Huzaima Bukhari & Dr. Ikramul Haq
Millions of Pakistanis by virtue of over 65 types of withholding taxes imposed under the Income Tax Ordinance, 2001, both adjustable and non-adjustable, are paying advance income tax but only a fraction of them (about 1.5% file income tax returns). There are in Pakistan about 95 million unique mobile users [though according to Pakistan Telecommunication Authority total number of SIMs (Subscriber Identity Module) up to September 30, 2018 were 152 million—many persons have more than one SIM). They all are ‘income tax payers’,bound topay 12% advance, adjustable income tax with bills or pre-paid cards. These 95 million include not only persons liable to tax, but millions (at least 85 million) having either no income (e.g. students, wage workers, unemployed etc) or their incomes fall below taxable limit. Those who keep on saying on TV talk-shows and seminars etc that Pakistanis do not pay taxes are sadly mistaken and misinformed. Our income tax paying population includes the poorest of the poor, but filers do not include the known rich—even those amongst the affluent who file returns, incomes are grossly understated.
According to a Press release of October 11, 2018 by Federal Board of Revenue (FBR), it received till October 10, 2018 “482,275 Income Tax returns for the Tax Year 2018, which are 170,208 more than the 312,067 Income Tax returns received for Tax Year 2017 by the same date, registering an impressive increase of 55%”. Another Press release of FBR, issued on March 2, 2018, claims that “a meaningful comparison of the number of returns filed for a year with the preceding year has to be for a given date because the returns for the preceding year continue to be filed even in the next year. By the 28th of February 2018, 1,260,181 returns have been filed for the tax year 2017 and that are 246,945 more than the 1,013,528 returns received for the tax year 2016 by the same date i.e. 28th of February 2017”.
It is strange that FBR in its annual year books does not give total number of income tax filers and total number of registered sales tax persons on the closing date of every financial year for which it highlights its performance. For the sake of transparency, they must give on website historic and current upto-date data of return filers and sales tax registered persons as early as possible. Hopefully, the Finance Minister, Asad Umar, and State Minister for Revenue, Hammad Azhar, will take note of it.
In an official communiqué (Press release of December 31, 2017 issued by FBR), it was admitted that 1,158,380 returns were received till December 31, 2017, showing an increase of 21.5% in the number of returns received during the same period of 2016. It is pertinent to mention that Jorge Martinez-Vazquez and Musharraf Rasool Cyan in their book, ‘The Role of Taxation in Pakistan’s Revival’, mentioned at page 676 [Figure 36] that 2.1 million Pakistanis (individuals) filed income tax returns in 2006-07. This shows that FBR has lost one million return filers since 2006-07. FBR needs soul searching and a research study to find out what has gone wrong. Where have one million return filers vanished?
Pakistan’s real dilemma is that the rich and mighty are not paying taxes according to their actual incomes as on and off they get amnesties. Tax Directories for Tax Year 2013 to 2016, published by FBR confirm that on an average less than 4000 persons paid tax between Rs 1,000,000 and Rs. 10 million (individuals declaring tax of over Rs 10 million are less than 4000.). According to a report, a total of 100 parliamentarians did not filed income tax returns for the year 2017 (during 2016, the number of non-compliant was 116 and in 2015, it was 120) and FBR till today has taken no action against them. Majority of parliamentarian show salary from State as only source of income whereas their standard of living did not justify it.
In Pakistan, the rich are avoiding tax obligations but millions of mobile users having no income or incomes below taxable limit are being forced to pay advance income tax in gross violation of Article 4 of the Constitution which assures that the State cannot force a person to do what the law does not require him to do. When they are not chargeable to tax, how can they be forced to pay tax in advance that is never refunded even if return is filed.
According to 2017 census, our population is 207.77 million [provisional]. The dependent population of children under the age of 15 years is 35.4% whereas 4.2% people are above 65 years. Out of total population, 60 million are below poverty line earning less than two dollars a day. Our labour force, among the tenth largest in the world, is around 70 million. Majority of rural labour force [42.3%] earns below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance, 2001. Analysing all these figures (juxtaposed), individuals liable to income tax cannot be more than 10 million, whereas, the government is getting 12% advance adjustable income tax from 95 million mobile users alone (total subscribers were 152 million as on September 30, 2018).
All commercial electricity users pay advance income tax under section 235 of the Income Tax Ordinance, 2001 with their bills, and if monthly bill is up to Rs. 30,000, tax paid is treated as minimum tax with no claim to a refund! In the presence of this section, read with section 181AA, was there any need to impose tax on banking transactions by non-filers? A report, ‘Doing away with the transactional tax’,Business Recorder, October 30, 2018, says: “The idea of the transaction tax was two folds—one was to increase the tax revenues and the other was to incentivise the non-filers to file by penalising them. But the adverse impact of documentation was not well thought of. Spanning over three years, neither the tax revenues increased significantly nor the tax filing enhanced meaningfully. On the flip side, the informality in the economy increased disproportionately”.
It is an undeniable fact that FBR has failed to get due tax from the rich and mighty and thus its main emphasis is on withholding taxes (WHT). FBR’s Year Book 2017-18 concedes that “WHT contribute “a major chunk i.e. 65% to the total collection of income tax”. It adds that “the WHT collection during FY 2017-18 has been Rs. 1047 billion against Rs. 944 billion indicating a growth of around 10.9%”. The actual contribution of WHT is 68.5% that is 3.5% more than what FBR has claimed in Year Book 2017-18.
According to details given in Year Book 2017-18, total direct tax collection was of 1536.6 billion, out of which income tax was of Rs.1528.5. Year Book 2017-18 does not mention what was the nature of direct tax of Rs. 8.1, other than income tax, collected by FBR. In respect of income tax, besides collection of Rs. 1047 billion from WHT(68.5%), Rs.335.79 billion came as advance tax (21.9%), Rs. 41.64 billion with returns (2.7%) and Rs.1.31 billion under ‘Tax Arrears Settlement Incentive Scheme (TASIS) 2008’ (.08%) .
FBR’s own efforts (collection on demand) yielded only Rs. 102.82 billion (6.7%)—from arrears Rs. 17.69 billion (1.2%) and from current demand Rs. 85.13 billion (5.6%). It confirms negligible share on the part of FBR to tap the actual tax potential as it would have been hurtful to the rich, majority of which are non-filers, despite having substantial undeclared, untaxed wealth and the audacity of ruling this country as a matter of right. They are ready to pay additional tax at source as non-filers but are not inclined to file tax returns.
The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)