Irrational taxation & high inflation

Huzaima Bukhari & Dr Ikramul Haq

The Federal Board of Revenue (FBR), in a Press release issued on May 1, 2021, claimed collection of net revenue of Rs. 3780 billion during the first ten months of the current fiscal year, exceeding “the target of Rs.3637 billion by more than Rs.143 billion”. The International Monetary Fund (IMF) before releasing the tranche of US$ 500 agreed to lower FBR’s collection target from Rs. 4.96 trillion to Rs. 4.71 trillion for the current fiscal year (FY). FBR needs to collect Rs. 937 billion in the remaining two months (Rs. 468.5 billion per month). The performance of FBR is praiseworthy, especially in the wake of third deadly wave of Covid-19 endemic affecting the economic activities massively due to complete and partial lockdowns in many parts of the country.

The FBR in Press release claimed the following:

• “The collection “represents a growth of about 14% over the collection of Rs.3320 billion during the same period last year. The net collection for the month of April was Rs.384 billion, against a required increase of Rs.242 billion, representing an increase of 57% over Rs.240 billion collected in April 2020 and 159% of the target. The year-on-year growth of 57% is unprecedented particularly as it is realized on the heel of 46% in March. These figures would further improve before the close of the day and after book adjustments have been taken into account”.

• The gross collections increased from Rs. 3438 billion during this period last year to Rs.3976 billion, showing an increase of 16 %. The amount of refunds disbursed was Rs.195 billion compared to Rs.118 billion paid last year, showing an increase of 65%. This is reflective of FBR’s resolve to fast-track refunds to prevent liquidity shortages in the industry. The improved revenue performance is a reflection of growing economic activities in the country despite facing the challenge of third wave of COVID-19. However, in the closing days of the April, revenue collection slowed down considerably as measures to fight COVID were put in place. Collections in May and June would be affected in case fighting pandemic reduces the space for economic activities.
• Meanwhile, FBR’s efforts to broaden the tax base are expending apace. Early signs suggest such efforts are bearing fruits. As on 1-5-2021, income tax returns for tax year 2020 have reached 2.9 million compared to 2.6 million in tax year 2019, showing an increase of 12%. The tax deposited with returns was Rs.50.6 billion compared to only Rs.33.1 billion, showing an increase of 53%.
• Pakistan Customs has collected Rs. 606 billion under the head of customs duty in first ten months of FY 2020-21 against the assigned target of Rs. 507 billion and exceeded its target by Rs. 99 billion which is 20% more than the assigned target. 59 billion which is again 10% more than the assigned monthly target……It is quite important to mention that an amount of Rs. 88 billion was collected more under the head of customs duty in first 10 months of current financial year as compared to FY 2019-20, despite the re-arrival of COVID-19 pandemic and has shown a growth of 17% as compared to previous financial year, which is quite remarkable”.  

For full details visit: https://fbr.gov.pk/fbr-registers-historic-growth-again-in-april-14-growth-in-10months/152969

In the Press release of FBR, there is no mention of collection of income tax, sales tax and federal excise duty. Out of total collection for ten month of the current FY, according to a Press report, 46% came from taxes levied at import stage. These taxes are collected in advance before actual transactions take place and real income or loss is computed. These have serious impacts on businesses that are already facing severe cash flow issues due to prevailing precarious position of economy.

This data shows that the main reliance of FBR remains on indirect taxes. Collection under the head income tax is Rs. 1.36 trillion, showing growth of only 8% over the same period of the last fiscal year. A Press report claims that FBR missed the target of income tax by Rs. 42 billion. The collection of nearly 70% of indirect taxes (in income tax many withholding taxes are in the nature of indirect taxes) not only adversely affects the salaried class and the poor but is also one of the factors for high inflation that reached 11% in April 2021.

The Prime Minister on the one hand wants to bring down the inflation and on the other praising growth in regressive taxes! It is admitted by his Special Assistant on Energy that through “reducing and rationalising the taxes on the fuel used for electricity generation and the consumer bills, the government can avoid further increase in tariffs”. The Press report mentions that “FBR collects sales tax on the basis of 100% billed amount while the actual collection remains around 92%”. It is worthwhile to mention that all retailers having commercial electricity connection and their total annual bill is up to 1.2 million, pay 5% sales tax where the monthly bill amount does not exceed Rs. 20,000 and at the rate of 7.5% where the monthly bill exceeds this threshold and additional 3% sales tax is levied in the case of unregistered retailers. The electricity supplier is bound to deposit this amount without adjusting any input tax.

Sales tax collected through electricity bills as per FBR’sYear Book: 2019-20was Rs. 91.8 billion in the FY 2019-20. It was second highest after POL at Rs. 234.5 billion. The income tax collected with electricity bills for other than companies is not adjustable up to Rs, 43,200 under section 235 of the Income Tax Ordinance, 2001. These indirect taxes through withholding provisions are big burden on small and medium enterprises (SMEs) but never highlighted in any research or in briefing to the Prime Minister by members of Economic Advisory Council (EAC) and even stalwarts of Pakistan Tehreek-i-Insaf (PTI).        

According to Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on February 28, 2021 was 180 million (84.6% teledensity), out of which 95 million are 3G/4G subscribers (44.5% penetration), 2 million basic telephony users (1.3 teledensity) and 98 million broadband subscribers (45.6% penetration). At present, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable 12.5 % as pre-paid or post-paid mobile users. But there is no recognition of this fact. Though millions are paying advance/adjustable income tax but the nation is labelled as “tax cheat—a highly lamentable act. The number of filers, according to FBR’s Press release is 2.9 million. FBR should register all taxable persons to bridge the tax gap and stop taking 12.5% oppressive tax from the poorest of the poor.    

The above facts and the followingfigures ofPakistan Bureau of Statistics, released on May 1, 2021 for April 2021, as  reported in Press, escaped the attention of Prime Minister, members of EAC and leaders of the PTI who attended the meeting on May 2, 2021, where the Prime Minister desired development projects, reduction in inflation and pro-people budget for FY 2021-22:

• “Chicken prices shot up almost 100%, followed by 81% increase in prices of tomatoes, 42% eggs and wheat prices were up by 27% over a year.
• The cooking oil prices were higher by 19%, sugar 18% and wheat flour 17%.
• Food inflation rose more in urban centres than in the villages. In cities, it increased from 11.5% to 15.7%, 4.2% within a month. In rural areas, it jumped from 11.1% to 14.1%.
• Core inflation, calculated by excluding food and energy items, also increased to 7% in urban areas—the highest ratio in past one year”.

The Prime Minister and his economic team need to be reminded of the famous quote of Milton Friedman that “inflation is taxation without legislation”. In the coming budget, if they want to give relief to masses, they must reduce rates of all taxes, eliminate collection of sales tax and income tax at import stage and withholding taxes on electricity, internet/mobile use and bank transactions—in fact all withholding provisions   having no nexus with income. There is need to increase income tax for equity. There is also need for broadening of tax base. FBR has 7.4 million NTN holders and compliance percentage is less than 50% including registered companies. Those who paid Rs. 1091.5 billion as withholding taxes in FY 2019-20, conducting transactions worth billions of rupees, but not filing returns should immediately be tapped as the Finance Minister, Shaukat Tarin also told FBR and Standing Committee on Finance of National Assembly on May 3, 2021.

_____________________________________________________________________        

The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)