Startling facts & fallacies
Huzaima Bukhari, Dr. Ikramul Haq & Syed Muhammad Ijaz
Reference two-part series (FBR’s statistics: a critical analysis—I, Business Recorder, September 25, 2020 and FBR’s statistics: a critical analysis—II, Business Recorder, September 25, 2020, this article presents statistical analysis of all the three documents released by Federal Board of Revenue (FBR) on September 18, 2020, namely, ‘Parliamentarians’ Tax Directory for Tax Year 2018’, ‘Tax Directory of all Taxpayers for Tax Year 2018’ and ‘Tax Directory Analysis for Tax Year 2018’. The data contained in Tax Directory Analysis for Tax Year 2018’ on the basis of returns received up to September 14, 2020 reveal some startling facts and fallacies on the part of Federal Board of Revenue (FBR). The forthcoming paragraphs will show the deficiencies, dichotomies and contradictions committed and misrepresentations made by the apex revenue authority with impunity and without realizing that it would further cause serious aspersions on its credibility as well as tarnishing the already negative perception and image of the organization. It is difficult to believe that Inland Revenue, a wing of FBR having a staff of about 15,000 with many enjoying grades 20 to 22 working at headquarters could not give the nation a clear picture of tax related data with transparency and reliability. This also reflects negatively on the Advisor to the Prime Minister on Revenue and Finance, who at the time of launching these documents made tall claims that they were “publishing these directories to show how transparent the government is.” What makes the situation more painful is the fact that FBR, with a fully-owned IT company, Pakistan Revenue Automation Private Limited (PRAL) having personnel experts in computing and getting market wages, still could not avoid many grave mistakes and misrepresentations in presenting a rather simpler fact-sheet of tax collection and returns filed on geographical and other parameters.
In Tax Directory Analysis for Tax Year 2018 of income tax returns received up to September 14, 2020 (hereinafter as “the Analysis”) many mistakes and omissions are apparent that are discussed below. The Analysis failed to mention the base figure (total tax collected up to September 14, 2020) in respect of total returns shown at 2,852,349 (the resident filers are 2,788,335 or 98% of total returns received). In the very first presentation (Serial 1 or Table 1) in the Analysis, the last column shows percentage of tax collected from four categories: Companies, Associations of Persons (AOPs), Non-salaried Individuals and Salaried Individuals. The percentage share in collection of returns filed by these four categories cannot be calculated unless the base figure (total tax collection up to September 14, 2020) is available to ascertain the absolute numbers.
The bifurcation given of returns received is: companies 44,609 (1.56% of total filers with tax contribution of 55.84%), AOPs 64,336 (2.26% of total filers with tax contribution of 8.49%), non-salaried individuals 1,542,088 (54.06% of total filers with tax contribution of 21.01%) and salaried individuals 1,201,316 (42.12% of total filers with tax contribution of 14.66%). Obviously all those who filed returns for tax year 2018 between July 1, 2018 to June 30, 2019, their contribution would have been reflected in Year Book 2018-2019 and those between July 1, 2020 to September 14, 2020, tax paid if any, would be accounted for in current financial year [2020-21]. However, the determination of what is the total contribution of each filer (category wise) in absolute numbers is not possible in the absence of total amount received from all of them till September 14, 2020.
It is mentioned in the Analysis that the share of companies in total revenue collection is 55.84%. In this regard, the following points need consideration:
- as per record of Securities and Exchange Commission of Pakistan (SECP) the total number of companies as on June 30, 2018 were 87,620. FBR claims that it has compiled the data on the basis of returns filed up to September 14, 2020. On the basis of this data the percentage of filers of companies comes to 50.91%. It is shocking that they could not enforce section 114 of the Income Tax Ordinance 2001 (ITO 2001) requiring every company to file return, no matter if it is exempt or in loss or has even not yet started business or is in the process of liquidation but not yet liquidated. Even after passage of 2 years and 14 days, they did not issue notices to these defaulting companies to file returns or if notice issued why they remained non-responsive! It is an open admission on the part of FBR of its inefficiency in not being able to monitor less than 100,000 corporate taxpayers what to speak of about 90 million unique mobile users as per data of Pakistan Telecommunication Authority (PTA). All of them were paying advance adjustable income tax @ 12.5% during the relevant period. It exposes unbelievable lack of enforceability on the part of Inland Revenue Service (IRS) of FBR having staff of about 15,000.
- It is pertinent to mention that if FBR fails to collect due tax the sufferers are provinces having 57.5% share under the prevalent 7th National Finance Commission (NFC) Award and the federal government that due to this lapse (resulting in huge tax gap) keeps on borrowing money even to run its day to day affairs.
According to calculation from Tax Directory of all Taxpayers for Tax Year 2018’, the share of companies (55.84% as per the Analysis) comes to Rs. 499.20 billion. If one takes the figure reported in budget documents, Economic Survey and FBR Year Book for the relevant period, the total collection under the head income tax was Rs. 1536.6 billion. Interestingly in just issued FBR Year Book for 2019-20, the figure for tax year 2019 is shown at Rs. 1445.5 billion [Table 2, page 6] reflecting a negative growth of 5.9% over the tax year 2017-18 of Rs. 1536.6 billion [TY 2017-18 year on year basis (YOY) with TY 2016-17 (Rs. 1,344.2 billion) registered a growth of 14.3% (Table 2, page 5 of Year book 2017-18].
In the FBR Year Book 2018-19 for fiscal year ending on June 30, 2019 in Table 7 [page 10], total returns filed for tax year 2018 are shown as 2,666,256 out of which companies are 43,246. The incremental increase in number in the Analysis comes to 1363. The incremental tax from these companies is worked out in a report published in (Tax directory of companies: new data, old story, Business Recorder, September 22, 2020) says: “This is also visible in the table for new filers where nearly 81 percent of first-time filers filed a return of zero rupees. For clarification sake, first time filers or new filers are assumed to be those companies whose National Tax Numbers were found in FY18’s tax directory but not found in FY17’s tax directory. Understandably, this may not be the most tenable assumption, but in the absence of detailed analyses presented by FBR, this should shed at least some light on the expansion of the so-called tax net”.
According to findings given in Tax directory of companies: new data, old story, the incremental returns did not yield significant tax revenue. However, the onus lies on FBR to present the correct picture in respect of companies as filers are even less than 45,000 and it is not difficult to workout tax paid by new filers which are only 1363. If 44,609 companies are paying 55.84% tax, then the remaining categories present quite a disappointing contribution.
It is pertinent to mention that out of total collection of income tax as per FBR Year Book for 2017-18, 81% was through withholding taxes and that too from only 9 major items out of 66 withholding taxes prevalent in that financial year. The bifurcation is as under; Contracts Rs. 283 billion (in that year it was a final tax), Imports Rs 219 billion, Salaries Rs. 133 billion, Dividend Rs. 58 billion, Telephone Rs 47 billion, Bank Interest Rs. 46 billion, Cash withdrawal Rs. 34 billion, Electricity Rs. 34 billion, Exports Rs. 28 billion and Technical Fee Rs. 26 billion. The collection of Rs. 1,536.6 billion reflecting a growth of 14.3% over the collection of Rs. 1,344.2 billion of the previous fiscal year [Table 2, Page 5 Tax Year Book 2017-18].
Taxpayers paid Rs, 42 billion with returns and through advance tax 336 billion [Table 7, Page 9 of Year Book 2017-18]. Collection out of demand created was only Rs 104 billion (arrear Rs. 18 billion and current demand Rs. 85 billion and Rs. 1.3 billion under 146B [tax arrears settlement scheme] as per Table 6, Page 9 Tax Year Book 2017-18 as against total collection of Rs. 1,536.6 billion reflecting a growth of 14.3% over the previous year collection of Rs. 1,344.2 billion [Table 2, Page 5 of Tax Year Book 2017-18]. This shows that the huge workforce of IRS only collected 6.7 percent of total collection with own efforts and the rest came voluntarily either through withholding or advance taxes or tax paid with return. The Analysis has omitted these and many other critical key performance indicators (KPIs) like for example, in collecting Rs. 104 billion cost of collection is not worked out.
The province and region wise collection is in percentage without mentioning from which sum these percentages have been worked out. The percentages are as under:
Punjab 35%, Sindh 45%, Balochistan 2%, Khyber Pakhtunkhwa 4%, Capital territory 15%, Gilgit Baltistan 0.1%.
Applying total collection on these percentages shows that many banks, public sector companies/organizations, telecoms, oil and gas and many others entities engaged in trans-provincial business activities and without mentioning their head offices and income earned in each province, this data presents a distorted picture. For example, capital territory received only 5% of total returns but its share is 15% in total direct tax collection, clearly establishing that majority of oil and gas companies filed their returns in Islamabad though doing main business and earning income outside the Capital Territory. For example, Fauji Group paid Rs. 5 billion, OGDCL Rs. 17 billion, Telenor Group Companies Rs. one billion, Attock Petroleum Limited Rs. 2.5 billion, Bestway Cement and Holdings both Rs. 4 billion cumulatively, BowEnergy Resources (Pakistan) SRL Rs. 3.4 billion, China Communications Construction Company Limited Rs. 2 billion, China State Construction Engineering Corporation Limited Rs. 7 billion, China-East Resources Import And Export Corporation Rs. one billion, Cmpak Limited Rs.2 billion, Deodar (Pvt.) Limited Rs. 2 billion, Government Holdings (Private) Limited Rs 12 billion, Huawei Technologies Pakistan (Private) Limited Rs. 2 billion, just to mention a few. State owned corporations in Islamabad are also contributing, which is like the federal government paying income tax because even if they are in losses, they are subjected to minimum tax on their turnover.
It is also worthwhile to mention that many companies having factories in Faisalabad (listed on Stock Exchange) are filing their returns in Karachi and therefore, share of Sindh at 45% does not reflect the true picture. The four leading banks i.e. National Bank [tax paid Rs. 5 billion], Habib Bank Ltd [tax paid Rs. 7 billion], United Bank Ltd [tax paid Rs 12 billion], Bank Alfalah [tax paid Rs. 3.5 billion]—total comes to 24 billion—but their main earning is from deposits raised from residents of Punjab (with more branches than anywhere else) and other provinces. If these earnings are excluded and proper adjustments are made only then one can understand why Sindh is contributing 45% with returns comprising 27% (779,771) and Punjab with 59% (1,696,533) filers is contributing 35% in tax.
Punjab with 59% return filers confirms that main consumption and business activities are in the most populous province. Therefore, taxes collected at ports of Karachi (50% of total tax collection is at import stage) are not attributable to Sindh or Karachi alone but also to importers based in the rest of the country. This is evident from the fact that point of collection and point of claiming tax withheld are two different things. It is evident from the fact that Sindh has only 27% of total return filers.
The above fundamental and basic facts cannot be denied. The purpose of this article is not to create any parochial thinking or biases on the basis of province or city. However, those claiming that Karachi alone is feeding Pakistan should only look at these basic figures and stop making unfounded claims and prejudices and politicking that is not desirable within a federation. We should rather strive to end uneven development in the entire country uplifting the far flung backward areas and less privileged citizens, wherever residing.
The most disquieting aspect of the Analysis is massive evasion of tax by the rich people or exemptions granted to the privileged classes. Among the individual filers only 0.8% showed taxable income exceeding Rs. 6 million. Majority of the rich people live in bigger metropolis like Karachi, Hyderabad, Lahore, Faisalabad, Sialkot or Islamabad or have houses there as in the case of absentee landowners, but their contribution to overall tax collection is shamelessly low. This should be a matter of debate rather than proving that Karachi alone in terms of tax collection sustains Pakistan. Had it been true, it should have reflected in the data shown at serial 5 and 6 of the Analysis as well as at serial number 7. The table/serial 5 relates to individual filers out of which salaried persons are not mentioned. Table/serial 6 consists of 64336 AOPs while making negligible contribution in 3 higher slabs which is only 5% whereas overall its share in total collection is 9%. Table/serial 7 of the Analysis is more important because it is admitted that corporate sector paid 56% of total tax collection.
Out of 44,609 companies 8% paid tax on amount exceeding Rs. 7 million. The number of companies that declared income not exceeding Rs. 500,000 is 71%. It means major tax came from banking, oil and gas, and public sector organizations. It is worth noting that companies showing income exceeding Rs 5 million and up to Rs. 7 million are only 1.2%. When data is minutely analyzed, it exposes the efficacy of FBR that not only failed to force all the companies to file returns but also could not conduct audit of 31,561 companies (71% showing income less than Rs. 500,000) to check veracity of their accounts. If they cannot audit 31,561 companies, then what is the justification of having about 15,000 employees incurring huge cost to the national exchequer?
Data at Sr. No 8 of major cities have not been mentioned as to which province, tehsil or division these belong to. It is found that some cities, e.g. Abbaspur, are not located in any province but Azad Jammu & Kashmir which has its own constitution and tax machinery. This shows the callousness of preparing data of the 494 major cities contributing Rs. 1,026,156,746,886.
Coming to major markets mentioned at Sr. 9 [with 413,859 filers and Rs. 210,067,230,940 direct tax contribution], interestingly Raiwind Bazar is shown as part of Lahore and paying Rs. 4.2 billion. If it is an independent city then it should also appear as a major city at serial number 8, which is not the case, thus, how its contribution is taken out of Lahore, undermining its total share. In Karachi as well Malir has been shown not part of the city. In the same manner, many districts of Lahore have not been shown in collection of Lahore but appearing in serial number 8 separately. Districts of Karachi have been shown at one place but those of Lahore are scattered all over resulting into mismatch for comparison purpose. It should have been on Division-to-Division basis at one place. WAPDA Town Lahore alone paid Rs. 1.6 billion (with 10967 filers) as compared to Zamzama Street Karachi at Rs. 197 million (with 288 filers). It appears strange because WAPDA Town Lahore has fewer markets and quantum of business as compared to Zamzama Street Karachi contributing 197 million (with 288 filers) or Zaibunnissa Street Karachi where tax paid is only Rs. 22 million (with 102 filers).
These facts are just a few glaring mistakes, omissions, discrepancies, deficiencies and distortions in the Analysis. It is hoped that FBR will consider the above points and after removing, all shortcomings will issue a revised version of the Analysis to keep the record and data factually correct and reliable.
The writers, lawyers and partners of Huzaima, Ikram & Ijaz. Huzaima and Ikram are adjunct faculty of Lahore University of Management Sciences (LUMS) and Syed Muhammad Ijaz is that of Beaconhouse National University (BNU).