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Dr. Ikramul Haq & Abdul Rauf Shakoori
For the Federal Board of Revenue (FBR) financial year 2021-22 ended on a positive note admirably surpassing the revised target of Rs. 6.1 trillion by Rs. 25 billion. These provisional numbers depict an impressive growth of 29% as compared to previous fiscal year, where the net collection was Rs. 4.7 trillion. Bifurcation of collection shows a significant increase of 32% in direct taxes as compared to the last year. During the fiscal year (FY) 2021-22 net collection from income tax stood at Rs 2278 billion against Rs 1731 billion in the last fiscal year. Similarly, sales tax collection reached Rs 2525 billion as compared to Rs. 1983 billion during the last fiscal year. For the first time net collection from customs duty touched the mark of Rs. 1000 billion as compared to Rs. 747 billion in 2020-21, followed by federal excise duty at Rs. 322 billion as compared to Rs. 284 billion during the last fiscal year.
Despite the political turmoil, FBR performed extraordinarily in the last quarter of FY 2022 by registering net collection of Rs. 1741 billion, which is 32% higher than Rs. 1351 billion in the last quarter of 2021. During 2022 fiscal year FBR processed refunds of Rs. 335 billion, 33% higher than Rs 251 billion paid in the last fiscal year. Out of total refunds of Rs.335 billion, Rs. 105 billion were issued in the last quarter of financial year 2021-22—55% higher than Rs. 68 billion issued in the same quarter of the previous fiscal year that helped taxpayers manage liquidity challenges without seeking expensive borrowing from banks and other financial institutions.
The above numbers, however, cannot be seen in isolation. One of the important performance criteria is tax-to-GDP ratio. This works as an index for quantifying capacity and performance of the tax system. With improved tax-to-GDP ratio, the government can rely on internal resources rather than go for borrowings at exorbitant costs. Historically, tax-to-GDP ratio in Pakistan has remained low over the years with multiple factors behind it. Key elements are extremely narrow tax base, negligible contribution by agricultural sector, rampant tax evasion, lack of documentation, monstrous size of informal economy, numerous tax exemptions, concessions, waivers and amnesties, limited use of technology and artificial intelligence, all pervasive corruption, unending and prolonged litigations.
During the five year (2013-18) rule of Pakistan Muslim League (Nawaz)—PMLN—FBR considerably improved tax-to-GDP ratio. It reached 11.2% in 2017-18 (before rebasing). The World Bank also appreciated this achievement. It documented this significant improvement in overall tax-to-GDP ratio from 9.5% in fiscal year 2012-13 to 13% in fiscal year 2017-18 attributing the increase in tax revenues to policy measures, reduction in tax exemptions for specific industries, and improvements in tax administration at the federal and provincial levels. However, this improvement still fell short of the benchmark of 15% that is considered the minimum for developing countries to fund basic governmental functions. The four year rule of the coalition government of Pakistan Tehreek-i-Insaf (PTI) witnessed significant decrease in tax- to-GDP ratio—it fell to around 8.6% for financial year 2021 and would recover at about 9.5% in the fiscal year 2022 once the figures are finalised.
Increase in tax-to-GDP ratio is considered mandatory by international lenders and donors to bridge deficits and generate fiscal space for spending on infrastructure, education, and health and other projects for the benefit of public at large. The World Bank estimates that Pakistan has substantial potential to increase tax receipts without imposing new taxes or raising tax rates and using a broad-based, low-rate approach. It refers to tax gap analysis indicating that Pakistan’s tax revenues can be increased significantly to 26% of GDP, if tax compliance alone is raised to 75%
For broadening the tax base and encouraging equitable and fair tax treatments, the government needs to revisit its massive tax expenditure. Tax laws currently offer numerous exemptions and reduced rates to selective industries and economic activities. These exemptions distort the competitive environment. According to Tax expenditure report of FY 2022, tax revenues foregone on account of exemptions and concessional rates are estimated at Rs. 1482 billion or 2.67% of GDP. Tax expenditures are approximately 25% of total collection in FY 2021-22. The biggest part of tax expenditures is related to sales tax exemptions and concessions, which are estimated to be Rs. 740 billion, followed by Rs. 400 billion in income tax and Rs. 342 billion in custom duties.
Though in the recent years, FBR has made efforts to increase the share of direct taxes in its total collection, yet its overwhelming reliance remains on indirect taxes and collection through withholding agents. This is indicative of the fact that tax collecting authority has a limited capacity to identify unregistered taxpayers and bring them into tax net. FBR is heavily dependent on prescribed withholding agents to collect taxes on their behalf. Total collection by FBR’s own efforts is not more than 5% of total net revenues. Unfortunately, besides bad tax policy, FBR has miserably failed to modernise itself and use latest data analysis techniques to corroborate information received through withholding agents and third party sources to verify taxpayers’ declarations. Unless this is done, FBR can never ascertain information provided by taxpayers and identify potential taxpayers who remain outside tax net by not filing tax returns/statements.
All the federal and provincial tax authorities are entrusted with responsibility of collection of taxes, duties and charge by integrating and sharing information. There must be coordinated efforts between the federal and provincial governments to enhance overall tax receipts and strictly implement tax culture in the country. Currently, different indirect and direct taxation laws/rules/regulations are applied by the federation and the provinces which lead to disputes and litigations.
The recent tax measures announced in the federal budget for FY 2022-23 have been strongly criticised by tax experts, stakeholders and public at large. For example, deemed tax on immovable property is nothing but in pith and substance a backdoor imposition of wealth tax.
After the Eighteenth Constitutional Amendment [“18thAmendment”] the Federal Government cannot levy wealth tax, gift tax, estate duty, capital gains tax or inheritance tax on immovable property. Measures to this effect clearly signal that the federal government has no respect for the supreme law of the land—the Constitution of Islamic Republic of Pakistan. Because now all kinds of taxation of immovable property is within exclusive domain of the provinces.
Item No. 50 of the Federal Legislative List through 18th Constitutional Amendment, in fact, debars the federation to levy any kind of tax on immovable property. Therefore, Capital value Tax (CVT) on immovable property stands transferred to provinces. If federation cannot levy any tax on immovable property, how can it tax “capital gain” arising out of immovable property? Detailed discussion is available in Taxing immovable property, The News, July 5, 2015.
The phrase “not including taxes on immovable property” in item 50 cannot be read to “include taxes on capital gains on immovable property”. It is obvious that taxes include taxes on income and capital gains.
The National Assembly has intentionally or ignorantly transgressed the constitutional command in taxing immovable property under the garb of income taxation and capital gains. It confirms that provinces have no political will to tax the rich and mighty owners of substantial immovable property in the wake of 18th Amendment by imposing progressive taxes, namely wealth tax, inheritance tax, gift tax, estate duty etc. that were once in vogue in Pakistan but repealed later on. While the poor and small farmers are burdened with heavy sales tax on many goods (inputs) directly used for crop production the rich absentee landlords are paying negligible tax on their colossal agricultural income.
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Dr. Ikramul Haq, Advocate Supreme Court and writer, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow 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 recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions