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Lack of initiatives & innovations—II
Huzaima Bukhari & Dr. Ikramul Haq
The existing system imposes high taxes but yields low revenues. Only 2000 companies pay 75% of total taxes. The standard sales tax rate is 17% but effective rate, according to 2016 report of Tax Reforms Commission, was not more than three to four percent. The situation in 2020 may have improved, but it is still not more than eight percent. Refunds of billions of rupees of sales tax and income tax were unlawfully withheld to show higher figures in the past—Of unpaid refunds and figure fudging, Business Recorder, November 9 & 14, 2018. Federal Board of Revenue (FBR) never reveals the actual amount of refunds due—just shows the figure of refunds actually paid. FBR has yet not posted on its website the total quantum of refunds payable as on June 30, 2020 after claim of exceeding the target. It should do so without any further delay and must pay all the pending refunds by July 31, 2020.
Unfair taxation is the root cause of our multiple socio-economic ills, resulting into inequitable distribution of resources. FBR as it exists today is incapable of tapping real tax potential, as in addition to capacity issues, those in power and other vested interests do not allow it to work freely. We need a National Tax Agency (NTA)—FBR high-ups prefer the name, ‘Pakistan Revenue Board’ (PRB). This body, whatever name may be given, shall not only be responsible for collection of taxes for federal, provincial and local governments but also to administer various social and economic benefits and incentive programmes, otherwise tax compliance will remain a distant dream. People must get free education, quality healthcare, decent housing/transport plus social security schemes, such as, disability allowance, old age benefits, income support, child support, pension, just to mention a few, in lieu of paying fair taxes.
One of the salient features of NTA would be its innovative structure, run by an independent Board, accountable to Parliament through the Minister of Revenue. The minister would have the authority to ensure that the NTA operates within the overall government framework and treats its clients with fairness, integrity, and consistency. Further details of its structure and duties are discussed in Case for “NTA”, Business Recorder, November 27, 2015.
Out of about 2.5 million income tax returns filed for tax year 2019 until May 31, 2020, one million showed nil income or income below taxable limit. A country with a population of 220 million, at least 96 million unique mobile users [total subscribers are 166 million, but many will have multiple SIMs or dormant accounts] and 82 million internet users are paying advance, adjustable income tax of 12.5%. How many of these have taxable income? No data is available with FBR. According to data of 2018 compiled by Pakistan Electric Power Company (PEPCO) as on June 30, 2018, there were 3,028,054 commercial and 339,853 industrial electricity users paying advance income tax under section 235 of the Income Tax Ordinance, 2001. K-Electric had 463,670 commercial and 20,647 industrial users on June 30, 2018. According to FBR Year Book 2018-19, total income tax returns received for tax year 2018 were 2,666,256. Out of total sales tax registered persons of 220,242, only 141,106 filed statements in fiscal year 2017-18.
FBR has recently closed audit of 310,000 cases, selected merely on account of late filing of returns. The reason for closure, assigned by FBR, is “lack of capacity” [FBR: audit closure, capacity & legality, Business Recorder, May 8, 2020]. Either this lack of capacity is due to shortage of officers or absence of proper training/skills or pressure from political masters is again not disclosed by FBR or the coalition Government of Pakistan Tehreek-i-Insaf (PTI).
The field officers complain about shortage of manpower and necessary facilities. They further complain that approval of head of FBR is required even for a visit/raid to any business premises or to seek details of a bank account. In other words, they allege that purposefully on the pressure of business community, the PTI Government, like its predecessors, has rendered the FBR toothless as they can neither impound record, nor get third party information. Their claim needs to be confirmed or refuted by the Government. On the other hand, businessmen accuse tax authorities of abuse of powers, highhandedness and harassment for self-aggrandisement. In this agonizing scenario, can the PTI Government collect taxes fairly and fearlessly when the system is so complex and needs simplification? The PTI Government must give due weightage to recent studies of Pakistan Institute of Development Economics (PIDE), Doing Taxes Better: Simplify, Open & Grow Economyand Growth inclusive tax policy: A reform proposal, quoting Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016).
The following were the remaining proposals [earlier reported in [Finance Act 2020—lacking initiatives and innovations—I, Business Recorder, July 3, 2020] made to Ministry of Finance and FBR before the announcement of budget on June 12, 2020.
- In order to tap the real tax potential of retail sector and to bring informal economy into tax net, the following simple and fair tax system is proposed:
Section 3(9) & (9A) of the Sales Tax Act, 1990 should be omitted and following new subsection (9) should be inserted:
“(9) Notwithstanding anything contrary contained in the provisions of this Act, tax on retailers be charged, levied, collected and paid as provided under rules issued under section 99B of the Income Tax Ordinance, 2001 at the rate of 4% of the gross turnover or at such a lower or higher rate as the Federal Government may specify by notification in official gazette.
Provided that provisions of subsection (7) of section 3 shall not be applicable in case of retailers covered under this sub-section”.
In the Income Tax Ordinance, 2001, section 99B should be substituted as under:
“Notwithstanding anything contained in any other law for the time being in force a tax shall be charged, levied, collected and paid at the rate of 2% of the gross turnover inclusive of Sales Tax as provided under subsection (9) of section 3 of the Sales Tax Act, 1990 on 15th of every month next following the month to which such turnover relates. The Federal Government may, by notification in the official Gazette, prescribe special procedure for scope and payment of tax, filing of return and assessment in respect of such retailers, as may be specified therein:
Provided that the provisions of section 147, withholding of tax under Part “V” of Chapter X (except tax on salaries under section 149) and Chapter XII and provisions of Schedule 10 shall not be applicable to retailers covered under this section”.
“In exercise of powers under subsection (9) of section 3 of the Sales Tax Act, 1990 and section 99B of the Income Tax Ordinance, 2001, the Federal Government has prescribe the following procedure for qualifying retailers thereunder:
- The retailers shall receive/file monthly return and make payment on monthly basis along with return calculated as per formula provided below on 15th of every month next following the end of month to which such turnover relates.
Turnover PKR 10,000,000
Sales Tax on above @ 4% (A) PKR 400,000
Total amount subject to income tax PKR 10,400,000
Income tax @ 2% on above (B) PKR 208,000
Total tax liability to be paid with return (A+B) PKR 608,000
- All retailers must get themselves connected with FBR through Point of Sale (POS) irrespective of their turnover. No audit shall be conducted for retailers who opt for POS.
- Retailers shall be allowed to incorporate profit in their books working back the income tax paid applicable to total income (imputable income).
- 1% cash back/rebate on yearly basis will be allowed to such retailers who have adhered to all the provisions prescribed. However, if it is proved on the basis of information that cash back/rebate was claimed on erroneous basis then notwithstanding anything contained in any law for the time being in force, such retailer shall be charged with a penalty of 5% of annual turnover and imprisonment that may be up to 5 years”.
As evident from above, effective income tax rate will be 1% of turnover for those retailers who opt and comply with the proposed law/procedure. Those who do not opt will become uncompetitive as they will remain subjected to withholding taxes, 17% sales tax, advance tax, if applicable, audit and higher rate of income tax. The details of their assets, incomes and expenditure etc will be in possession of FBR after having real time data access and obtaining reports from private licensed credit information bureaus, established under Bureau Act, 2015, working under the regulatory control of State Bank of Pakistan.
- The total collection by imposing unified sales tax on goods and services (as done by India in 2017) can reach Rs. 3500 billion as against collection of around Rs. 1593 billion by FBR in 2019-20 through sales tax on goods and provinces cumulatively of Rs. 190 billion through sales tax on services. The additional revenue collection of Rs. 1700 billion will not only give fiscal space to the federal government to narrow down fiscal deficit but will also enhance distribution amount to the provinces. Distribution will be strictly as per Constitution. The collection under new law will be by FBR till NTA is established. For this provincial assemblies only need to pass resolutions under Article 144 of the Constitution empowering the National Assembly to enact integrated sales tax on goods and services. There is no need for any amendment in the Constitution for this purpose and establishing NTA. The slogan of ‘One nation, One Tax’, adopted by India in 2017, and Harmonised Sales Tax (HST) by Canadian federal and some provincial governments is the way forward as taxpayers operating on trans-provincial level are facing many difficulties. It was suggested that if provinces do not agree, then for trans-provincial entities, FBR can levy sales tax on services following the command of Supreme Court in Messers Sui Southern Gas Ltd & Others v Federation of Pakistan & Other 2018 SCMR 802. It extensively and authoritatively elucidates the post-Eighteenth Amendment position vis-à-vis legislative competence of federation and federating units as under:
“We are in agreement with the observation made by the learned High Court that though in a Federal system, provincial autonomy means capacity of a province to govern itself without interference from the Federal Government or the Federal legislature, but as the Provincial legislature does not possess extra-territorial legislative authority i.e. it cannot legislate regarding the establishments operating beyond the territorial boundaries of that province”.
The above pronouncement of the Supreme Court is not restricted to any particular law and covers tax laws as well. It is binding under the Constitution and provinces if do not agree for integrated sales tax of goods and service will suffer loss of revenue paid by trans-provincial entities.
The above measures and those mentioned in Finance Act 2020—lacking initiatives and innovations—I, Business Recorder, July 3, 2020, can still be implemented through a Finance Supplementary (Bill) 2020 to generate additional revenue of at least Rs. 2500 reducing fiscal deficit in fiscal year 2020-21 significantly, more shares for provinces under National Finance Commission (NFC) Award, and helping the businesses to overcome economic toll of Covid-19 endemic.
It was suggested that the FBR should become member of private licensed credit information bureaus [“the bureaus”] who have already collated and stored data from NADRA, Excise, Land, Banking, FIA (travel), schools, insurance companies, utilities’ providers and telecommunication operators (telcos). But FBR wants to reinvent the wheel. It has secured power to real-time data access in Finance Act 2020 without having capacity to analyse database that only a smart data scientist can do. The FBR has poor record of data protection as there have been frequent leakages and abuses. It will create further harassing of the citizens and existing taxpayers. One wonders, what was the need to obtain this power when work has already been done by bureaus enjoying legal mandate to collect data from those sources that FBR wants to tap in the absence of infrastructure and human capabilities? There is, in fact, a need to have a Centralized Depository wherein data from all sources can be utilised by various agencies including FBR after passing Personal Data Protection Law, still at draft stage with the Ministry of Information Technology and Telecommunication.
The pathetic situation of FBR can be gauged from the fact that it has about 240,000 registered persons under Sales Tax Act, 1990 but tax comes from about 44,000. Shockingly, out of 360,500 industrial connections as on June 30, 2018, only 18,000 were registered under sales tax regime. Out of 3,491,724 commercial electricity users as on June 30, 2018, less than 350,000 filed income tax returns though tax of Rs. 33.832 billion was paid with bills as per FBR Year Book 2017-18 and figure for fiscal year 2018-19 was Rs. 35.5 billion as per FBR Year Book 2018-19.
As suggested above, by adopting rational measures, the federal and provincial governments could have substantial funds to counter the economic toll of the Covid-19 outbreak, as they must spend more money for infrastructure improvement to create more employment and ensure higher growth, engaging the private sector to take part in public projects. This alone can kick-start the economy. Simultaneously, the governments need to reduce wasteful expenditure, right-size the monstrous size of their inefficient machinery and make loss-bearing public sector enterprise (PSEs) profitable through public-private partnership or get rid of them, monetize all the perquisites of bureaucracy and make taxes simple and low-rate. State lands, lying unproductive in the heart of cities, owned by the federation and provinces, should be leased out for industrial, business and commercial ventures. This will generate substantial funds, revenue and facilitate rapid economic growth and substantial employment opportunities.
As expected, the PTI Government like its predecessors opted for routine measures and ignored all suggestions/recommendations for improving compliance, creating ease of doing business that has assumed renewed importance in the wake of Covid-19 endemic. This has been happening since 2008 under every government that the elected representatives (sic) show apathy towards important constitutional obligations under Article 73 and 82 of the Constitution of the Islamic Republic of Pakistan. Every year, their attitude confirms that they are only interested in safeguarding their privileges, untaxed/undeclared assets, besides obtaining more and more perquisites and benefits.
The privileged classes—militro-judicial-civil complex and those in power—get what they want—tax benefit on perks and benefits of Rs. 30 billion in tax year 2019 alone! The level of shallow debate, hurling of accusations as well as mudslinging shown by the Treasury and Opposition benches during budget session amounted to open defiance of the mandate of the masses of this country, that voted them into power with the hope that they would do something for their socio-economic uplifting or at least provide them basic essential services—education, health, housing, transport, cleaning drinking water, social protection and civic amenities.
As was in the past, worthy members of the National Assembly (MNAs) did not assess nor even bothered to ponder about the impact of regressive taxation on the ailing economy and its devastating burden on the poor—out of total revenue 78% comes from indirect taxes that is highest in the world.
Prior to 2008, the standard excuse was that “we are not allowed to perform our constitutional duties under the umbrella of a military dictator”. Now, in the absence of this pretext, it is obvious that fault lies somewhere else. Time and again, it has been emphasised that democracy is not electioneering per se. Establishment of a responsible government caring for the needs of its people is a prerequisite for true democratic dispensation. This is only possible if the Parliament performs its constitutional role, implements flawless process of accountability and ensures good governance. Constitutionally speaking, the Cabinet is answerable to the Parliament, but the truth is that MNAs run after ministers for personal favours and gains.
Due to non-participation of public representatives in budget-making, financial managers and tax collectors have persistently failed to overcome fiscal deficit and remove fiscal imbalances as their tax policies are based narrowly on collecting taxes at source, without bringing the mighty sections of society within the tax net or collecting what is actually due from them.
The common citizen is subjected to exorbitant sales tax and federal excise duty [FED] plus advance income tax. They say Pakistanis do not pay taxes while 166 million mobile subscribers as on May 31, 2020 according to data available on website of Pakistan Telecommunication Authority and braodband users (82 million) are paying 12.5% advance income tax in addition to 19.5% sales tax on services to provinces and 16% FED if living in Islamabad Capital Territory, irrespective of their level of income. The tax incidence is over 35% to 55% on many imported goods after applicable customs duty, sales tax, FED, mandatory value addition and income tax. Even salt sold under brand names is subjected to sales tax but the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are amassing more and more wealth without enjoying exemptions and/or amnesties.
We can generate enough money for meeting all our current expenses, development needs and public welfare and the federal/provincial governments can retire debts in a few years’ if exemptions and waivers are withdrawn and fair taxes are collected firmly through an agency insulated from all kinds of influences and run by competent and professional staff. It is possible to become a self-reliant nation. However, this dream for Pakistan can never be realized unless all the elitist structures are dismantled and people are empowered to run their financial and administrative matters through efficient and elected bodies as envisaged in Article 140A of the Constitution with fiscal power to have own funds and allocation from shares received by provinces from NFC Award to provide the facilities of health, education and all civic amenities to the local residents at grass root level.
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The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).