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Revenue Collection: Facts & Fallacies

Dr. Ikramul Haq[*]

The worthy finance minister of Pakistan appears to be totally ignorant about the reliability of fiscal data prepared and fed to him by the Central Board of revenue (CBR). In a news conference in Islamabad on 27 April 2001, he claimed that the number of taxpayers in the country had increased to 1.9 million and by the end of the year the figure will be 2 million, which is “ our remarkable achievement”.

The CBR stalwarts (sic) have failed to tell the finance minister the correct number of taxpayers in the country. In fact, they themselves are not aware of it and yet they appear on national TV now and then to talk rubbish about our narrow tax base. The figure of 1.9 million, quoted by the minister, is highly understated. In the income tax realm, every account holder of a bank is subjected to 10% withholding tax. According to the latest figures compiled by the State Bank of Pakistan, the total number of account holders of all Pakistani and foreign banks operating here, who paid income tax under section 50(2A) of the Income Tax Ordinance, 1979, for the period ending 31 December 2000, was 11 million. According to National Saving Directorate, the total number of persons who paid tax at source on different schemes during the period 1 July 1999 to 30 June 2000 was 9 million.  It is worthwhile to note that in their case tax deducted at sources is full and final discharge under section 80B of the Income Tax Ordinance, 1979. They are required to file a simple statement u/s 143B of the Ordinance, if do not have any other source of income, instead a normal tax return. Had the CBR allotted all of them National Tax Numbers (NTNs), it could proudly be said that 11 million are registered taxpayers in Pakistan. Our tax base in not narrow, the tax counting of the CBR is fallacious and marred by “narrow mindedness”. There is no need for us to be apologetic before the donors that we have a narrow tax base.

This huge population of taxpayers has been completely ignored by the CBR and our finance minister by saying that we have only 1.9 million taxpayers. His “remarkable achievement” falls short of 18 million unaccounted people. Perhaps his greatest achievement is not to count the people who are paying taxes through the mechanism of deduction of tax at source and that too not in thousands but in millions. May be he has a different definition of a taxpayer. The same is true for 5 million commercial/industrial electricity users who are regularly paying income tax along with their utility bills, but failed to qualify in the counting criterion of the minister [The total number of industrial/commercial electricity consumers in Pakistan as on March 2000 was 4.99 million–Economic Survey 1999-2000, Page 211].

It is a matter of great pity that the apex tax collection authority, CBR, itself does not know how may people in Pakistan are paying income tax. The people of this country are accused of not paying the income tax; whereas the reality is that even a petty shopkeeper in a village (whose total income is much below the minimum taxable limit of Rs. 40,000) is paying as high tax as Rs. 720 per annum along with electricity bills as a commercial user. The total population of Pakistan, according to Population Census, 1998, is 134.5 million. The percentage of rural population is 67.5%. Out of total population, 43.1 per cent are below the age of 15 years (They are not income earner, hence cannot be taxpayers). The total labour force stands at 38.59 million, out of which 25.86 million is rural labour force. Reading all these facts together, the income tax paying population of Pakistan cannot be more than 15 million, out of which 11 million paid income tax u/s 50(2A) of the Income Tax Ordinance, 1979! Yet the CBR and the Minister are engaged in a vicious propaganda that people of Pakistan are not paying taxes and our income tax base is narrow! The CBR in its Year Book for 1998-1999 itself admitted that this class of taxpayers alone paid Rs. 6 billion as income tax.

The CBR on the one hand is fleecing people through presumptive and withholding taxes (irrespective of the fact whether they have taxable income or not) and on the other has the cheek not to include them in the list of taxpayers. This is adding insult to injury. Huge claims are being made about documentation of economy and preparation of taxpayers’ roll whereas the very basic counting methodology and conceptual framework of the CBR about the number of taxpayers in the country is faulty.

It is painful to note that present structure of presumptive taxation has complicated the poverty problem of Pakistan. According to a recent study of Asian Development Bank, the tax system of Pakistan, which was progressive till 1990, was converted into regressive regime in 1991 with the introduction of provisions like section 80B, 80C, 80CC and 80D in the Income Tax Orinance, 1979 and VAT-type tax in the Sales Tax Act, 1990. The result is that during the ten years’ period (1991-2000), the tax burden on the poorest households is estimated to have increased by 7.4 percent, while it declined by 15.9 percent for the richest households. This study of ADB is eye-opener for the target-oriented CBR’s stalwarts (sic) that in the frenzy of showing higher figures to their foreign masters they have put extra burden of taxes on the poor of Pakistan. History will never forgive them for this senselessness and shamelessness.

 The banks, WAPDA and the PTCL are fully computerized and can compute the total number of people on whose behalf these agencies collected and deposited income tax in the government treasury. Their combined figure of such persons is nearly 10 million and our Ministry of Finance is claiming remarkable achievement by mentioning their number at 1.9 million. It is a great tragedy of errors and perhaps one of the ugliest jokes of the millennium.

Our honourable finance minister has also claimed that 99% revenue collection targets have been achieved for the first nine months of the current financial year. He was full of praise for the CBR for this ‘miracle’. The fact is that original revenue target of Rs.456 billion has been slashed to Rs.417 billion. It is really shameful that after reducing the target now tall claims are being made for (super collections) but no mention of the reasons that forced the downward reduction of revenue targets. Is it a success or failure of economic managers? The painful reality is that an independent research report has indicated that the government may hit a fiscal deficit close to 6.2% as against the target of 5.3%. The wonders achieved by our CBR stalwarts stand fully exposed.

The economic growth has become substantially sluggish at the hands of our present economic leadership. There are strong implications that economic growth rate for the current fiscal year may be revised downward for the third time: originally set at 5%, was first revised to 4.5%, followed by the latest official estimates at 3.8%. Unofficial estimates are that ultimately it will end up at 3.2%. The continuous deceleration of the economic growth is directly related to harsh, illogical and confiscatory tax measures adopted by the CBR under the name of national tax survey campaign. The data they are collecting through these futile and offensive campaigns is already available with different government departments and in computer database of WAPDA and many other agencies.

The industrial recession is now entering a stage where the very economic survival of the country is at stake. Thanks to unreasonable VAT legislation, the medium-scale manufacturing units have shown 0.2% growth during the last eighteen months. The same is the position of large-scale manufacturing sector that has grown by 3.1% only, in the first half of the current fiscal year compared to 7.8% during the corresponding period of the last year. The failure of tax managers to achieve original budget target of Rs. 456 billion has already forced a cut of 10% in the Public Sector Development Programme (PSDP). To keep the fiscal deficit under IMF-prescribed limits and due to financial constraints caused by shortfall in tax revenue, the people of Pakistan are getting much less for public sector development than what they had been getting in the earlier years. In the face of these stark realities, one wonders how the finance minister was all praises for the tax collection machinery, which has become another name for corruption and inefficiency in Pakistani society.

There are strong indications that continuous economic recession will have a devastating effect on revenue collection. The original target of Rs. 456 billion is now officially refixed at Rs. 417 billion. However, there are unofficial estimates that the actual collection will be around Rs. 380 billion [although it will be shown as Rs.417 billion by withholding genuine refunds of about Rs. 30 to 40 billion]. The CBR stalwarts have managed to convince Mr. Shaukat Aziz that overall 15% increase in revenues during the first nine months of the financial year was a splendid achievement having no parallel in Pakistan’s tax history. The truth is that they did not pay undisputed refunds of nearly 30 billion to the income tax and sales tax payers. The Member Customs, Dr Manzoor Ahmed, according to a Press report [DAWN, April 15,2001], admitted that the CBR recently, had to stop sales tax refund payments due to paucity of funds with the government for meeting such obligations.

The CBR’s stalwarts, through these disgusting tactics, have managed to show wonderful results convincing the finance minister to shower kudos on them. They are least pushed if the entire export sector is destroyed for want of cash liquidity. The withholding of refunds on one pretext or the other is a heinous crime for which the entire top management of CBR should be sacked. Respected minister should ask the CBR figure-jugglers to recalculate the growth rate of tax collections after deducting from gross collection the amount of refunds due but deliberately withheld to show higher figures. It is tragic that the finance minister on the contrary is giving a pat on their backs to be more oppressive and destructive. The historians will never spare those who pushed the country towards poverty by making it a slave of the donors and rendering the lives of the poor miserable. The future historians will certainly record the names of the persons responsible for destroying our economic growth. The names of many of our ‘competent and imported’ finance ministers will certainly appear in this list.

[*] Dr. Ikramul Haq, a leading international tax counsel, is a well-known author specialising in international tax, press, intellectual property, corporate and constitutional law. Dr. Ikram is Chief Partner of Lahore Law Associates (fax: +92 42 7226953, e-mail: irm@brain.net.pk; website: http://www.paktax.com.pk). He is a member of the visiting faculty of the Institute of Direct Taxes in Lahore. He served for 12 years as Deputy Commissioner of Income Tax. He studied literature, journalism and law, for his Masters and Doctorate degrees. He has written many books on various aspects of Pakistani law and global narcotics trade, some of which are co-authored with his wife, Mrs. Huzaima Bukhari, Additional Commissioner of Income Tax. He has been awarded Doctorate of Law for his research: Tax Reform in Quasi-Constitutional Perspective.

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