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Huzaima Bukhari & Dr. Ikramul Haq
After about relief of 10 months, at least 95 million unique mobile users [as per website of Pakistan Telecommunication Authority (PTA), total cellular subscribers as on March 31, 2019 were 159 million, but many have multiple and/or dormant SIMs] after vacation of stay by Supreme Court on April 24, 2019 in Human Rights Case (HRC No. 18877/2018) have with effect from April 27, 2019 started paying 19.5% sales tax on services to provinces, 17% federal excise duty to the FBR, 12.5% income tax and 10% service/maintenance charge. According to submission of PTA, during the period of stay [June 11, 2018 to April 23, 2019] by Supreme Court, Rs. 90 billion tax was not collected by mobile companies.
After vacation of stay, millions of Pakistanis, having no taxable income or income below taxable limit, are again subjected to extortion in the name of advance income tax. This is the real dilemma of Pakistan—those having enormous incomes and assets are being offered frequent and generous amnesties and the vast majority of population, even those living below poverty line, are forced to pay exorbitant taxes. Adding insult to injury, they do not get in return even basic amenities of life, what to speak of free education and health facilities.
The prevailing tax system is unjust, outmoded and unproductive with high taxes, yielding low revenues and operationally complex, time-consuming and costly. It is not taxing the people according to their ability to pay but relies mainly on indirect taxes that are regressive, as these take a much larger percentage of income from low-income families than from high-income earners.
Let us try to determine a rational income tax base. According to 2017 official census, our population [provisionally] was 207.7 million (by January 31, 2019, it was estimated at 212.7 million). The dependent population of children under the age of 15 years as on June 30, 2018 was 35.4% while 4.2% people were above 65 years. Out of total population, 40 million were below poverty line earning less than two dollars a day. Our labour force was around 70 million—majority of it in rural area [42.3%] that earned below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance, 2001.
Analysing all the above figures (juxtaposed), individuals liable to income tax could not have been more than 4 million in tax year 2018. FBR collected 12.5% advance, adjustable income tax from 95 unique million mobile users alone during the fiscal year 2017-18. Out of these only 1,492,507 (0.98%) filed tax returns for tax year 2018 till December 17, 2018 after availing many months of relaxation. The government later extended the date up to April 30, 2019. There will soon be yet another generous amnesty. FBR is hopeful that the figure of income tax return filers, after the amnesty, may go up to 2 million—there will remain be a huge gap of 100% as the real potential is around 4 million.
It is evident from above that the prevailing myth, popular with TV anchors, donors and tax bureaucracy, that our tax base is narrow and only 1% of the population pays income tax is totally fallacious—this statement reiterated by the representative of Federal Board of Revenue (FBR) before Senate Standing Committee on January 30, 2019 was taken as Gospel truth. The fact is that during the financial year 2017-18, according to available data, not less than 95 million Pakistanis paid income tax under one or more of about 65 withholding taxes imposed under the Income Tax Ordinance, 2001—some adjustable and some non-adjustable. It is strange, rather lamentable, how our tax managers conveniently ignore the distinction between ‘filers’ and ‘payers’. What makes the situation more painful is the fact that self-acclaimed, all-knowing members of the Parliament, media men, many so-called tax experts and donors in their talks—even in published studies—quote the false claim of FBR.
Majority of the mobile users do not have taxable income, hence, are not legally required to file tax returns. If they do so only to claim the withheld tax, they fear becoming victims of the excesses of FBR officials and exploitation at the hands of unscrupulous tax advisers. In any case the cost to reclaim such amount would be much higher. It is an established fact that majority of the ultra-rich do not bother to file tax returns—they are happy with withholding tax provisions as these take only a fraction of their mammoth incomes. This confirms beyond any doubt the ineffectiveness and incompetence of FBR as it has miserably failed to recover tax from the rich that include 99.9% parliamentarians who have yet not paid Income Support Levy for tax year 2013.
Table: FBR collection: 2014-15 to 2017-18 (Rupees in billions)
Source: FBR Year Books
It is a curious paradox of Pakistan that though income tax payers are not less than 95 million, but return filers are pathetically low—only about 1.81 million filed income returns for tax year 2018 till April 30, 2019. In 2006-07, FBR received 2.1 million returns [Figure, 36, Page 676,The Role of Taxation in Pakistan’s Revival, Martinez-Vazquez and Musharraf Rasool]. FBR needs soul-searching to find out what has gone wrong and where have these taxpayers vanished—certainly due to harassment and highhandedness. Obviously, this is the worst that can happen to any tax machinery, but FBR, as usual, is shifting blame on the citizens and hiding the truth.
According to FBR’s Year Book 2017-18, total direct tax collection in last fiscal year [2017-18] was 1536.6 billion, out of which income tax was Rs.1528.5 billion—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.
Elites and the rich are not sharing the burden of taxes due from them—the rich and mighty are not paying taxes according to their ability. From tax year 2013 to 2017, less than 40,000 paid income tax between Rs 1,000,000 and Rs. 10 million, and less than 5,000 declared tax over Rs 10 million. At present millions having below taxable incomes are paying income tax at source, yet FBR is engaged in a vicious propaganda that people of Pakistan are tax cheats! This is highly deplorable especially when small traders using commercial electricity connections are paying advance income tax under section 235 of the Income Tax Ordinance, 2001. It is an undeniable fact that FBR has miserably failed to get due tax from the rich—its main emphasis is on withholding taxes. Sparing the ultra-rich, who are deliberately avoiding tax obligations, and taxing the millions having incomes below taxable limit, is a gross violation of Article 3, 4 and 25 of the Constitution. Why should poor people hire a tax adviser to file return and pay money to get refund? The extreme injustice in tax system demands a widow and a senior citizen to pay 10% income tax on gross yield earned from Bahbood Certificate or Pension Account of National Saving Scheme. On the other hand, the rich and mighty landowner, absentee landlords are paying meagre or no tax.
FBR has failed to tax those who have amassed mammoth wealth, some of them availed generous amnesties. Had they been taxed at normal tax rates, collection could have reached Rs. 8 trillion. This target is still achievable provided collection is fully automated, tax machinery is overhauled, leakages are plugged and all exemptions/concessions to the privileged classes are withdrawn. Banks, WAPDA, PTCL and mobile companies that collect advance taxes on behalf of FBR are fully computerised. By using their database, FBR can easily determine fair tax base. Provisional assessments can be made in respect of persons who are not filing tax returns and recoveries can be made. This will end the undesirable regime of non-filers as discussed in detail in Ending non-filers regime[The News, Political Economy, February 10, 2019].
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The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).