Finance Act 2020

FBR, tax collection & elite

Huzaima Bukhari & Dr. Ikramul Haq

The passage of Finance Bill 2020 by the National Assembly on June 29, 2020, amid protest by the Opposition, claim by Federal Board of Revenue (FBR) of exceeding the revised target for fiscal year (FY) 2019-20 (Rs. 4126 billion gross and Rs. 4000 billion net collected provisionally against revised target of Rs. 3908 billion) and the target fixed by the Government of the Pakistan Tehreek-i-Insaf (PTI) for FY 2020-21 at Rs. 4963 billion, generated heated debates during the last week. The PTI Government claimed that it presented budget for 2020-21without any “new tax” due to economic toll of Covid-19 endemic.

Prior to Covid-19 outbreak, FBR was behind the revised target of Rs. 5238 billion (originally it was Rs. 5555 billion) after first review of International Monetary Fund [IMF] under $6 billion Extended Fund Facility (EFF) programme. It was later revised to Rs. 4803 billion on the eve of incomplete second IMF review, held prior to Covid-19 pandemic, and after coronavirus outbreak, finally reduced to Rs. 3907 billion.

In the Finance Bill 2020 presented on June 12, 2020, the PTI Government did in fact introduce a new tax, Tax on luxury houses in Islamabad Capital Territory, but withdrew it succumbing to the pressure of the rich and mighty. The Senate in its recommendations said “it should be omitted” without giving any reasons. The critics say that withdrawal of this tax, successfully levied by Punjab as Luxury House Tax through section 8 of the Punjab Finance Act, 2014 and upheld by Lahore High Court confirms that the PTI Government is not inclined to tax the rich. Like its predecessors, it has decided to keep on extracting exorbitant sales tax that takes away a larger slice of the people with meager incomes while the unscrupulous business houses, make more money by passing it onto the end consumers, but not depositing the entire amount in the treasury. This results in their illegal enrichment.

Had the PTI Government introduced this tax on the rich, it would have earned appreciation, but it failed to do so as was done in 2014 by the Government of Pakistan Muslim League (Nawaz) that enacted Income Support Levy Act, 2013 to help the economically distressed classes but withdrew it the very next year. For historical record, the draft of ‘Tax on luxury houses in Islamabad Capital Territory’ that could have fetched substantial amount for improving the lot of the poor living in Islamabad Capital Territory (ICT), is reproduced as under:

On residential buildings:

1. In case of two kanal to four kanal with covered area of more than 6000 square feet: Rs.100,000 per kanal
2. In case of five kanal or above with covered area of more than 8, 000 square feet: Rs.200,000 per kanal.

On farm houses having four kanal including area under farming

1. A farm house with covered area between 5000 to 7000 square feet: Rs.25 per square foot of the covered area per annum.
2. A farm house with covered area between 7001 to 10,000 square feet:Rs.40 per square foot of the covered area per annum.
3. A farm house with covered area of more than 10,000 square feet: Rs.50 per square foot of the covered area per annum.

   On farm houses having more than four kanal including area under farming

1. A farm house with covered area between 5000 to 7000 square feet: Rs. 60 per square foot of the covered area per annum.
2.  A farm house with covered area between 7001 to 10,000 square feet: Rs. 70 per square foot of the covered area per annum.
3. A farm house with covered area of more than 10,000 square feet: Rs. 80 per square foot of the covered area per annum.

The above was not applicable in the case one self-occupied house of widows. It was to be collected by the Ministry of Interior through its attached departments to deposit directly in the Federal Consolidated Fund, not becoming part of distribution under Article 160 of the Constitution of Islamic Republic of Pakistan [“the Constitution”]. The imposition of such a progressive levy directly affecting the Prime Minister and all members of elite having expensive properties in ICT exposes the tall clams of PTI Government that it believes in establishing an egalitarian system, shifting benefit to the poor by taxing the rich. This also dispels the impression that FBR favours the elites. In fact, the above proves that our political masters lack the will to tax the privileged classes—many are part of it or are financed in elections individually or provide funding to parties.

In the Finance Act 2020, the PTI Government has enhanced taxes that may further harm businesses and industry, already affected badly by Covid-19 endemic and lockouts, complete and partial. According to a report [Govt imposes Rs. 200b worth of additional taxes, Express Tribune, June 13, 2020], “in the midst of recession, the federal government slapped at least Rs. 200 billion worth of additional taxes aimed at achieving Rs. 4.963…..”

The following are details of some additional and new taxes imposed through Finance Act 2020:  

• The permanent establishments of foreign companies have been brought into the ambit of minimum income tax of 1.5% under section 113 of the Income Tax Ordinance, 2001 yielding estimated additional revenue of Rs. 27.2 billion.
• 3% income tax imposed on non-residents in respect of various services akin to resident taxpayers expecting additional yield of billions.
• Depreciation allowance is restricted to 50%, initial and normal in certain cases, generating billions but certainly it is an anti-business and anti-investment move.
• Electricity expense will be disallowed against business income on certain prescribed conditions. Restricting expenses is another way to impose new tax!
• Expenditure of foreign companies on interest to be taxed as their income under initiative of Organisation for Economic Co-operation and Development (OECD) having additional potential of Rs. 4 billion.
• Additional about Rs. 80 billion through imposition of General Sales Tax (GST) and through increase in rate of Federal Excise Duty (FED) on many items.
• Amendment in the Eleventh Schedule to the Sales tax Act, 1990 to collect 17% GST on supplies to non-registered persons expecting to generate additional tax of Rs. 35 billion.
• The amendment in withholding tax under Sales tax Act, 1990 to charge 17% GST from unregistered persons on sale to government departments, estimated extra yield of over Rs. 100 billion.
• The concept of active taxpayer in the GST law will also fetch substantial additional taxes.
• The FED increase on cigars, cheroots, and cigarillos and cigarettes, and its levy on e-liquids of electric cigarettes etc.  
• 7.5% FED at ad valorem has been imposed on locally manufactured double cabin (4×4) pick-up vehicles and at 25% in the case of imported ones are new taxes!
• Enormous raise in appeal fee [500% in company and 250% in non-company cases for first appeal and 250% for second appeal] is another way of imposing new tax that also amounts to denying the fundamental right of free and unfettered access to justice!
• Penalties would be levied as revenue generation measures against power and gas distribution companies for issuing industrial and commercial connections of electricity or natural gas to non-registered taxpayers rather than registering the same under the law.

The above clearly busts the myth of “no-tax” or no “new tax budget” by the PTI Government! The fixation of target of FBR at Rs. 4.963 trillion for the current  financial year 2020-21 (increase of 20%) is not to be met through plugging leakages, administrative reforms for better enforcement, use of technology and data mining or lowering taxes and ending tax expenditure of over Rs. 1.5 trillion admitted in Annex-II appended to Economic Survey 2019-20. There are enhancements of rates or new tax measures within the existing tax codes, but avoiding levy of new taxes on the rich and mighty. If only 40% of taxes waived/forgone in fiscal year 2019-20 were recouped in Finance Act 2020, there would have been fiscal space of Rs. 600 billion to reduce taxes rather than continuing with existing high taxes and further enhancing them when the economy in deep recession, needs impetus for revival to overcome economic toll of Covisd-19 endemic—losses incurred due to lockdown and other factors.

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The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)