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Huzaima Bukhari & Dr. Ikramul Haq
Our politicians and their crony bureaucrats keep on maligning taxpayers while the so-called “informed” analysts and all-knowing (sic) TV anchors join the bandwagon with often-repeated popular jargon that only “1% of the population pays income tax”. This is total fabrication that exposes the hollowness of all those who subscribe to it. The reality is that nearly 60 million Pakistanis, subjected to 58 kinds of withholding taxes under the Income Tax Ordinance, 2001 (both adjustable and non-adjustable), contributed nearly 65% of total direct tax collection in fiscal year 2014-15, according to official figures! Since about one million persons filed tax returns, it was assumed as if only they “are the taxpayers”. This fallacy has become Gospel’s truth in Pakistan that nobody is ready to refute.
The reality is that almost 60 million pay advance income tax despite the fact that majority of them is not enjoying taxable income. Law does not require them to file returns but they are dubbed as non-filers after tax is extorted from them in the name of advance income tax. Through all pervasive withholding tax provisions, the non-filers have been penalised and are forced to pay higher advance tax on various transactions and incomes. Coercive measures are being used to make them filers. They are being advised to file returns just to get the money that was withheld without any lawful justification. This is a blatant violation of fundamental rights guaranteed under the Constitution. A person cannot be deprived of money/property that he does not owe to the State.
Why should a person file tax return when he/she has no taxable income? Why should he/she incur cost to get refund? What is the assurance that he/she will get his/her money back without any hassle and harassment? The Intelligentsia (sic) of Pakistan has become so insensitive and callous that it is not agitating against this highhandedness and violation of fundamental rights. The weak and helpless have accepted unconstitutional withholding taxes as fait accompli. The nations that demonstrate such apathy and lethargy about their rights end up endorsing and promoting injustice, besides becoming victims in the hands of exploiters. The courts, tax bars and other bars, supposed to safeguard the rights of citizens against such violations of Constitutional provisions, are also guilty of inaction and silence.
Less than 500,000 returns for tax year 2015 were filed till February 15, 2016 even though multiple extensions were given. Federal Board of Revenue (FBR) is now expecting at least “two millions returns” in the wake of tax amnesty scheme for traders, camouflaged as Voluntary Tax Compliance Scheme (VTCS). The deadline to avail VTCS and returns by individuals is February 29, 2016. Traders are demanding that this should be be extended for another three months to accommodate them!
There exists a wrong notion that traders do not pay income tax. All traders, filer or non-filers, have been paying advance income tax with electricity and mobile bills. Section 235(4) (a) of the Income Tax Ordinance, 2001 says that “in the case of a taxpayer other than a company, tax collected of Rs. 43,200 up to bill amount of thirty thousand rupees per month of a commercial electricity user shall be treated as minimum tax on the income of such persons and no refund shall be allowed.” In the case of industrial commercial connection, advance tax is imposed at the rate of 5%. Law recognises payer of advance income tax with electricity bill as commercial or industrial electricity user “taxpayer” though he/she may file return or not, for which notice for filing of return can be issued. Is there a justification to impose on businessmen having commercial electricity connection, minimum tax paid up to Rs. 43,200 in a year with annual electricity bill of Rs. 360,000? This amount is not to be refunded to him/her even if he/she suffers a loss. So why should he/she file a return? Those presenting the case of traders while negotiating on section 236P of the Income Tax Ordinance, 2001 with completely overlooked this position of law. Adding insult to the injury, FBR was portraying traders as tax evaders after extorting billions from them along with electricity bills.
It is an irrefutable fact that billions have been squandered by FBR as extortionist agency from small traders under section 235(4)(a) of the Income Tax Ordinance, 2001, during the last many years and yet they have been dubbed as tax evaders! The vital and valid question is why a person having no taxable income is being forced to pay higher advance income tax or file income tax return/statement? Millions are paying advance income tax but not filing returns/statements for the simple reason that they have no taxable income. For example, millions of students paying income tax for mobile use out of funds already taxed in the hands of their parents. The government should first remove numerous withholding provisions and then get returns from all who have taxable incomes. It is unjust to impose 58 withholding tax provisions creating hardship for millions of students, widows, minors, men and women having no taxable income working in rural areas. They should not be forced to file tax returns just to get refunds, which we all know are hardly given. The FBR officials have admitted before Standing Committees of Parliament that refunds of billions of rupees are lying with the government.
According to Pakistan Telecommunication Authority (PTA), prior to biometric verification, there were 140,022,516 mobile users in Pakistan [July 2014]. The latest data on PTA’s website [as on December 15, 2015] shows this figure at 125,899,638. A large number of mobile users, not less than 60 million (if we exclude multiple and inactive subscribers), paid both 14% income tax and 19.5% sales tax till June 30, 2014, but only 1.7% of mobile users (individuals) filed income tax returns. FBR did not bother to utilise data available with the telecommunication companies to detect the richer ones and force them to file tax returns. On the contrary, it resorted to ill-advised actions of imposing withholding taxes even on those who have no incomes or incomes below taxable limit and that too at substantially high rates!
Majority of the mobile users do not have taxable income yet they are subjected to 14% advance income tax. If they want money back, they have to file a tax return and that too, electronically. The number of mobile users (125 million) is much higher than internet users (approximately 18 million broadband users) so is it possible for every mobile user who is not an internet user to file these returns without hiring the services of a tax adviser who may charge a fee that is greater than the actual refund in question? Besides, electronic filing of return by professionals is quite challenging what to speak of the common man. They also fear becoming victims of the excesses of FBR officials and exploitation at the hands of unscrupulous tax advisers if they do so. This shows the extreme highhandedness of the government, especially when majority of the ultra-rich do not file tax returns. FBR till today has failed to tell the nation what happened to nearly 3 million rich people about which an ex-Chairman claimed he had solid information about lavish living from his NADRA days! These ultra-rich are happy with withholding provisions as these take only a fraction of their mammoth incomes. This confirms beyond any doubt the ineffectiveness and incompetence of FBR.
Our real dilemma is that the rich and mighty are not paying taxes according to their ability. In 2014, only 32,031 persons paid tax between Rs 1,000,000 and Rs. 10 million, and just 3,663 declared tax over Rs 10 million. Now mighty traders will also enjoy immunity from audit for three years by paying fraction of their actual tax liability. The documented sector, mostly big companies will suffer further being the only easy prey left to meet FBR’s targets.
What is the realistic tax base of Pakistan? FBR has no concrete study and is continuously misleading the nation and the politicians. Even the so-called leaders of traders are ill-informed or have no idea as to who is a “taxpayer.” The other day, while speaking at a seminar arranged jointly by traders and FBR and chaired by Khawaja Muhammad Shafiq, Central Chairman of Anjuman Tajiran, Special Assistant to Prime Minister on Revenue, threatened that “35 percent tax and 100 percent penalty would be imposed on those non-tax filers who would not avail the amnesty scheme.” In other words, he is saying that even if one does not have taxable income he must avail the amnesty scheme and tax already withheld under section 235 should be forgone as bhatha (extortion money) paid to the government. How can tax at the rate of 35% be imposed for incomes falling in a lower slab? This shows that the worthy Special Assistant to Prime Minister does not know even fundamentals of income taxation. Chairman of Anjuman Tajiran was equally illogical while claiming that one million people out of 180 million in the country were “paying taxes”. He could not make a distinction between taxpayers and non-filers. He said we should have 20 million returns in the wake of Voluntary Tax Compliance Scheme (VTCS). The worthy Special Assistant to Prime Minister and Chairman of Anjuman Tajiran should be aware of the following facts:
- Our population, according to Economic Survey of Pakistan 2014-15, is 191.71 million, out of which 75.2 million constitute urban while the rural is 116.5 million.
- Out of total population, 20 million are below the age of 15 years (they are dependents) and 30 million are chronic poor earning less than two dollars a day.
- Our labour force, 10th largest in the world, is around 60 million, out of which 56.5 million are employed. Rural labour force of 43.5 million is earning below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance, 2001.
Reading all these facts together, the total persons liable to income tax cannot be more than 10 million while already over 60 million active mobile users and more than three million commercial and industrial electricity users are paying advance income tax. FBR is extorting income tax from millions as filers and then extra bucks from millions dubbed as non-filers though they may not even be liable to pay income tax!
At present the entire taxable population and even those having below taxable incomes are paying income tax at source as mobile users, yet politicians and FBR are engaged in a vicious propaganda that people of Pakistan are tax cheats. This is highly lamentable, especially when all persons using commercial or industrial electricity connections are paying advance income tax under section 235 of the Income Tax Ordinance, 2001 and in the case of individuals and associations of persons an amount up to Rs. 36,000 is treated as minimum tax.
All persons who pay income tax with electricity bills, where monthly bill is up to Rs. 30,000, tax paid at the rate of 10% is treated as minimum tax with no claim to any refund! In the presence of this section, read with section 181AA, was there any need to impose tax on banking transactions by non-filers? Even the affluent domestic electricity users are subjected to withholding tax if bill amount is Rs. 75,000 or above [the limit was Rs. 100,000 prior to July 1, 2015].
Why FBR wants tax returns from even those who have no taxable income? Certainly, more “filers” means more “speed money”, more earnings for unscrupulous tax advisers (sic), majority of whom comprises lower staff and even some officers of FBR working in the evening with some tax consultants or having their own independent offices. FBR stalwarts have failed to check this malpractice though pointed out repeatedly by many. It is an undeniable fact that FBR has miserably failed to get due tax from the rich and mighty and thus its main emphasis is on withholding taxes that constitute 65% of total income tax collection (bulk of this collection is from persons not liable to income tax). Another 30% comes from voluntary payments, advance tax and tax with returns. We have an army of employees in Inland Revenue Service (about 18,000) that hardly collect 5% of total direct taxes with their own efforts! But they make the life of honest taxpayers miserable and this is the main reason behind the absence of tax culture in Pakistan. In the face of these facts do we need an agency like this that cannot even justify its financial viability and that has to pay billions to taxpayers as refunds?
In Pakistan, the ultra-rich avoid tax obligations but millions having no income or incomes below taxable limit are forced to pay advance tax and in majority of the cases at higher rate. It is gross violation of Article 4 of the Constitution assuring that the State cannot force a person to do what the law does not require him to do. Why should poor people engage a tax adviser to file return and pay money to get refund? The extreme injustice in the tax system demands that a widow should pay 10% non-adjustable withholding tax on her income of Rs. 300,000 [whereas taxable limit is Rs. 400,000] from an investment made with national savings centre, from the funds she had received from pension/gratuity funds on the death of her husband. From the same source, a rich person pays only 10% tax on income of Rs. 2 million, whereas he should be taxed in the highest slab of 35%. Over 75% taxes collected by the federal and provincial governments are indirect in nature, the burden of which is borne by the poor and middle-class with scanty resources and no ownership of assets.
It is FBR’s failure to enforce provisions relating to filing of returns by people having taxable income, for which it cannot blame the public at large. Are the people of Pakistan responsible for this pathetic performance? The responsible officials of FBR should be taken to task for this gloomy state of affairs. It is high time that FBR should put its own house in order and enforce tax laws across the board rather than blaming the already over-taxed people of Pakistan for its own managerial fiascoes and established record of protecting the rich and mighty. It must be remembered by all that non-collection of tax where due is as detestable as its collection, where it is not due.
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The writers, lawyers and partners in law firm HUZAIMA IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)