Tax base & filers

Huzaima Bukhari & Dr. Ikramul Haq

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 further claimed that tax collected in the month of February 2020 had “increased by seventeen percent compared to corresponding period 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”.

In order to conceal its failure, FBR compared data of return filers with February 28, 2019 to show 45% growth in number of return filers whereas it should have been with total number of filers for tax year 2018. The figure given for Tax Year 2018 of 1,687,000 in Press release vis-à-vis those contained in FBR Year Book 2018-19[page 11, Table 7] confirm that total number of filers has decreased significantly.

Source: FBR Year Book 2018-19

According to a Press report [FBR collects Rs2.72tr in taxes, misses target, The Express Tribune, February 29, 2020], “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”

In another report [Pakistan’s tax base shrinks, only 40% NTN holders file returns, The Express Tribune, March 3, 2020]:

The government’s broadening of tax base campaign has fallen flat as only 2.5 million people have filed annual income tax returns against 6.2 million National Tax Number (NTN) holders that shows the weakening writ of the tax machinery.

The return filers were also 278,581 or 11% less than the last tax year despite Prime Minister Imran Khan’s government giving a tax amnesty scheme and conceding ground to traders in the hope of bringing them in the tax net.

Over one-tenth contraction in the tax base needs serious soul-searching on the part of the government, headed by Imran Khan, who is known for his financial integrity.

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 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 in World Bank’s Project Information Document (PID), updated on April 22, 2019 shows that out of 1,522,627 Income Tax Return filers only 1,116,066 paid any tax and out of Sales Tax registered persons of 220,042 only 43,355 paid any tax during fiscal year 2017-18.

Source: World Bank’s Project Information Document  

The report [Pakistan’s tax base shrinks, only 40% NTN holders file returns, The Express Tribune, March 3, 2020] further reveals shocking facts:

• “As compared to 415,624 returns filed by the traders in tax year 2018, this year only 399,534 traders filed returns. About 16,100 traders escaped the FBR’s net this year.
• The 2.5 million filers—to be precise—were just 40% of the people and entities registered with the FBR for income tax purposes, showing very poor enforcement. As many as 6.2 million people are registered with the FBR and hold the NTN.
• The filing of income tax return is the legal obligation of every person, earning taxable income of more than Rs. 400,000 a year, has at least one 1,000cc car or owns a home.
• The FBR has published the new Active Taxpayers List (ATL) for tax year 2019 and 2.53 million people have submitted income tax returns, said FBR Inland Revenue Policy Member, Dr Hamid Ateeq Sarwar, who is also the official spokesman. In tax year 2018, over 2.8 million people had filed returns, said Mr. Hamid Ateeq Sarwar.
• Instead of showing any increase in income tax returns, the tax base actually shrank by 279,000 or 11% in tax year 2019. To a question about traders escaping the tax net instead of coming in, Hamid Ateeq Sarwar said increasing the number of traders from 400,000 to three million would be a gradual process. He said committees had been constituted that would resolve issues about the filing of returns by the traders.
• In October last year, the traders got major concessions from the government on the intervention of PTI’s former secretary general Jahangir Khan Tareen. The government increased the exemption limit for sales tax registration of traders and allowed that only those paying up to Rs.1.2 million annually in electricity bills and owning a 1,000-square-feet shop would be required to get registered.
• Earlier, any shopkeeper whose annual electricity bill was above Rs. 600,000 was treated as a class-I trader and subjected to 17% sales tax.
• The government had also reduced the minimum income tax rate from 1.5% to only 0.5% for the traders who had annual turnover of up to Rs. 100 million. All this had been done on the claim that 3.5 million to four million traders would get registered with the FBR.
• It is not for the first time that the traders have deceived a sitting government. Earlier, they had made similar promises with Pakistan Muslim League-Nawaz (PML-N) government and got away with major tax concessions.
• In tax year 2018, there were 401,807 individual traders who filed tax returns—a figure that has now slipped to 387,867 instead of increasing.
• Similarly, there were 13,817 associations of persons owned by the traders that filed income tax returns in the last tax year. This figure too has slipped to 11,667 this year, a reduction of 15%.
• Under the Income Tax Rules of 2002, the FBR publishes the new Active Taxpayers List on March 1 every year and anybody that does not file return for the year is excluded from the list and is subject to double withholding tax. Mr. Hamid Ateeq Sarwar said the FBR would go after those 279,000 people who did not submit returns for this year.
• The political compromise struck by the PTI government twice—first by giving amnesty and then by providing a safe passage to traders—also weakened the FBR’s writ.
• In June 2013, the PML-N government had introduced the policy of charging higher tax rates from those who did not file income tax returns. Even that could not compel people to file returns”.

The above facts show that the Government of Pakistan Tehreek-i-Insaf (PTI) after gaining success in tax year 2018 for raising number of tax filers to 2,666,256 has failed to maintain the same, what to speak of increasing it. However, it must be highlighted that the policymakers (sic) sitting in the Ministry of Finance and top tax administrators of FBR always make a completely fallacious assertion that “only one percent of the population of the country pays income tax”. It is shocking that not only top bureaucrats but even most of the writers and TV anchors do not differentiate between a “taxpayer” and “return filer”. This point has been mentioned many times in ‘Fixing the ailing tax system’, Business Recorder, March 1, 2019, ‘Of taxpayers & non-filers’, Business Recorder, October 27, 2016, ‘Fallacies about tax base’, Business Recorder, August 21, 2015 and ‘Improving tax compliance’, Business Recorder, July 24, 2015 that there are about 95 million unique mobile users who pay advance, adjustable income tax in Pakistan but return filers were only 2,666,256 for tax year 2018 and now for tax year 2019, only 2,446,294 till February 28, 2020. Majority that pays advance and adjustable income tax is not earning taxable incomes—most are either dependents or have incomes below taxable limits. FBR has never conducted any study to determine fair tax base of the country.

Let us try to determine a rational income tax base. According to 2017 official census, our population [provisionally] was 207.7 million (by February 29, 2020, it was estimated at 208.14 million). Dependent population of children under the age of 15 years as on June 30, 2019 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 based in rural areas [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 be more than 4 million to file tax returns for tax year 2019. After extending the last date for filing returns to February 28, 2020, FBR was hopeful to receive 3 million returns but ended up with 2,446,294.

FBR collected 12.5% advance, adjustable income tax of 17.187 billion from 95 million unique mobile users alone during the fiscal year 2018-19 and in 2017-18 this figure was Rs. 47.38 billion. For tax year 2018, out of these only 2,666,256 (2.8%) filed tax returns after availing many months of relaxation—the due date of September 30, 2018 was extended up to April 30, 2019! After a generous amnesty, FBR was hopeful that the figure of income tax return filers would go up to 3 million—this target is yet not met as less than 2.5 million returns were received by February 28, 2020.  Thus there still exists a huge gap of 1.5 million if we take 4 million individuals as potential tax filers for tax year 2019.

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 started paying 19.5% sales tax on services to provinces, 17% federal excise duty to areas where FBR has jurisdiction along with 12.5% income tax and 10% service/maintenance charge with effect from April 27, 2019. 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. Total number of mobile users as on November 30, 2019 was 167 million as per latest data available on website of PTA. 

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 that include 12.5% advance income tax on mobile use. Adding insult to injury, they do not get in return even basic amenities of life, what to speak of free education and health facilities.

People have become either frightened or indifferent. They intentionally avoid registering themselves with FBR knowing very well that once they do so, the staff will make their lives miserable through unlawful orders, illegal demands and inhuman attitude. They lack faith in tax officials as well as the justice system. They are weary of long and expensive bouts of litigation that culminate into high costs and further misery for taxpayers as a result of high-handedness of revenue authorities as well as the appellate system.

The prevailing tax system is unjust, outmoded and unproductive with high taxes, yielding low revenues made worse by complex, time-consuming and costly operational procedure. It is not taxing the people according to their ability to pay but relying mainly on indirect taxes that are regressive, as these take a much larger percentage of earnings from low-income families than from high-income earners.

FBR has been claiming success in broadening the tax base, but reality is that it has even failed to regain what was achieved for tax year 2018. FBR stalwarts need soul-searching to find out what has gone wrong. Wrong policies, especially excessive reliance on withholding taxes, are showing devastating effects. High indirect taxation and outrageous burden of withholding taxes are proving detrimental for economic growth. Now there is open defiance on large scale as evident from decreasing number of filers and huge tax evasion in withholding tax regime causing illegal enrichment.

The real issue of taxation in Pakistan is appeasing the rich and mighty and lavish spending on comforts of elites—militro-judicial-civil complex and politicians in power.  The main cause of ever-expanding budgetary gap is not that masses are not paying taxes but the rich and mighty avoiding their obligations towards national exchequer, and then huge wastage of public funds on meaningless projects rather than improving human capital and infrastructure for growth and prosperity. Such wrong policies are responsible for continuous increase in the miseries of the people, concentration of wealth in a few hands while common citizens are deprived of even basis entitlements. Nearly 30% of Pakistan’s population now lives below $1.25 per day, which is categorised as extreme poverty.

It is a fact that FBR is not interested in nabbing big tax evaders. Tax Directories of Tax Year 2013 to 2018 show that less than 50% registered corporate bodies file tax returns, yet FBR is not taking any action. For tax year 2019, only 40,988 companies filed returns as per own admission of FBR. The total number of companies registered with SECP till 15 December 2018 was 108,433 but FBR cannot even force all of them to file returns which is obligatory requirement of section 114 of the Income Tax Ordinance, 2001!

The majority of parliamentarians, though enjoying luxurious living, just show remuneration from the State as their only source of income. FBR has evidence of their assets and huge expenses but never goes for audit of their tax affairs. The income/expenditure and asset declarations of judges and military-civil high-ups, who enjoy unprecedented benefits, tax concessions and exemptions, not available to ordinary mortals even though it is their fundamental right under Article 19A of the Constitution.

FBR has miserably failed to tap the real tax potential and increase the number of tax filers, bridging the obnoxious tax gap, registering all business houses and properties, checking leakages and rampant corruption within their ranks.

At present, millions of mobile users 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 and all the millions of mobile users under section 236 of the Income Tax Ordinance, 2001. It is an undeniable fact that FBR has lamentably failed to get due tax from the rich—its main emphasis is on withholding taxes that is borne even by millions having income below taxable limits. This is the worst one can expect from a government whose head keeps on making tall claims to rebuild Pakistan on the principles of Riyasat-i-Madina. 

It is not FBR’s sole fault that the State has failed to tax all those who have amassed mammoth wealth as the PMLN and PTI both gave them generous amnesties causing loss of billions of rupees. Had they been taxed at normal tax rates, collection could have reached Rs. 6 trillion. We can even collect Rs. 8 trillion 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 and tax due from the ultra-rich, which they are avoiding/evading. Provisional assessments and recoveries can be made in respect of persons who are not filing tax returns but earning substantially.

The PTI government, like its predecessors, instead of taxing the rich, reducing wasteful expenditure, incentivizing economic growth, is conveniently picking on the poorest of the poor to please the International Monetary Fund and other lenders/donors—the recent example is imposition of the exorbitant petroleum levy on POL products, which is anti-business, anti-growth and anti-people as well as against the Constitution as explained in Finance Act, 2018: flagrant constitutional violations, Business Recorder, May 25, 2018 .

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