Huzaima Bukhari & Dr. Ikramul Haq
In this concluding part, we are highlighting various proposals already given to the government of Pakistan Tehreek-i-Insaf (PTI) and some new ideas for restructuring tax administration on national level. Additionally, through a national revenue agency, federal and provincial government would disburse all social security related entitlements. Our existing Income Tax Ordinance, 2001 extends extraordinary tax-free perks and perquisites to the powerful segments of society (amnesties, concessions and waivers in the last two years caused tax loss of Rs. 3 trillion that is grossly understated in official documents as highlighted in FBR’s statistics: a critical analysis—I, Business Recorder, September 25, 2020, FBR’s statistics: a critical analysis—II, Business Recorder, September 25, 2020, FBR’s Tax Directory: Startling facts and fallacies—I, Business Recorder, October 2, 2020 and FBR’s statistics: a critical analysis—II, Business Recorder, September 25, 2020).
The collection under provincial laws relating to income tax on agricultural income also shows that rich and absentee landowners pay meagre income tax. The share of agricultural income tax (AIT) in total tax revenue of Rs. 4.75 trillion in fiscal year 2019-20 (11.4% of GDP) was only (0.06 % of GDP), whereas share of agriculture in GDP of Rs. 44.7 trillion was around 19%. According to Economic Survey of Pakistan 2019-20). What makes the situation more painful is the inadequate allocations and poor quality spending both by federal and provincial governments for health, education and other social services to mitigate the sufferings of the poor that are increasing day by day, especially because of frequent partial and complete lockdowns in the wake of Covid-19 endemic and high food inflation.
We need to restructure the tax system to tap the real tax potential at national level and at the same time provide quality social services to the citizens, drastically cut wasteful expenditures, get rid of mess in energy sector and stop further bleeding of public funds on loss-bearing state owned enterprises (SOEs). The real dilemma of Pakistan is outdated, colonial-style administrative and judicial structures, elitism, cronyism, greed and corruption on the part of predatory elites. The exiting bureaucrats are parasites and since rent-seeking is accepted as a norm, even the private sector is neither growth catalyst nor ready for innovations. We must undertake fundamental structural reforms to dismantle elitist and rent-seeking economic system [There’s need for new tax model, Business Recorder, February 26, 2021].
By improving voluntary tax compliance, lowering tax rates, withdrawing all withholding provision (except on salary, dividend, interest and payment to non-residents) and broadening tax base as suggested in two earlier parts, we can collect Rs. 8 trillion at federal level and Rs 2 trillion at provincial levels. If we manage to collect tax revenue of Rs. 10 trillion, our reliance on domestic and foreign loans will decrease significantly and diminish after few years, provided we achieve sustainable growth rate of at least 7% for a decade for which simplification of tax system as a whole is a prerequisite [FBR, tax potential & enforcement—I, Business Recorder, March 5, 2021 and FBR, tax potential & enforcement—II, Business Recorder, March 7, 2021].
The idea of restructuring of Federal Board of Revenue (FBR) presented in Need for National Tax Agency, Business Recorder, November 1, 2013 was later elaborated in various articles, Need for National Tax Authority, Business Recorder, October 20, 2017, A case for National Tax Authority—I, Business Recorder, November 30, 2018, A case for ‘National Tax Authority’—II, Business Recorder, December 2, 2018 and Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’, Business Recorder, August 31, 2018. The complete draft of national tax agency is available in Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020, PRIME Institute, Islamabad) and in Tax Reforms in Pakistan: Historic & Critical Review (PIDE, Islamabad). It was also included by the Tax Reforms Commission in its final report submitted to the government in February 2016, it was marked confidential by then Finance Minister, Ishaq Dar, now a fugitive.
There cannot be two opinions that FBR or any other tax collection agency needs to be run by a competent board as a short-term reform measure before all of these are finally merged into a single national tax authority. The officers of FBR have reportedly suggested the name: Pakistan Revenue Board (PRB). This body, whatever may be the name, should not only be responsible for collection of taxes for federal, provincial and local governments but also to administer various social and economic benefits and incentive programmes, otherwise tax compliance will remain a distant dream. People must get free education, quality healthcare, decent housing/transport plus social security, such as universal pension, disability allowance, old age benefits, income support, child support, just to mention a few, in lieu of paying due taxes as suggested in There’s need for new tax model, Business Recorder, February 26, 2021. The National Tax Agency (NTA) can be assigned the task of collecting all taxes for the federation (levied in terms of Article 142 read with the Fourth Schedule to the Constitution of Pakistan by federal and provincial parliaments). This is necessary for reducing the monstrous size of multiple collecting agencies at federal and provincial levels that are marked with inefficiencies, incompetence and corruption and creating unnecessary compliance cost, rather than operating under one-window. Presently, taxpayers have to deal with multiple tax agencies adding to their cost of doing business.
On March 12, 2020, according to Press release of Ministry of Finance, the National Tax Council [NTC] was established and its terms of reference (ToRs) approved. According to a Press report, “The harmonisation of GST is part of the World Bank’s budgetary support loan of US$750 to US$900 million”. It is mentioned in the report that as “suggested by International Monetary Fund (IMF), the centre and provinces have finally agreed to establish NTC “to resolve all tax-related issues, especially for the harmonisation of general sales tax (GST) across the country”. It confirms that our governments do nothing unless lenders/donors force them to do. It was decided that NTC would have technical level representations from the federation and federating units to resolve tax-related issues without amending the constitution. The NTC has an executive committee, comprising federal finance secretary, Chairman of FBR, provincial finance secretaries and heads of the provincial revenue authorities, namely, Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Balochistan Revenue Authority (BRA). The executive committee of NTC is to forward its suggestions/proposals for approval by the NTC. The NTC recommendations would be finalised in terms of majority to be presented before Monitoring Committee of the National Finance Commission (NFC).
The NTC should seriously consider the models of Swedish revenue authority [Skatteverket] and Canadian Revenue Authority (CRA) that not only collect taxes at all tiers of government but also extend benefits like social security, food stamps, universal pension and income support etc. The linkage of database of various bodies with NTA (complete digitisation) can be a great step towards an e-government model for the country that is presently non-existent. The complete roadmap for achieving this goal is discussed in Time up for fiscal integration—I, Business Recorder, December 21, 2018, Time up for fiscal integration—II, Business Recorder, December 23, 2018, Overcoming fragmented tax system, Business Recorder, October 19, 2018, Doing business under scattered taxation, Business Recorder, September 7, 2018 and Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018. It is hoped that the Government appoints a permanent Finance Minister for rest of its term rather than giving additional charge of this important portfolio to Hammad Azhar, Minister for Industries, who is also looking after compliance of Financial Action Task Force (FATF). In the present circumstances, as a dynamic person, he may consider all the above proposals and ask the NTC and other related departments working under him to design a national tax agency model after debate and input from all stakeholders and experts seeking consensus of all provinces through democratic model.
The Inland Revenue (IRS) and Customs under the present team of FBR are performing well by exceeding targets when economy is sluggish and suffering because of complete and partial lockdowns under deadly third wave of Covid-19. IRS on March 30, 2021 exceeded monthly target by 4.4% [in absolute terms Rs. 397.7 billion (net)]. Total collection reached Rs. 3025 billion for the first nine months of the current fiscal year and after paying Rs. 166 billion as refunds, net collection is Rs. 2859 billion against the fixed target of Rs. 2839 billion. Under the head income tax collection for the month was Rs. 190 billion (gross) and net Rs. 187 billion. Under the head sales tax after giving refunds of Rs. 20.6 billion the net collection is shown at Rs. 186 billion. For federal excise gross and net is the same (Rs. 22.8 billion) meaning by that no refund was issued. For the first nine months, total income tax collection is Rs. 1255 billion and net is Rs. 1245 billion, sales tax gross Rs. 1574 billion and net Rs. 1418 billion and federal excise Rs. 196 billion (no refund issued during the year). Imran Khan in a tweet appreciated FBR: “Achieving historic growth of 41% in March 2021 with collections recorded at Rs 460 billion. During Jul 20 – March 21 our collections reached Rs. 3380 bn which is 10% higher than the same period last year. This reflects broad-based economic revival led by government policies.”
The collection by IRS for the first nine months shows extraordinary performance by Member IRS (Operations) having consecutively exceeded targets since July 2020. As claimed by them, no advances were taken and all refunds of exporters were paid.
In Tax Laws (Second Amendment) Ordinance, 2021 (Ordinance No. VII of 2021) promulgated on March 22, 2021 on the dictates of IMF and deemed to be a Money Bill laid down before the National Assembly according to Article 89 of the Constitution of Islamic Republic of Pakistan, it is imperative to make a change in the Income Tax Ordinance, 2001 with immediate effect of compulsory registration of taxpayers by FBR and payment of refund without application through bank account of a person [those having no bank accounts should be paid through mobile wallet]. Once, this amendment is made, FBR should register 100 million unique mobile users as taxpayers without any further delay. According to latest data (accessed on March 31, 2021 at 10 am) available on the website of Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on January 31, 2021 is 180 million (84% teledensity), out of which 95 million are 3G/4G subscribers (44.5% penetration), 2 million basic telephony users (1.3 teledensity) and 98 million broadband subscribers (45.6% penetration). At present, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable income tax (12.5%) as pre-paid or post-paid mobile users.
Out of 180 million cellular subscribers (many have more than one number and unique users are not less than 100 million), there are 20 million, according to various data mining and matching exercises and researches, having taxable income. There is a huge tax gap between potential taxpayers and filers that needs to be bridged in April and May 2021. Out of 2,462,300 filers as per Active Taxpayers List [updated on March 29, 2021. FBR updates it every Monday on its website], 1.5 million declared NIL or below taxable income as per own admission of Special Assistant to the Prime Minister (Minister of State) on Revenue, Dr. Waqar Masood in an interview.
As suggested above, if FBR registers all the unique 100 million mobile users, we can achieve the collection of Rs. 8 trillion (income tax Rs. 5 trillion and sales tax Rs. 3 trillion). FBR will have to take the following steps:
- After compulsorily registration of all unique 100 million mobile users, send them text message giving username and password to upload (in the case of non-filers) or update profile (on the basis of filers) on FBR’s website answering just four questions:
- Dependent or head of family. If head of family, mention number of dependents.
- Self-employed or salaried person [salaried person to write name/address of employer].
- Self-employed to mention the nature of businesses or profession and address (or addresses if multiple places are used) where business is conducted and profession is exercised.
- Annual net income from all sources and gross receipts.
- Those having taxable income but never filed income tax return and sales tax statement should be facilitated to file simple and easy one-pager tax return having declaration of gross sales or receipts, as the case may be, made available both in English and Urdu. Those living in areas where internet is not available, help of Post Office nearby can be taken or a person having 3G/4G service of any mobile company to fill simple declaration mentioning the identity of the person who entered data on his behalf.
- It will help in documentation of all households and their earning levels at national level by matching family-tree data available with NADRA.
- Individuals earning below taxable limit should be paid income support (negative tax) till the time they are provided vocational training and employment rather than being kept as beggars for life. Special persons with any disability or disabilities must be taken care of by respective governments where they live.
- Those not registered as voters will be entered in the voters’ list through the help of Election Commission of Pakistan to become voters.
On the basis of above, FBR will have ‘National Socio-Economic Registry’ of all households. The requirement of Financial Action Task Force (FATF) of comprehensive data of all and their risk evaluation from the standpoint of anti-money laundering (AML) and countering of terrorist financing (CFT) will also be met to come out of grey list in June 2021.
Prime Minister, Imran Khan, must take special interest in this proposed scheme and order FBR to pay refunds of 12.5% collected from 80 million having non-taxable or no income during the last 5 years. It was advance and adjustable income tax as pre-paid or post-paid mobile users. In case it is done, PTI will secure support of 80 million in the next election. Refund to them will be a great gesture by the State in helping all those earning no income or income below taxable limit in the difficult days of Covid-19 endemic. In addition, Pakistan will have data of all 100 million adults—already verified through biometric system to have mobile connectivity about their socio-economic status. It will help in planning initiatives under Ehsaas in a transparent and targeted manner. This will be a great step forward to making Pakistan an economically viable and a welfare state.
The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)