Huzaima Bukhari & Dr. Ikramul Haq
Senate Standing Committee on Finance sent a number of meaningful, though unbinding, recommendations to the National Assembly on 21 June 2013. Finance Minister Ishaq Dar ignored all of them while making the concluding speech on the budget on 23 June 2013. The amended version of Finance Bill 2013 submitted shows stubbornness to stick to regressive taxation and give more and more discretionary powers to Federal Board of Revenue (FBR)—an institution wrought with corruption, and inefficiency.
Mr. Ishaq Dar is relying on FBR where frequent occurrences of mega scams—fake refunds, flying invoices, under invoicing, excessive payments of export rebates, just to mention a few—have increased manifold confirming the existence of a strong mafia—as unholy alliance between corrupt tax officials and unscrupulous elements—that is depriving the nation of billions of rupees and criminally shifting the incidence of taxes onto the poor. FBR was assigned the target of Rs. 2381 billion for the current fiscal year. However, it collected only Rs. 1824 billion till 24 June 2013, which included blocked refunds, fake demands and advance payments of billions from banks alone. It is a national scandal which needs to be probed at the highest level.
The Senate Committee specifically has recommended exchange of information with Swiss banks where the rich Pakistanis have stashed trillions—this is all untaxed money and its source is dubious. This recommendation has assumed renewed importance as latest report from Swiss Central Bank published in The Times of India of 21 June 2013 showed that Pakistanis has a slight edge over Indians with total funds amounting to 1,441 million Swiss francs [Rs. 1.52 trillion] held there by Pakistani individuals and entities. However, this was the lowest level for such funds ever since Switzerland’s Central Bank began compiling this data in 2002 and was less than half of the record high amount of over 3 billion Swiss francs [Rs. 4.18 trillion] recorded in 2005. The previous record low of 1.95 billion Swiss francs [Rs. 2.06 trillion] was seen in the year 2010. In their local currency, the total funds held by individuals and entities from Pakistan in Swiss banks stood at over Rs. 1.5 trillion as on December 31, 2012”.
It was further revealed in the report that “this marked a decline of nearly 32 per cent from 2,119 million Swiss francs (Rs. 2.32 trillion) at the end of 2011, as per the latest annual report of Switzerland’s Central Bank on banks operating in the country. The issue of alleged stashing of black money in Swiss banks has been a matter of intense debate in Pakistan, as there have been reports of some top former government leaders having kept their money in banks in the European country due to their hugely popular ‘safe-haven’ status. However, a higher amount than Indian entities, assumes significance because Pakistan is a much smaller country in terms of population and area. Still, the quantum of money held by Swiss banks for their Pakistani clients was about 1.5 per cent higher than the equivalent figure for Indians at 1,421 million Swiss francs at the end of 2012, the latest data compiled by Swiss National Bank (SNB) shows”.
Senate committee recommended comprehensive amendments to the Finance Bill 2013, some significant are:
- if the government is sincere and serious in catching the real tax-evaders, then money held by Pakistanis in Swiss banks and other off shore centres should be traced by seeking mutual assistance of other countries under the international law and through bilateral agreements. Obviously the big fish have hidden their untaxed wealth there. There is already a precedent as the United States government has asked for details of secret Swiss Bank accounts of American citizens to catch tax evaders. This proposal must be included in the Finance Bill.
- We have serious reservations about sub-clause 17(c) of the clause (4) of the Finance Bill, 2013 authorising appointment of an officer in BPS-17 with 15 years’ experience as Judicial Member of the Appellate Tribunal. This will result in appointment of junior officers in BS-18 or 19 as Judicial Member compromising the effectiveness of the Appellate Tribunal. It is therefore proposed that only officers in the BS-20 or above who are law graduates may be appointed as Member Judicial.
- Increase in sales tax rates should be withdrawn as it would raise prices of all commodities which would adversely affect the common man.
- all those sections and clauses included in the Finance Bill, 2013 that are not within the purview of a money bill should be dropped.
- the proposal for access to all bank accounts in Pakistan to Board is “too intrusive, against privacy of individuals and is prone to abuse and misuse since FBR is itself susceptible to corruption, as even stated by Chief Justice of Pakistan”. It will likely lead to loss of confidence of Pakistan’s people in their own banks, almost similar loss of confidence is suffered due to seizure of foreign currency accounts after the 1998 nuclear tests. This amendment should be withdrawn.
- the lowest taxable income slab be kept at Rs 500,000 instead of Rs 400,000.
- There should be enhancement in the rate of import duty on cosmetics.
- current proposal for salary taxation is regressive. It should be reviewed to be made equitable.
- proposal that the parameters for selection of audit through computer balloting by the FBR shall remain confidential is against the principle that the tax system should be fair and transparent. Taxpayers are entitled to know what the parameters for selection of audit through computer balloting are and FBR must make these public.
- SRO 500 (1)/ 2013 and SRO 503 (1)/ 2013 which seek to withdraw concessions available to 13 districts of Khyber Pakhtunkhaw, FATA and PATA should be withdrawn immediately.
- proposed reduction in minimum tax liability of those engaged in the distribution of cigarettes is unjust as cigarette smoking is injurious to health. It should be withdrawn.
- charge of withholding tax on corporate structure basis is punitive and against the spirit of withholding tax regime. Withholding tax rates have always been defined items/products supplied and on the basis of resident or non-resident taxpayer basis. The choice of corporate structure is a business decision of individuals which may not be questioned for withholding purposes. Further, professionals firms e.g. chartered accountants, lawyers and many others are not allowed by operation of law to incorporate as company.
- There should be no withholding on raw agricultural produce and on agro-based industries, ensuring protection of low-income farmers and agricultural producers/cultivators.
- the procedure of sales tax refund for retailers, which is very complex, be simplified. It further recommended that the procedures of 50 percent concession on sales tax refund allowed to retailers in Khyber Pakhtunkhaw be simplified.
- proposed amendments in the Budget to impose extra taxes of different types of supplies to or purchases from unregistered persons may be replaced with the following, “A nominal percentage of withholding tax (say 0.001 percent) should be imposed through banks on all kinds of outward remittances made by any bank account holder to a bank account of a registered person or deposit of cash by any CNIC holder in the account of registered person. This will enable FBR to compile data of business payments made by any un-registered person to a registered person. On the basis of data collected from banks, FBR must initiate proceedings to register those un-registered persons who are required to be registered under the Sales Tax Rules 2006. FBR’s website should be made helpful for the banks to identify the registered persons at the time of making any remittance or depositing cash to its account.”
- revision of return before assessment shall be the right of assesses. If the revision is done voluntarily before issuance of notice on it the Commissioners’ prior approval should not be required.
- empowerment of commissioner to conduct audit of assesses is purely a judgment for which many reasons may be recorded. It would be more pertinent that the power be given to the Chief Commissioner instead of the Commissioner.
- FBR should introduce ‘FBR Privilege Card’ for compliant taxpayers who significantly contribute to national exchequer. The said privilege card should be provided to individuals and corporate units with the benefits including but not limited to availability of finances at discounted rates, travel privileges, easy processing of utilities connections, incentives to investment in new business ventures, exemption of taxes on royalties and technical fees for bringing new technologies in the country, reduced rates of taxes on dividends. The FBR Privilege Card should be given to a company which contributes over Rs. 200 million in national exchequer. For individuals, it should be given on Rs. 5 million or more paid in income taxes.
- improve equity in taxation system by increasing the direct and indirect tax ratio to 45:55 from 35:65.
- to encourage broadening of the tax base, targets for number of taxpayers filing income tax returns may also be set and people with NTN must be made to file their returns.
The Securities and Exchange Commission of Pakistan (SECP) also expressed concern over certain amendments proposed in the Finance Bill 2013 which, according to it, would hurt the financial services industry. The SECP in its proposals opposed imposition of federal excise duty (FED) on investors in mutual funds. SECP as regulator of non-bank financial sector (capital markets, insurance, NBFCs, mutual funds, pension funds) and corporate sector, SECP has been advocating reduction of corporate tax rate, to encourage corporatisation and documentation of economy. In its response to Finance Bill 2013, SECP appreciated proposal of corporate tax rate of 34 percent and a gradual reduction in its rate to 30 percent over five years. This measure, it says, would help achieve the objectives of documentation, besides stimulating capital formation and enhancing competitiveness of local companies in the global markets. However, SECP says, certain proposals forwarded by it were not considered in the Finance Bill 2013 such as:
- Exemption from withholding tax deduction on withdrawal of accumulated sums from Voluntary Pension Scheme (VPS) if the amount represented transfer from provident fund (Section 156B of Income Tax Ordinance, 2001). Tax chargeability on the same is already exempt under clause (23C), Part I of Second Schedule. Exemption from withholding tax deduction of monthly instalments paid from Income Payment Plan, the duration of which exceeds ten years (Section 156B of Income Tax Ordinance, 2001). The tax chargeability on the same is already exempt under clause (23B) of Part I of Second Schedule.
- Ownership threshold to avail group taxation under section 59AA of the Income Tax Ordinance, 2001 is 100%, which is difficult to be met if a subsidiary company, which is listed on stock exchanges in Pakistan, is delisted. Some minor shareholders may be untraceable for variety of reasons and therefore holding company is not able to acquire 100% shares to avail group taxation benefit. SECP recommends that the condition of 100% shareholding in the subsidiary company by the holding company should be reduced to 98% in case the subsidiary company being a listed company undergoes delisting.
SECP says that the following amendments proposed in the Finance Bill 2013 would adversely affect the government’s target to increase savings and investment rate to 20% of GDP:
- Imposition of FED on investors in mutual funds: Investors in mutual funds are already subject to provincial sales tax on services at 16 percent. The Finance Bill 2013 carries a proposal of introducing federal excise duty on asset management services (which is paid by the mutual fund investors) as well. This tantamount to double taxation on mutual funds investors and will result in mutual funds investors paying a total levy of 33% (on top of the capital gains tax and tax on dividends at investor level already being paid by them) which will severely discourage them from investing in mutual funds. In an environment where savings rate is already very low, and investors base in the mutual fund industry is very limited, such measures will deter investment. The SECP proposes that in the presence of provincial sales tax, FED should not be additionally imposed on mutual funds investors and the amendments proposed through clause 5(8)(b)(ii) and clause 5(9)(b) of the Finance Bill 2013 in S. No 8 of Table II of the First Schedule and in S. No 8 of Table II of Third Schedule of the Federal Excise Act, 2005 should be removed.
- Tax credit on investments to be obtained via refunds from FBR: Presently tax credit on investments in mutual funds, voluntary pension schemes, and life insurance schemes is allowed as adjustment against the gross tax liability on production of documentary evidence. This facility has now been proposed to be withdrawn with the recommendation that the tax credit may be claimed as a refund at the end of the year. This proposal is revenue neutral but will certainly create delays and operational inconvenience both to the investors and the FBR. The complication of tax credit process will discourage investors from investing in mutual funds, voluntary pension schemes and life insurance schemes, thus hindering savings and resource mobilisation in the country and affecting capital markets. The proposed change will be detrimental for the development of the retail investor base and will not help grow the savings rate in the country. This measure also appears to be in a sharp contrast with the present regime’s stated objective of simplifying the tax procedures to make them compatible with the efficient tax jurisdictions of the contemporary world. Therefore, the SECP proposes that the amendment proposed through clause 4(18) of the Finance Bill 2013 in section 149(1)(b) of the ITO may accordingly be omitted.
- Pass through status of mutual funds: Section 233AA, amended through clause 4(39) of the Finance Bill 2013, proposes 10% withholding tax on margin financiers for stock exchange transactions. Mutual funds world-wide, and in Pakistan, are recognised as a pass through vehicle in order to prevent double taxation on savings through mutual funds. The SECP proposes that when mutual funds act as margin financiers, considering their pass through status as recognised by FBR, they should not be subject to withholding tax under this clause. For mutual funds, income from capital gains and profit from debt is also not subjected to withholding tax. This measure will be revenue neutral as mutual funds being pass through vehicles will in any case be entitled to a tax refund of the same amount. An amendment in clause 47(b) of Part IV of Second Schedule of the income Tax Ordinance may accordingly, be made to allow exemption to mutual funds from the withholding tax.
- Income support levy proposed through clause 6 of the Finance Bill, 2013: This levy will be only overburdening those who are already in the tax net, paying income tax and have made their wealth after paying due taxes, therefore this should be withdrawn. Such a levy will not support the Government’s objective to bring in those persons in the tax net who are presently not paying any income tax to the government.
Terming the above proposals significant, the SECP has strongly recommended appropriate incorporation in the final Finance Act of 2013 to be passed soon. The SECP says that its proposals would help in achieving objectives of documentation of economy and to promote development of alternative non-bank financial system working in parallel to the banking system.
The adoption of Finance Bill 2013 without considering the above recommendations of Senate Standing Committee or SECP or other bodies would be an unwise step. Unlike the past practice of worthy members of the National Assembly (MNAs) not even bothered to ponder about the impact of regressive taxation on the ailing economy and its devastating burden on the poor, the new members should try to understand what FBR is doing to have its hegemony over the Parliament.
The following observations from Mr. Abid Shaban, a leading tax expert, can be helpful for the worthy members of National Assembly to understand the real malady—FBR—that is destroying our tax system:
“Despite this year’s dismal performance of failing to meet the tax collection target of Rs 2381 billion and instead collecting about Rs. 2000 billion; in spite of frequent news of fraudulent issuance of refunds running into billions of rupees; in spite of rampant corruption in the organization which according to ex-Finance Minister Saleem Mandviwalla amounted to Rs 600 billion, the FBR has decided to give bonuses to its staff and officers ranging from one salary to three salaries. This is shameful to say the least especially as the country is going through economic crises. One fails to understand or appreciate why FBR gives double basic salary to its staff and now this un-called for bonuses. FBR officials are government employees and they should only be entitled to their normal salary according to their pay scale as is the case with others. The Finance Minister Mr. Ishaq Dar and the National Assembly should look into this issue of FBR staff getting double basic salary and now “bonuses”. They should also un-pack the whole issue of “tax collection” and they will be shocked to know that over 70% tax collected is from tax deductions and FBR staff does not contribute anything towards it.
The ex-Chairman of FBR is on record to state that Pakistan has one of the lowest tax-to-GDP ratios in the world as only 0.9% of population pays tax and Pakistan ranks 23rd from the bottom of a list of 176 countries ranked based on percentage of population paying. In Pakistan 82 percent of all sales tax and federal excise duty is paid by top 100 companies. It is also a fact that there are about 1,18,000 persons/entities enrolled in Sales tax and about 85,000 of them file their monthly return of Sales Tax and out of those filing their Sales Tax returns there are about 15,000 Sales Tax payment filers others either filing Nil or Null returns. So one wonders what FBR is with 35,000 plus staff and officers doing.
On Income Tax side, one has been hearing about the so called potential 3 million taxpayers about whom FBR has solid data based on their expenditure that they should be filing their returns but are not filing their income tax returns. The ex-Chairman FBR had made a solemn commitment in December 2012 in the Senate, that 3,00,000 notices out of the above data base of 3 million tax payers will be immediately issued and these will be brought on the tax net. Six months have gone by and nothing has happened. The list of FBR failures and corruption reported in press is very large and gives one a feeling that FBR has become dysfunctional and there is an urgent need to re-organise the organization. In a commercial organisation, employee bonuses are tied to results. If employees do better when the firm does better, then individual efforts and interests may be more correctly aligned with firm interests and they may or may not get a bonus. Hence, workers get bonuses in good times, and get their “guaranteed” salary in bad times”.
The Finance Bill 2013 as usual is the handiwork of bureaucrats sitting in the FBR. These wizards (sic) are directly responsible for monstrous fiscal deficit as they have failed to meet the targets and bring the mighty sections of society within the tax net or not collecting what is actually due from them. They are bent upon collecting taxes where they are not due. There is a direct link between growing poverty in Pakistan and distortion in the tax base since 1992, when under Nawaz Sharif regime, major tax burden was shifted on consumers by introduction of massive presumptive taxes in income tax law. Lack of judicious balance between direct and indirect taxes and levy of regressive taxes in the garb of income tax has pushed an overwhelming majority of Pakistanis either towards or below the poverty line—the number is now over 60 million.
The common man is presently subjected to exorbitant sales tax and FED of 17% to 19.5% (tax incidence is 35% on finished imported goods after applicable customs duty, sales tax, federal excise, mandatory value addition and income tax) on essential commodities [even salt sold under brand names is subjected to 17% sales tax] but the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are shamelessly amassing more and more wealth without paying any income tax. Unfair taxation resulting into inequitable distribution of resources is the root cause of our multiple socio-economic ills. State policies induce massive tax evasion (section 111(4) of the Income Tax Ordinance, 2001 is a permanent tool for whitening of untaxed money). Pakistan, for the last decade has been witnessing below 10 percent tax-to-GDP ratio, whereas in our region Sri Lanka had tax-to-GDP ratio of 17 percent in 2011. After 10 years of World Bank-sponsored tax reforms, we have ended up with a monstrous informal economy, dip in tax-to-GDP ratio, and rampant corruption in tax machinery.
FBR as it exists today is incapable of tapping real tax potential of Pakistan which is not less than Rs. 8 trillion [see details in How to bridge huge tax gaps? Business Recorder, April 15, 2011]. By collecting less than Rs. 2 trillion at the end this fiscal year, FBR’s stalwarts are claiming to have achieved “wonders” and created a “record” entitling them to bonuses! Nothing will change unless FBR is made independent, efficient and effective body managed by true professionals—preferably under a Board of Directors answerable directly to a joint committee of both the houses. The members of MNAs before passing Finance Bill 2013 should give serious thought to what is highlighted by Senate Standing Committee on Finance, SECP and Mr. Abid Shaban narrated above.
The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Professors at Lahore University of Management Sciences (LUMS).