main reason behind an over 40% increase in tax collection during the July-November 2022 period”.
As per Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on November 30, 2022 was 194 million (86.70% teledensity). Out of these, 121 million were 3G/4G subscribers (54.15% penetration), 2 million basic telephony users (1.20 teledensity) and 124 million broadband subscribers (56% penetration). Not less than 110 million unique mobile users (many having multiple SIMs) are thus paying advance/adjustable income tax of 15% (earlier 12.5%) from July 1, 2022. The number was not less than 105 million as on June 30, 2022 and about 100 million at the close of June 2021. It means that FBR could have found at least 30 million taxable persons from this database—all were paying advance/adjustable income tax. The number of individual tax filers on ATL is even less than 4% unique mobile users paying advance income tax under section 236 of the Income Tax Ordinance, 2001.
The above data/facts prove beyond any doubt that presently, the entire taxable population and even those having no income or income below taxable limit are paying advance/adjustable income tax at source as mobile users. If all file income tax returns, there will be refund payable to at least 80 million having no income or income below taxable limit though cost to claim will be much higher than withheld tax—sadly, FBR does not acknowledge them as “taxpayers” and even not ready to pay refunds to existing income tax filers.
The State must collect taxes where due and not in advance or from those not chargeable to tax. Provision like section 236 and many others providing withholding of taxes on transactions rather than real incomes reflect a bad tax policy—anti-poor and contradictory to FBR’s claim of increasing direct taxes by diligently taxing the rich and the mighty.
The coalition government of Pakistan Tehreek-i-Insaf (PTI) resorted to oppressive taxation during its rule [August 2018 to April 2022]. Now its successor, alliance government of Pakistan Democratic Movement (PDM), is doing the same. It is high time that the state stop taxing the less-privileged and downtrodden. Why are the poor still subjected to oppressive taxes like 75 paisa for cell call exceeding 5-minutes and 15% advance income on mobile and/or internet use from July 1, 2022? The rich and mighty are yet enjoying tax-free perquisites and benefits of billions of rupees.
Heavy taxation on electricity bills and a number of food items and those of daily use by the citizens is completely unjustified when tax expenditure remains above one trillion rupees in the last many years. Tax credits for senior citizens and special people that were available before the enhancement of tax rates by Finance Act, 2019 should have been restored by the PDM government in 2023 budget, but it failed to do so. It should be done in the forthcoming Money Bill through a Presidential Ordinance, reportedly on card. Amendment in the Income Tax Ordinance, 2001 for compulsory registration of unique mobile users by FBR and payment of refunds without application, through bank account of a person [those having no bank accounts can be paid through mobile wallet] should also be made.
Prime Minister Shehbaz Sharif must take personal interest in the proposed amendment and order FBR to pay refund of adjustable tax collected in advance from 80 million mobile users having no or non-taxable income during the last 5 years. If it is done, the PDM will secure support of 80 million in the next election. Tax refunds will be a great gesture on the State’s part in helping all those earning no income or income below taxable limit in these very difficult economic days. In addition, we will have data of about 110 million adults—already verified through biometric system—to ascertain their socio-economic status and register many as missing voters. It will also help in planning targeted subsidies in a transparent manner.
Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE).
Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have coauthored a book, Pakistan Tackling FATF: Challenges and Solutions