Huzaima Bukhari & Dr. Ikramul Haq
One slogan that is not raised enough by the economic or political agents in the country is ‘taxpayers ko izzat do’. The matter cannot be overemphasized—Ali Khizar, Respect the taxpayers, Business Recorder, November 1, 2020.
The writer in the above-referred op-ed aptly emphasised reforming all the tax agencies, especially Federal Board of Revenue (FBR) and give respect to taxpayers. Tax agencies keep on making rules and issuing statutory regulatory orders (SROs) creating more and more difficulties for citizens and increasing cost of compliance. Legislature is also indifferent in making tax codes simple and free from cumbersome rules/procedure to facilitate citizens. The author thus pertinently observed: “The perceived cost of documentation for many is too high. That is why neither higher interest rates nor higher taxes on non-filers are working. The culture of tax collecting agencies (especially FBR) must change. The trust deficit between the government and taxpayer must also be reduced. For that overall public service delivery (governance) and FBR’s way of operation has to improve. All easier said than done though”.
Revenuecracy [term coined by Dr. Pervez Tahir in Giving FBR a decent burial, The Express Tribune, November 8, 2019], keeps on maligning the citizens as tax dodgers. Unfortunately, the bandwagon is joined by the so-called “informed” analysts and all-knowing (sic) TV anchors calling Pakistanis “tax cheats”, whereas reality is quite the opposite—read details in e-book [Tax Reforms in Pakistan: Historic & Critical View] recently published by Pakistan Institute of Development Economic (PIDE) and available free at its website [https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf].
The often-repeated popular phrase that only “1% of the population pays income tax” has become Gospel truth in Pakistan that nobody is ready to challenge. It exposes the hollowness of all those who subscribe to it. Collection under withholding income tax was Rs. 1092 billion out of total direct tax collection of Rs. 1514 billion in fiscal year 2019-20, according to official document, FBR’sYear Book 2019-20. Advance tax paid was Rs. 351 billion and with returns Rs. 61 billion. FBR collected only Rs. 61 billion (arrears of Rs. 14 billion and out of current demand Rs. 47 billion) with its own efforts, which is only 4% of total income tax collection. They say problem lies with appellate authorities/courts for quashing genuine tax demands created by them.
The claim by Inland Revenue Service (FBR) that it contributes by monitoring of withholding taxes is fallacious as major contributors are: Contracts (Rs. 237.4), Imports (Rs 199.6 billion), Salaries (Rs. 129.4 billion), Bank interest & securities (Rs. 128.1 billion), Dividend (Rs. 55 billion), Telephone (Rs 54.6 billion), Electricity (Rs. 45.4 billion), Technical Fee (40.1 billion), Exports (Rs. 38.4 billion) and Cash withdrawal (Rs. 15.1 billion)—Table 10, Page 15 of FBR’s Year Book for 2019-20.
It is pertinent to mention that no bifurcation is given for remaining 56 withholding tax provisions prevalent during the relevant year. FBR claims that withholding taxes need strict monitoring for which it made “extraordinary” efforts. One wonders, what strict monitoring they do when other arm of FBR (Customs) admits the fact of under-invoicing, wrong declaration and smuggling—just to mention a few. If this is true then defaulting withholding tax agents that include officers/staff of Customs must have been penalised. No disclosure is available in any official document about what action was taken against them and how much of the lost revenue was recovered. It is still open for FBR to post on its website the details of any such actions as well as make public, the number of income tax returns and sales tax registered persons, category-wise, as on June 30, 2020 and December 31, 2020 so that performance evaluation can be made.
FBR must also post on its website on monthly basis, increase in income tax filers, sales tax registered persons, and collection figures of all taxes—income tax, sales tax, customs and federal excise duty—along with quantum of refunds due and not actually paid as is done in Year Book 2019-20. The FBR admitted before the Standing Committee on Revenue of National Assembly that total refunds due on June 30, 2020 were Rs. 710 billion [Tax refunds balloon to Rs710b, The Express Tribune, September 3, 2020]. If the admitted refunds payable are deducted from the total tax collection of FBR for fiscal year 2019-20, the net figure comes to Rs. 3287 billion or just 7.7% of GDP.
Millions pay advance income tax despite the fact that majority of them has no income or income below taxable limit. Law does not require them to file returns but under the lenders’ agenda to retard growth and in the name of so-called documentation drive, FBR wants to bother them. Members of Parliament pass tax laws as suggested by Executive without proper public debate and their critical review by independent professionals [who should be summoned by Standing Committee on Finance & Revenue]. The Parliaments and judiciary have failed to protect the fundamental rights of citizens. Forcing a person not earning taxable income to pay advance tax or file tax returns is a blatant violation of Article 4(c) of the Constitution: “no person shall be compelled to do that which the law does not required him to do”.
Another wrong notion is that traders do not pay income tax. About 4 million having commercial electricity connection have to pay advance income and sales tax with electricity. Section 235(4)(a) of the Income Tax Ordinance, 2001 says that in the case of a taxpayer other than a company, tax collected up to Rs. 43,200 of a commercial electricity user shall be treated as minimum tax and no refund shall be allowed even in case of suffering losses, especially in the wake of Covid-19 endemic/lockdowns. Law recognises payers of advance income tax with electricity bills as “taxpayers”, yet FBR/lenders/donors and all-knowing TV anchors call them “tax cheats”. They should target the rich and mighty who have been availing amnesties/exemptions/concessions/waivers under successive regimes.
The majority of mobile users, subjected to 12.5% advance/adjustable income tax, is not earning any or below taxable income. The law requires them to file complicated income tax return, wealth statement and refund application electronically!
About 60% of our population comprising youth is yet not employed, but FBR is extorting income tax from 100 million unique mobile users (having more than one number and active users). The latest data available on the website of Pakistan Telecommunication Authority (PTA) shows the total cellular subscribers as on August 31, 2020, 169 million, out of which 85 million are 3G/4G subscribers, 3 million basic telephony users and 87 million broadband subscribers.
For eliminating the trust deficit between tax collectors and taxpayers, the following steps are inevitable:
- All tax laws/rules/procedures should be made simple, fair, and easy to comply [Urdu text of all should be made available to public]. Existing tax codes/rules are complicated, ambiguous, vulnerable to diverse interpretations, thus, leading to undue litigation.
- Honest taxpayers should be respected and “tax evaders” should be punished under the law promptly to create deterrence for all.
- In the tax administration, sense of justice will come through stringent accountability. An independent authority must award damages for any excesses.
- Citizens have to deal with multiple tax agencies. These should be merged, manned by professionals creating conducive and friendly environment for taxpayers.
- Instead of being given unreasonable targets, tax authorities should be equipped and supported to collect the right amount in accordance with law without fear and favour.
- Tax collected must be used for public welfare and other legitimate needs of State and not on the tax-free perks and benefits of the affluent.
- Maximum income tax rate should be 10% or 2.5% on net wealth exceeding Rs. 10 million, whichever is higher. Companies should be taxed at 25%.
- Withholding taxes should be on real incomes (salary, dividend, rent, interest etc) and not on transactions, except for non-residents or as per rate under a tax treaty, if applicable.
- Reciprocity of taxes is essential in the form of social security and pension for all citizens.
- Honest taxpayers get discouraged when the dishonest are offered amnesties and waivers. The influential enjoy tax-free perquisites/benefits, palatial bungalows, servants, free medical facilities abroad and plots at lucrative places either free or at concessional rate. This dichotomy is lamentable and must end.
The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)