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FBR’s clarification re ‘dismal income tax collection’   

Rejoinder: Putting the record straight

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

In response to our article [FBR: dismal income tax collection, Business Recorder, November 11, 2022], the Federal Board of Revenue (FBR) on its website issuedClarification I on November 12, 2022, raising some questions and making a few observations. This clarification needs rebuttal, elaboration and further debate regarding non-taxation of the rich and mighty creating a huge dent in collection of income tax. This rejoinder is meant to further accentuate our point that in the name of direct taxes, FBR has been imposing indirect taxes, which in some cases amount to encroaching on the right of provinces under the Constitution of the Islamic Republic of Pakistan [“the Constitution”].

At the very outset, it is imperative to put the record straight that nowhere in our article, we made any analysis of the income tax collection of the first four months of the current fiscal year (FY) 2022-23 as FBR has not disclosed the detailed figures on its website for this period. Our article was based on the performance of FBR vis-à-vis income tax collection [not direct tax as wrongly assumed by FBR] in the FY 2021-22 on the basis of Year Book 2021-22 [Revenue Division, Ministry of Finance] having bifurcation of figures in detail.

While the FBR did not contest even a single figure we mentioned, it customarily chose to claim that “the present policy of FBR and the Federal Government is also based on direct tax dominated system i.e. the principle of equity where tax contribution is proportional to “ability to pay”. It is worthwhile to mention that we emphasised the irrefutable fact: “Non-collection of income tax from the rich and mighty is the root cause of many distortions in our tax system”.

Our above conclusion was based on official figures, released by the FBR itself, namely, Tax Expenditure Report 2022 [hereinafter “the Report”]. The Report available on FBR’s website shows that out of total tax expenditure for FY 2021-22 of about Rs. 1482 billion, income tax forgone was not less than Rs. 400 billion.

The important question is what was done by the Federal Government to eliminate or reduce this huge tax expenditure (especially income tax exemptions, waivers and concessions extended to the rich and mighty) rather than imposing controversial taxes of Rs. 250 billion through the Finance Act 2022, namely, “super tax, Capital Value Tax (CVT) on foreign assets, deemed rental income on the assets of the rich and higher rates for companies earning high profits such as banks”. Is it good tax policy to impose new highly controversial taxes (many have been challenged in the High Courts under Article 199 of the Constitution), rather than reducing tax expenditure even by a half?

Regarding FBR’s claim that “direct taxes collection continue to register steady growth and during the first four months of the current year direct taxes/income tax have risen to 886 billion which is 41% higher than the direct tax inflows during the same period last year”, we made no comments. We would be more than inclined to do so if FBR shares with us, in fact the public at large, the complete break-up of data, especially of income tax collection through all modes, as was done in the Year Book 2021-22.

As for indirect taxation through withholding tax regime in the Income Tax Ordinance, 2001, FBR’s contention to the contrary is untenable in view of undeniable facts and figures as well as on legal plank. First of all, from the legal perspective, it is quite obvious that income tax can be levied in lieu of income but not in addition to it. Suffice to just quote from the judgement of the Supreme Court, which is binding under Article 189 of the Constitution:

“If we were to construe Entry 52 of the Legislative List keeping in view the above meanings of the expression “in lieu of”, it becomes evident that the Legislature has the option instead of invoking Entry 47 for imposing taxes on income, it can impose the same under Entry 52 on the basis of capacity to earn in lieu of Entry 47, but it cannot adopt both the methods in respect of one particular tax. Since under sections 80-C and 80-CC the imposition of presumptive tax is in substitution of the normal method of levy and recovery of the income-tax, the same is in consonance with Entry 52”—Messers Elahi Cotton Mills & others v Federation of Pakistan & others [PLD 1997 Supreme Court 582].

In the light of above dictum, collections under the heads, contracts [Rs. 342 billion], imports [Rs. 282 billion] and exports [Rs. 65 billion], for FY 2021-22 [see Year Book 2021-22], cannot be in strictu senso called income tax. If we take these collections out of the total net income tax collection, after payment of refunds of Rs.54 billion, the figure comes to Rs. 1559 billion in FY 2021-22. Thus, the ratio of income tax to GDP is further reduced to 2.33% and share in total tax collection to 25.54%. This proves our point beyond any doubt that share of indirect taxes in FBR’s total collection in FY 2021-22 was as high as 75%.

FBR must provide data for the first four months of FY 2022-23 so that correct analysis can be made in respect of share of direct and indirect taxes in total tax collection. As per summary of fiscal operations issued by Ministry of Finance for July to September 2022, out of total tax collection of Rs. 1634 billion, direct tax was Rs. 683 billion (41%) and indirect Rs. 951 billion (59%). If income tax withheld on imports, contracts, goods and services is extracted being indirect in nature, the contribution of income tax will not be more than 25%. It is for the FBR now to present the data on its website to refute this point.

The last point related to tax-to-GDP ratio is also totally messed up by FBR as admitted in ‘Clarification I’: “Although, tax-to-GDP ratio is lower than what is desired, it is clarified that the current ratio is due to rebasing of GDP from 2005-06 figures to 2015-16 figures, thus adversely impacting it. With base year 2005-06, tax-to-GDP ratio would have been higher by at least 2 percentage points”. Needless to say that when everything is measured after rebasing of the GDP, it is naïve to say that performance is not satisfactory just because of this factor.

It is worthwhile to mention that in our article [FBR: dismal income tax collection, Business Recorder, November 11, 2022] it was mentioned: “Our policymakers need to study how the Indians increased their tax-to-GDP ratio from 9.9% to 18.3% in the last 10 years. Apart from many other successful initiatives, India utilised third party information that increased the capacity of Indian tax administration immensely and resulted in enormous revenue growth. On the contrary, we came down from 12.5% in FY 2017-18 to 10.3 in FY 2021-22 and official forecast for FY 2022-23 is just 9.9% as the will to collect taxes, especially income tax from the rich and mighty, has dwindled down to almost zero”.

In view of above, FBR stalwarts must read our article again, see things objectively and act upon the proposals aimed at bridging the monstrous tax gap of Rs. 7 trillion by forcing non-filers to file returns and not through imposing new and higher taxes on the existing taxpayers. FBR should not waste its precious time and resources for issuing baseless and unfounded clarifications on assumptions. For us, it is suffice to submit: we will keep on speaking the truth until the time you stop telling the lies!


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         


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