Returns filers: contradictory numbers

Huzaima Bukhari & Dr Ikramul Haq

“The last extended date for filing income tax returns ended on Friday and till the closing time, the FBR had received 2.45 million tax returns for tax year 2019, according to FBR officials. However, for tax year 2018 over 2.8 million taxpayers had submitted the returns”—Shahbaz Rana, FBR collects Rs2.72tr in taxes, misses target , The Express Tribune, February 29, 2020

According to a Press release of Federal Board of Revenue (FBR), it received “two million four hundred forty six thousand two hundred and ninety four (2,446,294) Tax Returns for Tax Year 2019 which increased by 45% compared to one million six hundred eighty seven thousand (1,687,000) Tax Returns filed in Tax Year 2018”.

FBR has further said that tax collected in the month of February 2020 was “increased by seventeen percent compared to corresponding period in the last year. The number of individuals filing the Tax Returns in Tax Year 2019 is 2,342,701, whereas 62,403 Associations of Persons and 40,988 Companies filed their Tax Returns”.

Shockingly, the figure given for Tax Year 2018 of 1,687,000 in Press release contradicts FBR’s own stance contained in FBR Year Book 2018-19 [page 11, Table 7] wherein the following figures have been given about tax return from Tax Year 2016 to Tax Year 2018 (it appears that FBR compared data with February 2019 to show growth in number of return filers whereas it should have been with full number of filers for tax year 2018):

Source: FBR Year Book 2018-19

What a mockery that after highlighting the figure of 2,666,256 in Tax Year 2018 with growth rate of 42.4% in official publication, suddenly the number is decreased to 1,687,000—a huge difference of 9,79,256. This is simply unbelievable! However, you can expect any kind of figure manipulation, fudging or distortion from FBR as its past record shows.

At page 10 of FBR Year Book 2018-19, it is stated as under:

“The trend for filing of income tax returns has not been satisfactory in Pakistan. Keeping in view very low compliance, FBR had initiated a Broadening of Tax Base (BTB) drive few years ago, which has not started paying dividends in shape of growth in the number of filers. The income tax returns which were just 1.5 million in TY 2016 have crossed the two million mark first time in the history of FBR. During TY 2017 the number of income tax filers reached to 1.9 million and in TY 2018 2.2 million (Table 7). During TY 2018 the number of return filers increased by 17.1% or 316,526 in absolute terms. This performance in terms of number of returns is satisfactory but payment with returns has a meager growth of 3.0%, which is the matter of concern. The desk audit of filed returns can be helpful increasing the amount paid with returns”. 

The World Bank in its Project Information Document (PID), updated on April 22, 2019, reported as under:

“Income tax receipts come from a small number of taxpayers due to generous thresholds for individuals and widespread tax evasion.The budget law adopted in 2018 reduced the maximum income tax rates from 35 to 25 percent and for firms and from 25 to 15 percent for individuals. It also raised the threshold for Personal Income Tax to PKR 400,000 (around US$2,860 – approximately double the per capita GDP), with a nominal tax up to PKR 2,000 applied to incomes up to PKR 1.2 million (around US$8,580 – more than 5.5 times the per capita GDP). ¹Only incomes above PKR 10 million (around US$71,500) are subject to the maximum rate of 15 percent. In addition, legal loopholes combined with weaknesses in compliance enforcement enable large-scale tax evasion, which also erodes the tax base. While people and firms unregistered as taxpayers pay GST and income tax withheld on their transactions (e.g., by banks, telecom, and utility companies), the number of taxpayers who file tax returns (for GST and/or income tax) remains very small at 1.52 million, while those who declared incomes above the taxable threshold amounted to only 1.12 million FY2017/18 (Table 1)”.

Footnote 1 mentioned in above paragraph reads: These exemptions apply to individuals who draw more than half of their total taxable income from salaries.

The Table 1 mentioned above is reproduced as under:

The figure quoted by World Bank are also different from what are quoted by FBR in FBR Year Book 2018-19 and in its Press release available at website (https://www.fbr.gov.pk/pr/no-further-extension-in-date-of-filing-income/152284).

The culture of figure fudging in fiscal matters and cheating in financial affairs has been promoted not only during the three governments of Pakistan Muslim League (Nawaz)—PMLN but also under Zardari and Musharraf rules. It has now resurfaced under the coalition Government of Pakistan Tehreek-i-Insaf (PTI) as elaborated above.

Shaukat Aziz, first as Finance Minister and then Prime Minister of Musharraf, admitted the fact of figure fudging under the PMLN Government, as narrated by eminent economist, Dr. Pervez Tahir, in A history of figure fudging[The Express Tribune, July 28, 2011,]as under:

“Fudging began in late 1999…… when the IMF pointed towards discrepancies in the fiscal accounts. The coup-makers, who had just seized power, were quick to blame it on the ousted government….in particular on …..Ishaq Dar…. The newly-imported finance minister, Shaukat Aziz, was too eager to pay the penalty to the IMF and bill himself as the country’s maiden Mr. Clean”. 

Shaukat Aziz, as ‘Mr. Clean”, according to Dr. Pervez, played havoc with figures to prove his dismal performance as the ‘greatest feat’ of Pakistan’s economic history. Dr. Pervez commented that Shaukat Aziz specifically targeted the Federal Bureau of Statistics (FBS) and manipulated figures of poverty, growth, prices and employment. Instead of appointing full-time secretaries of statistics division, Shaukat Aziz assigned the work to additional secretaries in-charge “who had no shame in acting as Director General of the FBS, a junior position”, wrote Dr. Pervez.

Daniyal Aziz, who served Minister for Privatization from August 2017 to May 2018 under PMLN, once blue-eyed boy of Musharraf, in a TV talk show in which Ishaq Dar, presently a proclaimed offender and suspended Senator, also participated accused him of tampering with figures that led to a “fine of Rs. 9 billion to Pakistan”.

During the Zardari era, Chairman FBR, in a hurriedly called Press conference during the late hours of June 30, 2011, announced that the revenue target was surpassed “by a comfortable margin of over Rs. 2 billion and receipts are still flowing in”. Later, he admitted the fact of figure fudging before the National Assembly Standing Committee on Finance, Revenue and Economic Affairs as then Governor State Bank refused to become part of the FBR’s fraud (of taking cheques from some banks and maneuvering clearance before June 30, 2011).

During the last four years of PMLN Government many “statistical discrepancies” were reported in budget documents by the experts—these were in fact undesirable acts of window dressing through fudging of figures to show a rosy picture of economy. The claim by Ishaq Dar that FBR met, rather exceeded, the targets for the fiscal year 2014-15 and 2015-16 were proved wrong. A report, Non-tax revenue: Rs. 195 billion included in taxes to claim lofty collection, [Business Recorder, July 3, 2016] revealed that Rs. 195 billion collection on account of non-tax revenue (Gas Infrastructure Development Cess and Natural Gas Development Surcharge) was shown as “other taxes” to claim “higher tax collection”. These were part of non-tax revenue till 2013-14.

Let us have a brief analysis of performance of FBR from fiscal year 2014-15 to 2018-19 and first eight months of the current fiscal year:

In fiscal year, 2014-15FBR failed to meet the third revised target. The original target of Rs. 2810 billion was first reduced to Rs. 2691 billion and then to Rs. 2605 billion. On shortfall of over Rs. 220 billion vis-à-vis original target, FBR stalwarts received kudos from Ishaq Dar, besides bonuses! On November 26, 2015, Ishaq Dar confessed before the National Assembly’s Standing Committee on Finance, Revenue, Economic Affairs, Statistics and Privatization that FBR withheld refunds of Rs. 200 billion.

For 2016-17, FBR missed even the revised target of Rs.3521 billion by a margin of over Rs. 200—original goal was Rs.3621 billion. As in past years, the collection figures of 2016-17 include blocked refunds of billions of rupees and advances taken from many large taxpayers.

As regards, fiscal year, 2017-18, the revenue target for FBR was Rs. 4013 billion that was later revised downward to Rs. 3935 billion and it collected only Rs. 3848 billion.

The target assigned to FBR for fiscal year 2018-19 was Rs. 4435 billion, which was revised downwards twice [first to Rs. 4398 billion and then to Rs. 4150 billion].According to FBR Year Book 2018-19 , FBR collected Rs. 3828.5 billion, which was “0.4% lesser than the collection of previous fiscal year”. This has pushed the fiscal deficit to all time record of over Rs. 2.5 trillion for fiscal year 2018-19.

From July through February of the current fiscal year 2019-20, FBR provisionally collected Rs. 2.72 trillion. “The collection fell short by a record Rs490 billion when compared with the original target of Rs5.555 trillion. The Rs2.72-trillion revenue collection was higher by 16.5% or Rs385 billion as compared to the same period of the previous fiscal year”, says a report [FBR collects Rs2.72tr in taxes, misses target , The Express Tribune, February 29, 2020] by eminent journalist, Shahbaz Rana.

As evident from above, perpetual failure of FBR to meet assigned targets is not something new. A large part of the blame goes to political masters who keep on giving amnesties, waivers and immunities. During the last fiscal year, negative growth was the result of policies of appeasement on the part of PMLN and then PTI. Every year FBR fails to collect downward revised target what to speak of originally assigned one in the budget estimates. This widens fiscal deficit resulting in more borrowing and taking away a large part of the budget for debt servicing/payment of principal amount. Fiscal consolidation is one of the daunting challenges faced by Pakistan.

Successive governments have failed to rationalise tax policies, simplify laws, procedure and cost of compliance as well as to reduce wasteful expenses. On the contrary, tax compliance has been made further cumbersome and policies are clearly anti-growth. No serious effort has been made by any government to broaden the tax base through lowering of rates and effective enforcement.

However, the issue of misreporting and figure fudging needs a thorough probe by an independent commission under judiciary or Federal Tax Ombudsman. Public Accounts Committee in the past, even after admission of figure fudging by FBR bosses never punished them. Strangely, but expectedly, till today nobody has raised this issue in the National assembly or Senate. Since elected members favour FBR bosses, they also protect them from probe and audits. The outcome of cases of many members of Parliament selected for audit for tax year 2016 have not been made public till today. It is known to all that majority of legislators declares meagre incomes as compared to their standard of living, yet FBR has never probed the matter to collect evidence, impose correct tax and penalise them. This marriage of convenience, rather unholy alliance between law-makers (legislators) and law-keepers (FBR), must end if we have to end the culture of cheat and deceit in society and collect taxes from all, wherever due, fairly and firmly, without any fear or favour. Like State Bank of Pakistan, FBR should also be complete autonomy and must be insulated from all outside pressures.             

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The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)