Taxation & inflation

Dr Ikramul Haq

The Federal Board of Revenue (FBR), in a Press release issued on March 1, 2023, claimed collection of net revenue of Rs. 4493 billion in the first eight months of the current financial year (FY) against Rs. 3820 billion collected in the corresponding period of last year “depicting a year-over-year growth of 18%”. FBR needs to collect Rs. 3148 billion in the remaining four months (Rs. 787 billion per month).

The target of FBR for FY 2022-23 was revised from Rs. 7470 billion to Rs. 7641 billion in the wake of Finance (Supplementary) Act, 2023 [commonly known as mini-budget]. However, FBR did not revise monthly target of Rs. 527 billion for February 2023, “despite a massive increase in federal excise duty and 1% increase in general sales tax (GST), said a Press report.   

In its Press release, FBR claimed the following:

• “As per the provisional data, direct tax collection grew at a robust pace of 47% during the first eight months of the current financial year which is reflective of Government’s policy of making taxation progressive and equitable through shifting tax burden towards society’s wealthy and affluent segments…” 

• “….FBR has also stayed on top of addressing exporters’ liquidity needs through issuance of Rs. 235 billion in refunds during the first eight months of the current financial year as against Rs.198 billion during corresponding period of last year-a year-over-year increase of 19%”.

For full details visit: https://www.fbr.gov.pk/pr/fbr-shines-again-commendable-performance-unde/173796

In FBR’s Press release, there is no bifurcation of collection under the heads income tax, sales tax and federal excise duty. Out of total collection for eight months of FY 2022-23, according to a news story [“report”], 53% came from indirect taxes. Even under income tax, major collection is from advance taxes, before computing real income or loss, and withholding taxes on transactions. These have serious impacts on businesses, already facing severe cash flow issues due to prevailing precarious position of economy.

The report, while confirming FBR’s main reliance on indirect taxes, mentions income tax collection upto February 28, 2023 at Rs. 1.96 trillion. Though it admits that FBR exceeded the target of income tax by Rs. 47 billion, but points out that on the last day, collection under this head was Rs. 39.9 billion, “which was unparalleled, thus deepening suspicion of resorting to the old habit of taking advances”.

It is well-established that many withholding provisions in Income Tax Ordinance, 2001 bear the nature of indirect taxes that not only adversely affect the salaried class and the poor but are also among the factors triggering high inflation that reached 31.5% in February 2023.

The dilemma of our successive governments—civil and military alike—has remained the same: on the one hand, they want to lower inflation and on the other have been praising growth in regressive taxes! By reducing and rationalising taxes on fuel used for electricity generation (ultimately passed onto consumers), the government could have avoid further increase in tariffs, especially permanent electricity surcharge of Rs. 3.23 per unit imposed on March 1, 2023. FBR collects sales tax based on 100% billed amount irrespective of recovery or otherwise.

All retailers, having commercial connections but not falling in Tier-1, pay 5% sales tax with electricity bills where total monthly bill does not exceed Rs. 20,000, and at the rate of 7.5% where the monthly bill exceeds this threshold and additional 3% sales tax in the case of unregistered retailers. The electricity supplier is bound to deposit this amount without adjusting any input tax.

Sales tax collected through electricity bills was Rs. 149.5 billion in FY 2021-22 [FBR’sYear Book: 2021-22]. It was the highest number, followed by petroleum, oil and lubricant (POL) products at Rs. 107 billion. Income tax collected with electricity bills, for other than companies, is not adjustable up to Rs. 43,200 under section 235 of the Income Tax Ordinance, 2001. In FY 2021-22, total collection under this head was Rs. 71 billion. These indirect taxes through withholding provisions are a big burden on small and medium enterprises (SMEs) but never highlighted in any research or in briefings to the Prime Minister by FBR or members of Economic Advisory Council (EAC).        

According to Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on January 31, 2023 was 193 million (86.19% teledensity), out of which 123 million were mobile broadband subscribers (54.91% penetration), 3 million fixed telephone subscribers  (1.17 teledensity) and 126 million broadband subscribers (56.31% penetration). Thus, at present, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable 15% income tax as pre-paid or post-paid mobile users. However, there is no recognition of this fact.

Around 110 million unique mobile users are paying advance/adjustable income tax but Pakistanis are labelled as “tax cheats—a highly lamentable act. The total income tax filers for tax year 2022, according to FBR’s Active Taxpayers’ List, updated on March 1 2023, were 3.2 million. FBR should register all taxable persons to bridge huge tax gap and stop extorting 15% oppressive tax from the poorest of the poor.    

The above facts and the followingfigures ofPakistan Bureau of Statistics, released on March 1, 2022 for week ending on February 23, 2023, escaped the attention of the Prime Minister, members of EAC and leaders of the PDM:

• Prices of onions shot up almost 372%, followed by 86% increase in prices of chicken, 75% in broken rice, 76% in eggs, and 82% in wheat over a year.
• Cooking oil prices were higher by 51% and wheat flour by 56%.
• Food inflation rose more in rural areas than in cities. In rural areas, it increased to 47% and in cities jumped to 42%.
• Core inflation, calculated by excluding food and energy items, also increased in February 2023 to 22% in rural areas and 17% in cities.

The Prime Minister and his economic team need to be reminded of the famous quote of Milton Friedman that “inflation is taxation without legislation”. In the coming federal budget, if they want to give relief to masses, they must reduce rates of all taxes, eliminate collection of sales tax and income tax at import stage and withholding taxes on electricity and internet/mobile use—in fact all withholding provisions having no nexus with income. There is need to increase income tax for equity.

There is also need for broadening of tax base. FBR has 7.4 million registered income tax persons but return filers are even less than 50% including registered companies. Those who paid Rs. 1534.3 billion as withholding taxes in FY 2021-22 under the income Tax Ordinance, 2001 alone, conducting transactions worth billions of rupees, but not filing returns, should immediately be tapped. This action is long overdue as the former Finance Minister, Shaukat Tarin told FBR and National Assembly’s Standing Committee on Finance way back on May 3, 2021.

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The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)