Huzaima Bukhari & Dr Ikramul Haq
The Federal Board of Revenue (FBR) has surpassed the third-time revised target of fiscal year (FY) 2020-2021 and for the first time crossed the mark of over Rs. 4.7 trillion by collecting Rs. 4732 billion. It is commendable but well short of the original target set at the time of budget for fiscal year 2020-21 of Rs. 4.963 trillion. It is really praiseworthy as FBR showed an upward trend of 18% over last year vis-à-vis the third revised target of Rs. 4691—the second revised was Rs. 4717 billion. The tax-to GDP ratio will go further down if rate predicted by the coalition Government of Pakistan Tehreek-i-Insaf (PTI), despite three waves of covid-19, crystallises around 4% when entire data is collated. When the data will be presented by Ministry of Finance, the real (favourable) picture will emerge as the base is negative 0.4% for fiscal year 2019-20 after many decades and twice in our entire history. Covid-19 can be a reason but Bangladesh under worse condition than us posted GDP growth of 6.4% in Covid-19 endemic period.
No doubt that the FBR collects bulk of taxes at the time of clearing of goods and through numerous withholding tax provisions and advance tax pertaining to the next fiscal year. This important institution also suffers from multiple shortcomings, like basic logistics, lack of modern tools, no active centre of excellence for fiscal research and administration, trained staff to enforce the various anti-avoidance provisions in all the tax laws it administers—Income Tax Ordinance, 2001, Sales Tax Act, 1990, Customs Act, 1969 and Federal Excise Act, 2015. In this background amid the sluggish economic activities during most part of FY 2020-21 due to the third deadly Covid-19 wave, surpassing of even difficult third revised target of Rs. 4691 billion by Rs. 41 billion (as claimed in FBR’s Press release) is highly laudable. The same source on June 30, 2021 conveyed to us on special request: “The figure of Rs. 4,731 is 100 percent clean money—no advances, no preponements, no holding back of refunds. In fact, when we closed last night, we had ZERO-LITERALLY ZERO Sales Tax refunds, and zero Income Tax refunds pertaining to T/Y 2020 that I had committed upfront that these would be paid against current revenues”.
In a Press report, the Member (Inland Revenue Operations), Dr. Muhammad Ashfaq Ahmad, who is also a celebrated writer, is quoted: “The last fiscal year remained phenomenal as the FBR had remained successful in clearing all the income tax and sales tax refunds claims that were filed within the fiscal year 2020-21”.He, however, reportedly admitted to the scribe the report that “previous fiscal years (2007 to 2019) refunds are pending”.
The report claimed that in fiscal year 2020-21, the FBR “had paid Rs. 251 billion in refunds, which were 85% higher than the preceding year. These include Rs. 209 billion sales tax refunds.
The report published in Business Recorder on July 1, 2021 says: “FBR has successfully achieved the assigned revenue collection target of Rs 4691 billion for 2020-21. The tax collection has crossed Rs 4725 billion mark. However, this is only a provisional figure and revenue collection would further show significant increase after compilation of data till 12 midnight June 30. These figures would further improve before the close of the day and after book adjustments have been taken into account. The FBR has provisionally collected Rs 4725 billion during July-June (2020-21) against Rs 3,996.7 billion during 2019-20, reflecting an increase of Rs 729 billion”.
The third revised revenue target as mentioned in the above report of Rs. 4691 billion is correct. The second revised was Rs. 4717 billion and FBR exceeded it by Rs. 14 billion. Dr Ashfaq told the other reporter: “There were another Rs. 75 billion refunds that had been adjusted against the demand”. He also claimed that “due to reliance on post-refund audits, the FBR has also been able to neutralize Rs. 114 billion refunds which gave a signal to the exporters that where the FBR was active in giving refunds, it was also vigilant on bogus refund claims”.
The bifurcation of original targets and the third time revised target of Rs. 4691 billion is: Direct tax: (revised Rs 2034 billion and original was Rs. 1789 billion, Income tax (revised Rs. 1780 and original Rs. 2032 billion), Sales Tax: (revised Rs. 1927 billion and original Rs. 1919 billion), Customs: (revised Rs. 700 billion and original Rs. 640 billion), Federal Excise Duty: (revised Rs. 275 billion and original 361 billion).
The head wise provisional collection figures for the whole year is not available in FBR’s Press release. On the basis of data revealed in the report , the analysis of collection by FBR under different heads vis-a-vis revised and original target is presented below:
- Income tax: Rs. 1737 billion (98% of revised and 85% of the original target).
- Sales tax: Rs. 2189 billion (113% of revised and 114% of the original target)
- Customs: Rs. 765 billion (109% of revised and 120% of the original target)
- Federal Excise Duty: 284 (103% of revised and 79% of the original target)
FBR has issued Press release about details of tax collections, which reads as under:
“Federal Board of Revenue (FBR) has released the provisional revenue collection figures for the Fiscal Year 2020-21. According to the provisional information, FBR has collected net revenue of Rs. 4,732 billion during Jul-June period, which has exceeded the target of Rs.4, 691 billion by Rs. 41 billion. This represents a growth of about 18% over the collection of Rs. 3,997 billion during the same period last year.
The net collection for the month of June was Rs. 568 billion representing an increase of 26% over Rs. 451 billion collected in June 2020. The year-on-year growth of 18% is unprecedented particularly as it is realized on the heel of 26% growth in June. These figures would further improve before the close of the day and after book adjustments have been taken into account.
On the other hand, the gross collections increased from Rs. 4,132 billion during this period last year to Rs. 4,983 billion, showing an increase of 21 %. The amount of refunds disbursed was Rs. 251 billion compared to Rs. 135 billion paid last year, showing an increase of 86%. This is reflective of FBR’s resolve to fast-track refunds to prevent liquidity shortages in the industry.
The improved revenue performance is even more significant due to adoption of ‘no-undue’ advances policy as well as effective enforcement by field formations. It is also a reflection of growing economic activities in the country despite facing the challenge of third wave of COVID-19.
Meanwhile, FBR’s efforts to broaden the tax base are expending apace. Early signs suggest such efforts are bearing fruits. As on 30-6-2021, income tax returns for tax year 2020 have reached 3.01 million compared to 2.67 million in Tax Year 2019, showing an increase of 12.5 %. The tax deposited with returns was Rs.52 billion compared to only Rs.34.3 billion last year, showing an increase of 52.1%.
According to the information released by FBR, 11,100 point of sale terminals have been integrated with real time reporting system of FBR.
Pakistan Customs has collected Rs. 742 billion under the head of customs duty in FY 2020-21 against the assigned target of Rs. 640 billion and exceeded its target by Rs. 102 billion which is 16% more than the assigned target. Whereas during the month of June, 2021 an amount of Rs. 83 billion has been collected under the head of customs duty against the monthly target of Rs. 75 billion which is again 12% more than the assigned monthly target. It is quite important to mention that an amount of Rs. 117 billion was collected more under the head of customs duty in financial year 2020-21 as compared to FY 2019-20, despite the re-arrival of COVID-19 pandemic and has shown a growth of 18% as compared to previous financial year, which is quite remarkable.
During June 2021 smuggled goods worth Rs. 3.7 billion have been seized. Similarly, during July 2020- June 2021, smuggled goods worth Rs. 57.7 billion have been seized as compared to Rs. 36 billion in Jul 2019-June 2020 thus showing an increase of 58%.
Directorate General of Intelligence & Investigation-IR showed commendable performance during July 2020 to June 2021. During this period, Directorate General forwarded 1,608 Investigation Reports and Red Alerts to the field formations involving revenue amounting to Rs. 244 billion. Directorate General filed 71 complaints under Anti-Money Laundering Act, 2010 where more than Rs. 62 billion were involved. Directorate General seized 8,754 cartons containing 87,540,000 cigarette sticks during the period of July 2020 to June 2021”.
There is obvious and brazen distortion in presentation of data in FBR’s Press release that is not showing tax collection by Inland Revenue Service (IRS) versus Pakistan Customs Service (PCS). It is highly lamentable. In simple words, PCS collected 765 billion that is 16% of total collection of 4732 billion and IRS made contribution of 84%. The poor language, typographical and grammatical mistakes in Press release further prove the point that the FBR needs fundamental reforms in all areas.
The FBR has performed satisfactorily proving many experts (not us, we said, it would exceed the third revised target of Rs. 4691 billion) wrong that collection could not be more than Rs. 4.6 trillion at the best. Even in the Federal Budget 2021-22: Annual Budget Statement in the revised target it was shown at Rs. 4691 billion. The FBR in the current fiscal year is given the target of Rs. 5829 billion as per Federal Budget 2021-22: Annual Budget Statement.
It is possible to achieve this high figure, even exceed Rs. 6 trillion if the proposals given in the articles ‘There’s need for new tax model’, Business Recorder, February 26, 2021 and ‘Restructuring the tax system’, Business Recorder, January 22-24, 2020] are considered seriously and implemented. It is highlighted time and again that the existing tax system needs complete overhauling to tap the actual tax potential and at the same time help economy to absorb the financial toll of Covid-19 and grow at a rapid pace.
The challenge before FBR is to enforce the law and get returns of income tax from all taxable persons as well as register all those who fall under the sales tax regime and other taxes administered by FBR.
According to Finance Minister, Shaukat Fayaz Ahmed Tarin, and Special Assistant to the Prime Minister (Minister of State) on Finance & Revenue, Dr. Waqar Masood, “around 7.4 million potential tax evaders have been identified and will be criminally prosecuted”. The reality as shown in our above and other articles is that gap in income tax is 19 million and in sales tax around 2.5 million. Presently, the income tax filers on Active Taxpayers List (ATL) are 2,775,349 as on June 28, 2021 and majority filed nil or below taxable return. The fact is concealed in the Press release.
The real potential of taxable income tax payers and sales tax was highlighted in ‘There’s need for new tax model’, Business Recorder, February 26, 2021. At present, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable income tax at source as mobile users, yet FBR, lender/donors/media call the people of Pakistan tax cheats. This is highly lamentable. Had this been the case, how did FBR collect so much tax at source (over 45% of total collection at import stage alone)! This is anti-growth.
We must collect taxes where due and not in advance or from those not chargeable to tax. Sadly the 75 paisa tax on cell call exceeding 5-minute is inconsiderate towards the poor, impractical to implement for operators, and inconsequential to the efforts of FBR. Allow the people capital formation and growth-friendly environment with simple taxation. The relief given to small and medium enterprises (SME) as manufacturers up to turnover of Rs. 250 million should be for retailers and others as well, without any discrimination. Low-rate tax on broad base with simple compliance procedure is needed to collect Rs. 8 trillion till 2023.
On our query about turnover tax, Dr. Ehtisham Ahmad, renowned economist and having rich experience of restructuring tax systems of various countries commented: “It may also create incentives for larger firms to masquerade as SMEs, or hide value chains by transacting with untraceable SMEs. Much depends on how the GST/VAT is applied. The Mexicans solved the problem by effectively dropping the VAT registration threshold to zero, bringing in complete value chains without the possibility of manipulation by the SMEs or the larger firms using the SMEs (important in textiles for example)”. He further conveyed to us:
“The Michael Best proposal to introduce a turnover tax for bats-case countries like Pakistan might raise revenues, but is absurd. (Best has been strongly pushed by Ijaz Nabi to chair the Revenue Sub-Committee of the EAC). While it might raise revenue in the short run, it would destroy the productive base much more completely than the stupid capacity tax measures in place from time to time for meeting stop-gap revenue targets. The third-best proposal also requires a reversion to the tax inspector model (old excise approach) as it is necessary to verify quantities produced and is the opposite of the arms’ length information based administration model that minimizes contact between the tax administration and taxpayers!! So this is likely to send the country back to the Stone Age—perhaps that’s the secret agenda of foreigners like Michael Best!!”
We told Dr. Ehtisham that “we want to learn from your rich knowledge and experience about our proposal of harmonised sales tax on goods and services, single national tax agency and National Tax Court. His reply was: “I strongly support the three issues mentioned, but would add that it is useful to consider a different administration model to that recommended by the IMF which focuses on primarily on large taxpayers. Integrating SMEs into the regular tax regime is critical—also for their uplift, including electronic invoicing and greater efficiency and integration with global value chains. Also, the more accurate and timely information would help to block leakages in the income tax, including by large taxpayers who hide productions, employment and profits by transacting with invisible smaller taxpayers/suppliers—so whole chains disappear (as in textiles). It is a mistake to keep beating up on middle income wage earners, as Hafiz Shaikh had proposed, and is in the IMF program. This is regressive at best, since non-wage income remains notoriously difficult to tax. You also need an arms’ length administration with information based audits. And impartial tax courts as you propose”.
Dr. Ehtisham was very kind to send through email some papers on the building back better agenda in China and Mexico and for emerging market countries more generally. These we will discuss in coming articles.
He informed in the email as under:
I am not on any sub-group of the Economic Advisory Committee (EAC) and had objected to Shaukat Tarin to being notified without my permission. I had also told Waqar Masud that if the government accepted Michael Best’s third best turnover tax proposal, even if that was being pushed by Ijaz Nabi, I would go up and down the country denouncing it—much as I did with Hafeez Shaikh’s SRO243 in 2011/12.
He then suggested:
We can try, as I have since 1980–and in an influential position during 2008/9—in Meekal’s old job representing Pakistan on the IMF board, getting $11 billion with limited conditions and also oversight over the revenue agenda. Both Shaukat and Waqar were in office, but could not deliver on domestic resource mobilization promised and I quitted after a year (the Finance Secretary lied to me on my last day representing Pakistan (December 2009) that the revised VAT Bill (drafted by Anwar Kamal, Saad Rasool and others, with my assistance) had been presented to Parliament. It got lost in the mail and is still missing! And Anwar was never paid!”
The conclusion by Dr. Ehtisham proved prophetic in the form of highly anti-people and anti-growth Finance Act 2021 that was passed on 29 June 2021 and received the assent of President on 30 June 2021:
The fixation of the Imran Khan’s administration with taxing the salaried middle classes is short sighted and self defeating (these were staunch supporters of IJI—no longer)! This will not raise any revenues and is regressive—as construction fat cats are given even more privileges and tax shelters. Shocking what passes for tax policy these days!!
This is the continuous sordid story of our tax reforms and faulty tax policy till today under the PTI government—courtesy the International Monetary Fund (IMF), Michael Best and Dr, Waqar Masood, fully exposed in the Finance Act, 2021. According to the Opposition [divided and at draggers drawn, especially Pakistan People Party and Pakistan Muslim League (Nawaz)] allegedly passed fraudulently. This allegation may be political, but the facts remain that they have also miserably failed to present their agenda of accelerated, higher and sustainable growth of 7 to 9 percent or adopt after debate the one presented by Pakistan Institute of Development Economics (PIDE) available at their website: https://pide.org.pk/Research/PIDE-Reform-Agenda-Report.pdf.
[PIDE Reform Agenda for Accelerated and Sustained Growth]. However, none of the members of National Assemble mentioned it in the budget debate.
The PTI Government has also not even considered the proposals by Federation of Pakistan Chambers of Commerce & Industries (FPCCI) of adopting the model presented in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, December 2020, available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/) that could have boosted rapid, higher and sustainable and inclusive development benefitting all segments of society, leading to new investment in all sectors, prosperity and self-reliance and as a consequence, total revenue collection at federal level alone of Rs. 8 trillion in two years.
The conclusion is simple as already mention in: FBR: FATF challenges, Daily Times, March 14, 2021: It is shocking that only two political parties filed income tax returns for tax year 2020 out of 27 registered with FBR and 127 with Election Commission of Pakistan despite section 114(1)(ac) of the Income Tax Ordinance, 2001 makes it mandatory. How can we expect rule of law in Pakistan, when 125 political parties are committing flagrant violation of Article 5(2) of the Constitution? They keep on bashing FBR but fail to fulfill the command that “Obedience to the Constitution and law is the inviolable obligation of every citizen wherever he may be and of every other person for the time being within Pakistan.
The result of above article was withdrawal of proposed exemption for political parties as it could have been a blatant violation of Article 17(3) of the Constitution, rule of law and further tarnishing of image of Pakistan when we are already in grey list since 2018. It is now for the FBR to enforce all political parties to file returns for tax year 2020 and past five years and must be audited and levied penalties after giving proper hearings.
After the satisfactory tax collection by FBR, though still not to full potential, there is need for all the parties for introspection for internal reforms and compliance of all laws applicable to them in letter and spirit. The judiciary must also improve its functioning in dispensation of justice and to enforce fundamental rights of the citizens, rather than favouring the rich as explained in Regularisation for the rich, demolition for the poor, Daily Times, January 13, 2019.
The PTI Government must forge national consensus on issues on national interest and engage all political parties and together ensure that all the institution perform their functions efficiently within the limits provided in the Constitution. The Opposition must demonstrate that it respects the mandate of people and conform to democratic norms. The PTI Government must stop exploiting all less-privileged and downtrodden citizens who have been subjected to oppressive taxes like 75 paisa for cell call exceeding 5-minute and ten percent on mobile use from July 1, 2021 and heavy taxation on many food items, energy and items of daily use by the citizens. The tax credits for senior citizens, special people and researchers and teachers should be restored—see details in Budget 2021-22 and erratic taxation, Daily Times, June 13, 2021.
For levy of penalty mens rea (criminal intent is fundamental rule) and deleting it is clear violation of Article 10A of the Constitution. Even the wizard draftsmen of FBR failed to provide that exporters of services taxed at 1% (laudable amendment to bring it at par with exports of goods) will take the credit in their books of imputable income. The self-acclaimed professional becoming part of committees to remove anomalies and technical issues (sector-wise etc.) have failed to even remove these obvious lacunas, what to speak of suggesting a pro-growth and investment-friendly tax policy helping in creating jobs from agriculture to high tech knowledge-bases initiatives, rather than emphasising on bricks and mortars. They must be reminded of couplet of great poet and thinker Dr. Mohammad Iqbal:
Jahan-e-Taza Ki Afkar-e-Taza Se Hai Namood
Ke Sang-o-Khisht Se Hote Nahin Jahan Paida
New worlds derive their pomp from thoughts quite fresh and new
From stones and bricks a world was neither built nor grew.
The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE)