Vital disclosures are missing
Huzaima Bukhari & Dr. Ikramul Haq
Ever year Federal Board of Revenue (FBR) issues data relating to collection of taxes, administered by it, with analysis highlighting vital areas of achievements, weaknesses and other disclosures to adjudge its performance. In the latest FBR Year Book for 2019-20, there is no mention of total income tax returns received for tax year 2019 and persons registered under Sales Tax Act, 1990 until June 30, 2020. In FBR Year Book 2018-19, total income tax returns received for tax year 2018 till the date of finalizing the year book were shown as 2,666,256, out of which 43,246 were those of companies. 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 incremental increase in tax received 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”.
The citizens of Pakistan are not seeking any information about any particular taxpayer, which is protected under section 216 of the Income Tax Ordinance, 2001, but they only want to know the contribution of all income tax return filers for each tax year. They also want analysis of contribution made by all categories of taxpayers, namely companies, association of persons (AOPs) and individuals (salaried, non-salaried) as well as sector-wise tax paid by those engaged in business and profession. This data is not available in FBR Year Book for 2019-20.
It is pertinent to mention that out of total collection of income tax of Rs. 1523 billion, the contribution of 10 types of 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 argument that the staff of Inland Revenue Service (IRS) contributes by monitoring of withholding taxes is fallacious as proved below.
The bifurcation of major contributors under withholding tax regime is: 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. It is pertinent to mention that no bifurcation is given for as many as 56 withholding tax provisions prevalent during the relevant year. FBR claims that withholding taxes need strict monitoring for which it made efforts. If this is true then defaulting withholding tax agents must have been penalised and demand should have reflected in either current/arrears collection, or through a separate note, which is totally missing. It is still open for FBR to post on its website the details of any such actions as well as make public, the number of income tax returns and sales tax registered persons, category wise, as on June 30, 2020. It must also disclose the quantum of due refunds. In the Year Book for 2019-20 only refunds actually paid are mentioned.
In Year Book for 2019-20 FBR has claimed exceeding the third-time revised target of Rs. 3908 billion by Rs. 88.7 billion, collecting net amount of Rs. 3997 billion—direct taxes (1523 billion), sales tax (Rs. 1597 billion), Federal Excise (250 billion) and Customs: 626 billion). The refunds paid were: direct taxes (68.6 billion), sales tax (92.6 billion), federal excise (nil) and customs (12.2 billion). FBR officials on September 2, 2020, before the National Assembly Standing Committee on Finance confessed that actual liability of income tax and sales tax refunds as on June 30, 2020 was Rs. 710 billion (sales tax Rs. 142 billion and income tax Rs. 568 billion). The international Monetary Fund (IMF) after its first review seeing that FBR was far behind the original target of Rs. 5555 billion, agreed to revise it to Rs. 5238 billion, then to Rs. 4803 billion on the eve of incomplete second review, held prior to Covid-19 endemic, and after coronavirus outbreak, finally to Rs. 3908 billion. If the admitted refunds payable are deducted from the total tax collection of FBR for fiscal year 2019-20, the net figure comes to Rs. 3287 billion or just 7.7% of GDP.
The blame for unpaid refunds cannot be attributed entirely to the coalition government of Pakistan Tehreek-i-Insaf (PTI). In FY 2019-20, FBR paid total refunds of Rs. 173 billion as against the previous year’s figure of 122 billion. An amount of Rs. 70 billion was paid in respect of long-outstanding refunds through technical supplementary grant (TSG). The government of Pakistan Muslim League (Nawaz) blocked/consumed bulk of these refunds. This confirms showing of inflated figures by PMLN. Interestingly, this non-disclosure took place when Pakistan was under US$ 6.4 billion Extended Fund Facility (EFF) programme of IMF and they never detected it, rather appreciated the then Finance Minister, Ishaq Dar, now a fugitive, of showing remarkable growth in FBR’s collection. The IMF gave 13 waivers to PMLN since the signing of programme in September 2013 and ending in August 2016.
According to FBR Year Book 2018-19 : “The trend for filing of income tax returns has not been satisfactory in Pakistan. Keeping in view very low compliance, FBR had initiated a Broadening of Tax Base (BTB) drive few years ago, which has *now started paying dividends in shape of growth in the number of filers. The income tax returns which were just 1.5 million in TY 2016 have crossed the two million mark first time in the history of FBR. During TY 2017 the number of income tax filers reached to 1.9 million and in TY 2018 2.2 million (Table 7). During TY 2018 the number of return filers increased by 17.1% or 316,526 in absolute terms. This 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”.
*Wrongly appearing as “not” in the directory
No such information is disclosed in Year Book for 2019-20 for tax year 2019. There are many other vital non-disclosures which will be discussed in coming articles.
For everything blame cannot be put on officials of FBR. The successive governments, including the present one, have been giving amnesties, waiver, exemptions and asset whitening facilities that have eroded the tax collection. In fiscal year 2019-2020, total tax expenditure was of Rs. 1.5 trillion (Annex-II appended to Economic Survey 2019-20). If only 40% of taxes waived/forgone in fiscal year 2019-20 were recouped in Finance Act 2020, there would have been a fiscal space of Rs. 600 billion to reduce taxes. However, the PTI Government showed apathy towards the weaker sections of society and small/medium enterprises (SMEs), facing the unbearable toll of Covid-19 outbreak/lockdown by not reducing exorbitant sales tax, withholding taxes, advance tax, and high cost of utilities. They are still subjected to oppressive 12.5% advance/adjustable income tax from every mobile user. The total number of cellular subscribers as on July 31, 2020 was 167 million that included 81 million 3G/4G subscribers and 83 million broadband subscribers. They also pay 19.5% sales tax on services to provinces and 17% federal excise duty if based in Islamabad Capital Territory.
The need of the hour is to reduce the huge tax expenditure by withdrawing exemptions available to the rich and mighty, give relief to taxpayers as they suffered heavily during the lockdown due to Covid-19 endemic and pay all outstanding refunds, which is their right and not a favour. According to a Press report, before the National Assembly Standing Committee on Finance, “FBR showed its inability to release the refunds from its revenue collection and sought a supplementary grant to clear the backlog”. It is now the duty of PTI Government to resolve this issue on priority basis.
The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).