Huzaima Bukhari & Dr. Ikramul Haq
An unusual decline in revenue collection and steep rise in current expenditures caused a deterioration in all major fiscal indicators during FY19. The overall budget deficit during the year stood at a historic high of 8.9 percent of GDP, which was also in excess of the 4.9 percent target set in the Budget 2018-19. Meanwhile, the primary and revenue balances worsened substantially, highlighting growing debt stress for the government and a shrinking space for the needed development expenditures—State Bank of Pakistan, Annual Report 2018-19—The State of Pakistan’s Economy
In ‘Flawed tax reforms agenda’, Business Recorder, 15 & 21 November, 2019, it was mentioned that Federal Board of Revenue (FBR), under the leadership of Syed Muhammad Shabbar Zaidi, a renowned chartered accountant and tax expert, failed to publish its annual year book for fiscal year (FY) 2018-19 even after a lapse of many months. It is now uploaded—online version is available at the website of FBR. It needs to be highlighted that Shabbar Zaidi has only served for less than two months during the last fiscal year 2018-19—he took charge on May 10, 2019 in pursuance of notification issued on May 9, 2019, appointing him Chairman FBR for two years on honorary/pro-bono basis. His performance for the full year will be reflected in Year Book 2019-20 when published after close of the current fiscal year.
The target assigned to FBR for FY 2018-19 was Rs. 4435 billion, which was revised downwards twice [first to Rs. 4398 billion and then to Rs. 4150 billion].According to FBR Year Book 2018-19 , FBR collected Rs. 3828.5 billion which was “0.4% lesser than the collection of previous fiscal year”. This has pushed the fiscal deficit to all time record of over Rs. 2.5 trillion for fiscal year 2018-19. It has nothing to do with the policies of the Government of Pakistan Tehreek-i-Insaf (PTI)—in fact baggage was passed on to them by the so-called economic wizards of Pakistan Muslim League (Nawaz) who ruled Pakistan from 2013-2018. They have many self-acclaimed experts, most notable, Muhammad Ishaq Dar (now a fugitive) and Ahsan Iqbal, claiming to make Pakistan Asian Tiger by 2020 and to become 10th largest economy through Vision 2025!!
In our article [Flawed tax reforms agenda] we observed as under:
FBR closed fiscal year 2018-19 under renowned tax expert, Syed Muhammad Shabbar Zaidi, and it is hoped that for the first time correct disclosure of collection figures will be provided to the nation after deducting the actual amount of refunds payable—withheld for years merely to show ‘extraordinary performance’ (sic) by stalwarts of FBR. Not only true disclosure is essential but all due refunds should be paid with compensation without any further delay. Stringent action should also be taken against those who criminally avoided giving appeal effects in favour of taxpayers, blatantly violating order of the higher courts and Tax Tribunals.
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, Mr. Shabbar Zaidi will take a serious note!
In the light of above note, for the first time, FBR disclosed details of income tax returns filed historically as under:
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 not 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. The desk audit of filed returns can be helpful in increasing the amount paid with returns.
An analysis of FBR Year Book 2018-19 reveals the following:
- “The target for FY 2019-20 i.e. Rs.5503 billion requiring around 43% growth, is highly challenging, which would be possible only through extraordinary concerted efforts by the senior FBR management and field formations”.
- FBR has collected Rs. 3,828.5 billion during FY 2018-19 against Rs. 3,843.8 billion during FY 2017-18 indicating a negative growth of 0.4%. The revised revenue target of Rs. 4,150 billion was achieved to the extent of 92.3%. The direct taxes, sales tax, FED and customs missed their respective targets by 12.9%, 2.1%, 10.5% and 6.7% respectively.
- During FY 2018-19, FBR has missed the target by around Rs. 321.5 billion mainly for the following major reasons:
- Petroleum (-) Rs. 96 billion
- Telecom—Suspension of withholding tax by Honorable Supreme Court (-) Rs. 55 billion
- Reduced Government Spending (-) Rs. 80 billion
- Import compression (withholding at import stage) (-) Rs. 16 billion
- Reduced rates on salary income announced in the Budget 2018-19 (-) Rs. 50 billion
- Reduction in Customs Duty (-) Rs. 50 billion
- As per the collection FY 2018-19, sales tax is the top revenue generator with 38.1% share followed by direct taxes with 37.8%, customs 17.9% and FED 6.2%. During FY 2018-19 the share of customs duty and FED has increased, whereas the share of direct taxes and sales tax has decreased slightly.
- The overall growth in collection remained dismal during FY 2018-19. The overall collection ended at (-) 0.4%, which is Rs. 15.3 billion lesser than the collection of FY 2017-18.
- During FY 2018-19 refunds of around Rs. 121.6 billion were paid, as compared to around Rs.154.7 billion in FY 2017-18. The refund amount paid during FY 2018-19 is 33.1 billion less as compared to previous fiscal year (PFY).
- Direct taxes have contributed 37.8% to the total tax collected during FY 2018-19. Net collection stood at around Rs. 1,445.4 billion reflecting a growth of (-) 5.9 % over the PFY collection of Rs. 1,536.6 billion. An amount of Rs. 83.9 billion has been paid back as refund to the claimants in FY 2018-19 as against Rs. 69.5 billion during FY 2017-18. Collection of income tax comprises withholding taxes (WHT), Advance Tax/Payments with Returns and collection on demand (COD). Collection from arrear demand and current demand has been Rs. 18.7 billion and Rs.84.2 billion respectively during FY 2018-19. Collection from current demand showed negative growth of (-)1.1%.
- Advance Tax/Payments with Returns under the head income tax: Rs. 384 billion was collected during FY 2018-19 as compared to Rs 374 billion in the FY 2017-18. Major component of this mode of payment is Advance Tax where a sum of Rs 344.2 billion stood collected as against Rs. 335.8 billion in FY 2017-18 registering a growth of 2.5%. The second component is payment with returns, where a sum of Rs 39.3 billion has been collected during FY 2018-19 against Rs. 38.1 billion in FY 2017-18 registering a growth of 3.0%.
- WHT contributes a major chunk i.e. 67% of the total collection of income tax. The WHT collection during FY 2018-19 has been Rs. 960.7 billion against Rs. 1047 billion indicating a negative growth of 8.2%. The nine major components of withholding taxes that contributed around 80% to the total WHT collection are: contracts [Rs. 235.4 billion], imports [Rs. 221.8 billion], salary [Rs. 76.4 billion], telephone [Rs. 17.1 billion], dividends [Rs. 57.0 billion], bank interest [Rs. 58.1 billion], cash withdrawal [Rs. 32.0 billion], electricity [Rs. 35.5 billion] and exports [Rs. 34.4 billion]. As far as growth is concerned, collection from bank interest grew by around 27%, exports (22%), electricity bills (5%), imports (1%) while rest of the items recorded a negative growth in collection. The highest contributor in withholding taxes is contracts with 24.5% share, followed by imports (23.1%) and salary (8%). Further break-up reveals that the share of only two heads of WHT i.e. contract and imports is around 48% and further addition of withholding tax on salary raises the share of these three items to more than 55% of the total withholding taxes, showing high reliance on fewer heads.
- Higher reliance on withholding taxes and within withholding taxes a high concentration on a few items makes the income tax revenues vulnerable. Moreover, taxing the already taxed, is a regressive approach which creates burden on the compliant taxpayers hence, FBR is focusing on working out a plan to diversify the base of income tax in the country.
- Direct taxes are collected from manufacturing, services, construction, whole sale and retail trade, transport and mining and quarrying. Major contributor is manufacturing sector with around 34.5% share in direct tax collection. Second major contributor is the services sector with around 24.2% share in collection. The share of wholesale & retail trade and transport sector is 2.9% and 2.3%, which is in fact very low as against the existing potential in the country.
- Wholesale and Retail Trade sectors together paid Rs. 48.2 billion: Large Retail Trade (7.9 billion), Small Retail Trade (9.7 billion) and Wholesale Trade (25.1 billion).
- During FY 2018-19, sales tax remained top revenue generating sources of federal tax receipts after direct taxes. It constitutes around 38.1% of the total net revenue collection. Collection during FY 2018-19 has been around Rs. 1,459.2 billion against around Rs. 1,485.3 billion in the PFY. Overall sales tax collection registered negative growth of -1.8% and around Rs. 26.1 billion of lesser amount has been collected during FY 2018-19 as compared to the collection of previous year. The downward revised target of sales tax has been met to the extent of around 97.9%. Major reasons of shortfall in the collection of sales tax domestic and imports during FY 2018-19 are following:
- A sharp reduction in the GST rate on Petroleum Products at both import and domestic stages
- Reduced GST on Natural Gas
- Import compression
- Domestic sales tax collection recorded a negative growth of 1.9%, whereas collection of sales tax on imports recorded a negative growth of 1.7%. The overall net collection of Sales Tax Domestic (STD) was Rs. 648.9 billion against Rs. 661.1 billion in the PFY and the net collection grew by (-) 1.9%. In absolute terms Rs. 12.2 billion less amount of revenue has been collected in FY 2018-19 as compared to PFY. The POL products the top revenue generating source, with 38.3% share, its collection grew by 4.9% during FY 2018-19. The collection from sugar, cigarettes, withholding agents, food products and electrical energy recorded a growth of 31.8%, 12.6%, 9.9%, 9.6% and 7.5% respectively during the period under review. On the other hand negative growth was recorded in cement, aerated waters, iron & steel and motor cars.
- Sales tax on imports (STM) is a significant component of federal tax receipts. The share of STM in total sales tax net collection has reached to around 55.5%. The net collection of STM during FY 2018-19 stood at Rs. 810.4 billion against Rs. 824.2 billion in FY 2017-18, registering a negative growth of 1.7%.
- Top 10 commodities of sales tax import have contributed a major chunk i.e. 76.5% in STM collection. The detailed data indicates that more than 59.6% of STM is contributed by POL products (Ch:27), machinery (Ch:84 & 85), iron & steel (Ch:72) and vehicles(Ch:87).
- Like sales tax (domestic), petroleum is the leading source of sales tax collection at import stage as well. Its share in sales tax imports is around 27.3%. During FY 2018-19 collection from POL products was Rs.221 billion against Rs. 264 billion during FY 2018-19 reflecting a growth of (-) 16.2%.
- Customs duty constitutes around 28.7% and 17.9% of the indirect taxes and federal taxes respectively. The share of customs duties in FBR collection is gradually increasing. The net collection from customs duty during FY 2018-19 has been around Rs. 685.6 billion indicating growth of 12.7%. The healthy growth in customs collection has helped the overall FBR revenues positively. Out of total net collection under the head Customs of Rs. 685.575 billion, the share of vehicle (non-railways) is Rs. 81.459 billion. POL products are the second major contributor of customs duty [Rs. 79.3 billion], Machinery & Mechanical Appliances [Rs. 42.5 billion] and Electric Machinery [Rs. 42.4 billion].
- Collection from Federal Excise Duty (FED) was Rs. 238.2 billion. FED constitutes 10.0% of indirect taxes and 6.2% of total federal taxes. The major sectors which contribute in FED revenues are tobacco [Rs. 91 billion], cement [Rs. 56 billion], beverages [Rs. 23 billion], natural gas [Rs. 10 billion] and edible oil [Rs. 6 billion] and some of the services. The tobacco (cigarette) is the top source of FED collection with around 38% share in FED revenue. The collection from cigarettes grew by around 36% during FY 2018-19. The second major sector is the cement which contributes about 24% in FED revenue. Nearly 94.6% of FED collection is realized from five items.
Once again, the FBR in FBR Year Book 2018-19 has not disclosed total number of registered sales tax persons and how many are actually paying tax despite others and ours asking repeatedly. It should be done on the closing date of every financial year. For the sake of transparency, FBR must provide on website historic and current up-to-date data of return filers and sales tax registered persons—hopefully Mr. Shabbar Zaidi will take a serious note of it! FBR Year Book 2018-19exposes the tall claims of the apex revenue authority 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 to only 12.6% in 2018-19). The reality is quite evident to all—higher (sic) collection has been due to exorbitant sales tax on POL products, due to over 70 withholding income tax provisions and enhancement of their rates, blocked refunds of billons and by taking advances from taxpayers.
It is clear by now that the sordid story of collection through withholdings and advances continues even under the government of PTI as it took no corrective measures after coming into power. The main reliance of FBR since 1991 has been on indirect taxes, even under the Income Tax Ordinance, 2001 that after Finance Act, 2019 contains over 75 withholding tax provisions, many of which constitute minimum 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! In FY 2018-19, the same situation remains unchanged.
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 Year Book 2018-19 concedes that “WHT contributes a major chunk i.e. 67% to the total collection of income tax”. Out of total collection of Rs. 1445.5 billion [it was Rs. 1536.6 billion in 2017-18], with returns came Rs. 39.2 billion [2.7%] and advance tax of Rs. 344.2 billion [23.8%]. FBR’s own efforts (collection of demand created) yielded only Rs. 84 billion (5.8%, it was 7% last year) and from arrears Rs. 18.6 billion (1.3%, it was 1.2% last year). It confirms negligible share [7.3%] on the part of FBR. It has failed to tap the actual tax potential as it would have hurt the rich, majority, despite having substantial undeclared, untaxed wealth and the audacity of ruling this country as a matter of right and adding insult to injury got enormous benefit through two assets whitening schemes of 2018 and 2019. As many as 135 persons, named in the OECD database, availed the 2018 tax amnesty scheme of PML-N and declared Rs. 62.4 billion in assets. They paid only Rs. 2.9 billion whereas, their actual liabilities without the tax amnesty could have been Rs. 43.7 billion, getting a relief of Rs. 40.8 billion from the last government. About 56 people, whose data was shared by the OECD, availed PTI’s tax amnesty scheme and declared Rs. 31.8 billion worth of assets. They paid only Rs. 1.7 billion and got a relief of Rs. 20.6 billion.
Perpetual failure of FBR to meet assigned targets is not something new. A large part of the blame goes to political masters who keep on giving amnesties, waivers and immunities. During the last fiscal year, negative growth was the result of policies of appeasement on the part of PMLN and then PTI. Every year FBR fails to collect downward revised target what to speak of originally assigned one in the budget estimates. This widens fiscal deficit resulting in more borrowing and taking away a large part of the budget for debt servicing/payment of principal amount. 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 FBR has not only miserably failed to tap the real tax potential despite imposing all kinds of oppressive taxes, it has been single handedly destroying Pakistan’s growth by anti-business actions especially during 2013-18. The then Finance Minister, now a proclaimed offender of the Accountability Court and suspended senator, gave free hand to tax officials to block bona fide refunds, take undue advances from large business houses, use negative tactics like raising unjust demands and freezing bank accounts for recovery. Exporters and other taxpayers, still waiting for refunds, have been denied lawful right of payments/compensation within stipulated time. Had Ishaq Dar concentrated on growth above 6%, as done by China, India and even Bangladesh in the region, we could have avoided the present fiscal and economic mess. Tax is a byproduct of growth and harsh taxation only hampers expansion and prevents investment in existing and new businesses. Will Dr. Abdul Hafeez Shaik and Syed Muhammad Shabbar Zaidi care to take corrective measures and reverse this trend.
The target of Rs. 5.5 trillion is still achievable provided collection is fully automated, tax machinery is overhauled, leakages are plugged and all exemptions/concessions to the privileged classes are withdrawn. Banks, WAPDA, PTCL and mobile companies that collect advance taxes on behalf of FBR are fully computerised. By using their database, FBR can easily determine fair tax base. Provisional assessments can be made in respect of persons who are not filing tax returns and recoveries can be made in the remaining months of the current fiscal year.
The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)