During the current fiscal year, economic growth remained 2.4 percent, fiscal deficit stood at 5.1 per cent of GDP excluding 120 billion rupees of circular debt. The fiscal deficit should have been greater if additional measures were not taken on March 15 by imposing additional taxes on sale of fertilisers, pesticides, tractors, a five per cent tax on five zero-rated export oriented sectors and 15% flood surcharge on taxes.
The new budget proposals projected a fiscal deficit of around 4 per cent of GDP. It is based upon baseless perception that may not materialise. Whether this target is achievable under the current socio, political and economic conditions remains debatable. However, the budgetary proposals for the new fiscal year are viewed as they did not incorporate any concrete measures that should have ensured to achieve the projected deficit set for the next year.
During the budgetary speech, Federal Board of Revenue (FBR) was complimented by the Finance Minister on identifying almost 2.3 million tax defaulters. Out of these, almost 700,000 tax defaulters are being served notices to collect an additional 50 billion rupees. Since then, almost on daily basis there is news that the defaulter community has been served with notices, there will be a crackdown on the tax defaulter, the tax defaulters would be treated harshly and they would be handed over to National Accountability Bureau (NAB) for harsh treatment. If we review this latest threatening behaviour to the tax paying community, we get an impression that all is not well and in fact there may be very few tax defaulters than the figure being publicised. Therefore, we are only scaring the tax payer community with threats. Their image is being tarnished without first establishing that they are in fact culprits. This behaviour discourages those segments that are already filing their tax returns and have been paying taxes since long. The negative propaganda campaign is damaging the business environment and resulting in the capital fleeing to other countries. Several businesses have been relocated to countries that are more business friendly.
They offer respect and nationality in return for investment. They provide better law and order situation. They have long-term business plans for the business community that does not change overnight. The officials are more trustworthy and above all, the tax payers are not insulted. These countries do not ask for disclosure of so-called "sources of funds" that has become the main hurdle in our investment strategies due to short-sightedness of our tax collecting agencies. The latest revelation by one of the senior official of the Malaysian embassy that young Pakistanis have remitted over eighty billions rupees to Malaysia for investment due to the deteriorating law and order situation in Pakistan is shocking. It should be an eye-opener for the government, planners and tax collecting agencies. In fact, tax collecting agencies are fully responsible for the fleeing of this capital through their corrupt practices, short-sightedness and not adapting them to meet new economic challenges.
The budgetary proposals did not incorporate any measures that the current taxation system would be modified to provide judicious treatment of tax payers so that they retain their self-respect and are encouraged voluntarily to pay their due share of taxes. All persons are treated equally for the recovery of taxes. The recent arbitrary amendments in the taxation laws as a result of these budgetary proposals are disturbing the business and industrial community and it seems that additional taxes would be collected through these harsh and arbitrary amendments, irrespective of the true and genuine income of the assessees. This is a classic example of changing tax laws every year that becomes the basis of uncertainties in the business community. Should we compliment FBR for these developments?
It is not rocket science to understand that under the economic downturn, rising inflation, deteriorating law and order situation, and the trust deficit that exists today, collection of revenue into the national exchequer would remain sluggish and below expectations. Even those segments that were honestly paying their due share of taxes are likely to suffer due to the economic downturn and may not be able to pay the same amount of taxes as they paid in the past due to lower profits and higher cost of doing business. After all, it was intended by the State Bank of Pakistan that the economy should not grow to curtail inflation by increasing the discount rates. Without a reasonable economic growth, how would the businesses generate profits and pay taxes that they were paying in the past. Expecting a rising collection that should surpass the previous year seems unrealistic. Therefore, it is not the fault of the tax payers but those who have not done their homework and hesitated to develop policies to ensure sustained economic growth. No one is against netting the genuine tax defaulters. But if we start blaming those who are already taxed, and file their tax returns regularly and honestly, harassing them is neither legal nor moral and the behaviour becomes an incentive to become a tax defaulter.
During the last three and half years, things have gone from bad to worse. No concrete proposals were incorporated to overcome the energy crisis, arresting inflation, reducing gas shortages, controlling unnecessary government expenditure and improving law and order situation within the country so that the businesses should start producing more, by creating employment and in return paying more money to national exchequer.
The Capital Gains Tax (CGT) was imposed for the first time in the fiscal year 2010-11. Detailed rules were framed in February 2011, almost 8 months after the introduction of this tax. There were several discrepancies visible in these rules for which bourses reached an agreement with the FRB's officials for the removal of these anomalies. The Karachi Stock Exchange's website is still witness to that agreement where the memorandum of understanding exists. So far, no action has been taken. This is just one example of our tax collecting agencies that reconfirms the trust deficit.
Before the introduction of Capital Gain Tax (CGT), the government used to pocket almost around 5 billion rupees annually compared with the current estimates of around 30 million rupees only. Certain new proposals were agreed between the businesses and investing community and the officials of the ministry of finance. These were to be incorporated into the budgetary proposals to collect Capital Gain Tax from individuals in an easier and transparent manner. These agreed proposals became part of the waste paper basket. This attitude has shocked many and is being seen viewed as an indifference attitude towards tax collection and would encourage more corrupt practices within the tax collection system.
On the other side, we see the FBR sending notices to the salaried class asking to show proof of their tax deposits whereas the Tax return itself contains evidence of tax deduction by the employer. The investors got notices to prove the source of funds for those shares on which they were paid dividends after deduction of tax at source. Those who showed their taxable income from rental property got notices to obtain proof that the rental income is in fact the same as shown in their tax return and nothing has been concealed. In one case that came to my knowledge recently was a salaried person who was served with a notice for a comprehensive tax audit.
This was his first ever return filed because that was his first job in Pakistan. If the tax collecting agencies keep on sending irrelevant notices to irrelevant parties and fulfil the task of issuing "so-called" notices to 2.3 million tax defaulters, then one might compliment the Finance Minister and the ruling elite for their innocence, who believe the FBR regarding the 2.3 million defaulters and that at least 50 billion rupees would be recovered from them. By the end of the next fiscal year, very little amount will be collected because there is no case to whom these notices are being issued.
If there is a continuous decline in tax collection for the last several years, it is of course a matter of concern, but we must identify reasons for lower collection and these are evident as discussed above. The FBR should have taken notice of the reported 18000 billion rupees lying with the Swedish banks of the Pakistani elite class, businessmen and politicians to ensure if they are not the defaulters. Has any notice gone to this class or it is only being sent to the existing tax payers?
(The writer is Fellow of Chartered Institute of Management and Global Accountants UK.)
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