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Income Tax base – Myth & Reality

By Dr. Ikramul Haq*

The Central Board of Revenue has been consistently and persistently claiming that tax base of Pakistan is disappointingly narrow and majority of the people do not pay income tax.  The reality is quite opposite. The people of Pakistan are the most heavily taxed (rather over-taxed) nation in the entire Asian region as per official facts and figures. As far as tax base is concerned, out of total population of those earning taxable income, 80 per cent are paying tax at source or through voluntary filing of returns. In most of the case, the tax deducted is the full and final discharge of liability, hence the taxpayers do not file statements (required under section 143B of the Income Tax Ordinance, 1979) which has created a wrong impression that our income tax base is narrow. The Income Tax Department collected Rs. 6 billion income tax during the financial year 1998-99 from 20 million bank account holders [who maintain Profit & Loss Sharing account (P&LS A/c)] alone, and yet they say that tax base is narrow!

For a long time now, we have been apologetic (especifically before the IMF & the World Bank) that total income taxpayers (registered) in Pakistan are just 1.2 million in a population of 134 million. This is a myth. The reality is that since 1st July, 1992 all commercial electricity consumers (including about 2.2. million retail outlets) are paying minimum of income tax of Rs. 60 per month (since 1.7.96 and prior to that Rs. 30 per month) and maximum of Rs. 720 per month( since 1.7.96 & prior to that Rs. 360 per month). The total number of commercial electricity consumers in Pakistan as on March, 1999 (Economic Survey 1998-99, Page 170) was 4.19 million.  It means that during the financial year 1998-99, the total number of persons who paid income tax u/s 50(7E) of the Income Tax Ordinance, 1979 (hereinafter: “the Ordinance”) is not less than 4 million. The Central Board of Revenue in its CBR Year Book 1997-98 (page 38) admitted that collection u/s 50(7E) of the Ordinance during the financial year 1997-98 was Rs. 2010 million.

The above figures explode the myth that income tax base in Pakistan is narrow. It is a matter of great pity that the apex tax collection authority (CBR) itself does not know how may people in Pakistan are paying income tax. The people of this country are accused of not paying the income tax, whereas the reality is that even a petty shop keeper in a village (whose total income is much below the minimum taxable limit of Rs. 40,000) is paying as high tax as Rs. 720 per annum. On the contrary, the big landlord of his village, who is earning million, is not paying even a single penny as personal income tax.

The total population of Pakistan, according to Population Census, 1998, is 134.5 million. The percentage of rural population is 67.5%. Out of total population, 43.1 per cent are below the age of 15 years (They are not income earner, hence cannot be taxpayers). The total labour force stands at 38.59 million, out of which 25.86 million is rural labour force. Reading all these facts together, the income tax paying population of Pakistan cannot be more than 30 million, out of which 20 million paid income tax u/s 50(2A) of the Ordinance! Yet the CBR and the Government is engaged in a vicious propaganda that people of Pakistan are not paying taxes and our income tax base is narrow!

The reality is that people are over-taxed, but they get nothing in return. The successive governments have failed to fulfil even their basis obligation of safeguarding life and property of people, not to talk of providing them basic facilities of health, education, water and other civic amenities.

The citizens have been making substantial contribution under the income tax regime and even do not claim the refunds by filing returns. The CBR without taking into account this fact has been claiming that total number of income tax payer is just over one million (those who filed return). It was the duty of the CBR to allot National Tax Numbers (NTNs) to all those who paid tax u/s 50(2A, 50(5), 50(6), 50(7BB), 50(7C), 50 (7E) etc. rather than waiting for returns/statements u/s 143B of the Ordinance, from them. Had the CBR done this by just collecting the names and particulars of commercial electricity consumers from the WAPDA, today we would have over 4 million taxpayers on roll. Had they brought to Tax Roll every account holder of bank in whose case tax was deducted u/s 50(2A) of the Ordinance, this figure could have been as high as 20 million. The Department did not bother to prepare a data base of persons in whose case full and final tax was deducted/collected, though million of rupees were spent (rather wasted) on so-called computerization. The Pakistan Revenue Automation Limited (PRAL) is CBR’s computer company (where market wages are given!) but it has done no worthwhile work in this direction.

The performance of PRAL is most lementable as the CBR even does not know the exact number of taxpayers in the country. The taxpayer is not one who filed return/statement, but a person who paid tax under the Ordinance [see section 2(6)]. How can CBR blame the public at large for its own pathetic performance?

It is highly lamentable that although the people of Pakistan paid Rs. 120 billion under the income tax alone in 1998-99 (the figure was just 40 billion in 1993-94), yet instead of getting credit for it, they have been dubbed as “tax evaders”. On the other hand, the so-called democratic governments have failed to cut their wasteful expenditure. Defence and debt service alone eat up the entire gross revenue of the State. Are the people of Pakistan are responsible for this mismanagement of State affairs? The rulers and vested interest should be taken to task for this State of affairs. The money plundered by them should be recovered.

The CBR owes an open apology from the people of Pakistan for criminal negligence in reporting the correct figures regarding income taxpayers in Pakistan. Out of total collection of 120 billion income tax during 1998-99, the percentage of withholding taxes and voluntary payment under section 54 of the Ordinance is over 82 per cent. The CBR’s own efforts (sic) in income tax collection are just to the extent of 18% of total collection. The corrupt tax machinery is the root cause of all the problems relating to compliance of tax laws. The taxpayers and withholding agents are victim of their highhandedness. It is the highest time that the CBR should put its own house in order and stop malicious propaganda against the people in general and business community in particular.

* The writer, a leading International Tax Counsel, specialises in international tax, corporate and constitutional laws. He is Chief Partner of Lahore Law Associates (Email irm@brain.net.pk). He is member of Visiting Faculty of Institute of Direct Taxes in Lahore.  He studied law, journalism and English literature at the University of Punjab and Government College Lahore.  From 1984 to 1996 he was associated with Civil Services of Pakistan as Deputy Commissioner of Income Tax. He is author of numerous books on Pakistani Tax Laws, some of which are co-authored with his wife, Mrs. Huzaima Bukhari. He has recently been awarded Doctorate of Law for his research on Tax Reform in a Quasi-Constitutional Perspective.

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