FBR's shenanigans

The International Monetary Fund (IMF), in a recent report, has projected a shortfall of Rs 29 billion in revenue collection by the Federal Board of Revenue (FBR) against the target of Rs 1952 billion fixed for the current fiscal year (FY12). In FY11, the FBR missed the target of Rs 1588 billion by Rs 30 billion by collecting Rs 1558 billion. The IMF projection of the tax-to-GDP ratio is also lagging behind the government's target of 9.3 percent. The tax-to-GDP ratio is estimated at 9.2 percent for FY12, which was 8.9 percent in FY11.
The IMF attributes low tax revenue in Pakistan to a weak fiscal structure, "which results in a poor tax-to-GDP ratio, one of the lowest in the world." It says that "there is a general unwillingness to pay taxes, due to poor public service delivery and because of perceived unfairness in the tax system". These issues were highlighted in these columns for the last many years, but nobody bothered to take note of it. The endorsement by the IMF of our analyses may now force the FBR to take some concrete steps to remedy the situation and improve the tax-to-GDP ratio by 15% in the FY13.
The IMF emphasises that "agriculture is mostly outside the tax net; besides the number of taxpayers filing income tax returns is very small about one percent of the population". Against the dismal revenue collection, the IMF comments that "there are large demands for government spending and most notably, subsidies (mostly electricity subsidies) and interest payments consume almost half of government revenue, while security spending uses up another quarter." As a result, it notes, "there are large budget deficits that are difficult to finance, especially when foreign assistance is limited. Therefore, budgetary management relies too much on the containment of investment spending and borrowing from the banking system".
The IMF, while commending the government for keeping spending under control, has cautioned that the deficit target of 4.7 percent of GDP appears out of reach. "Both low expenditure growth and a brisk increase in tax revenue contributed to the lower deficit," the IMF notes. However, strong tax revenue partly reflects one-time factors; revenue collection could weaken in the period ahead, particularly if the government succumbs to pressures to reverse the removal of tax exemptions and zero ratings, it adds.
The FBR has collected a provisional figure of Rs 964 billion in the first seven months of the current fiscal year and requires further Rs 988 billion in the remaining months with an average collection of Rs 197.6 billion per month. For a sustainable reduction in deficit, the IMF stresses, a consistent growth in tax revenue collection. Besides, IMF suggests another attempt should be made at implementing the reformed General Sales Tax (GST), which can generate revenue up to three percent of GDP in additional revenue.
The IMF and FBR have forgotten about the ten-year tax plan approved by General Musharraf on February 22, 2007 during his visit to the FBR. In this country, there is no continuity of policies and programmes. In 2007, the then Chairman of the FBR in 2007 promised that in the next fiscal year (FY 2008) the revenue target would be Rs one trillion. He further claimed that the tax-to-GDP ratio of 15% would be achieved in the next few years. These targets were easily achievable but FBR, as usual, failed to keep its promises.
The present coalition government did not even bother to investigate the reasons for the utter failure on the part of the wizards sitting in the FBR with regard to the plan it promised to implement till 2017. It also failed to give its own plan if the earlier one was not rational. The House Standing Committee on Finance never asked the FBR chief what happened to the ten-year plan and the five-year Tax Administration Reforms Programme (TARP), for which the best professional advice and enormous funds were available.
Our real revenue potential is much higher than the targets assigned to the FBR. In these columns we have suggested concrete measures to raise revenues to the tune of Rs 6 trillion. For tapping our actual potential, as a first step we need to revamp the FBR, make it an autonomous body like the State Bank of Pakistan, bring the undocumented economy in the tax net through asset-seizure legislation, scan all containers coming in and going out, counter massive evasion in customs and sales tax through use of the tax intelligence system and distribute the incidence of various taxes judiciously amongst all the segments of society.
A close examination of the FBR's performance shows that it has shifted the burden of collection of taxes to the withholding agents, who are performing the essential State function of the tax collectors, without getting any reimbursement of expenses incurred for performing this onerous task. It is an undeniable fact that about 90% of income tax is being collected through voluntary compliance as advance tax, tax with returns and through withholding at source.
The FBR has enormously widened the scope of collection/deduction of taxes through withholding agents making a number of amendments in income tax and sales tax laws. The corporate houses in general and banks in particular have virtually been converted into 'FBR Collection Houses'. The withholding agents incur substantial cost on complying with the tax collection provisions on behalf of the government (man-hours, infrastructure use and stationery, just to mention a few) and in return get penalty notices for lapses they never committed. There is no provision in the tax laws for receiving any collection charges for rendering these services, making it "forced labour", which is in violation of Article 11(3) of the Constitution.
The Federal Government retains 1% as collection charges from all the provincial governments, except Sindh which has levied its own tax on services. If the Federal Government is justified to retain collection charges from the provincial governments on General Sales Tax on Services, which it collects on their behalf, how can it deny the same facility to the withholding agents who collect billions of rupees on behalf of the FBR? In Pakistan, on the one hand this right of recovering cost is denied to all the withholding agents and on the other, arbitrary and unlawful orders are passed for alleged defaults and lapses.
FBR openly lies to the nation and gives false statements before the Standing Committees of Parliament on Finance about the correct number of income tax payers in the country. They claim that only those who file income tax returns are taxpayers, whereas the law says anybody from whom any tax is payable or who has paid any tax qualifies as a taxpayer. In reality, the total number of income tax payers in Pakistan is over 60 million - there are over 110 million mobile users subjected to 10% income tax both on prepaid and post-paid amounts. Even if half of them have two connections, the total number of taxpayers cannot be less that 60 million, though the vast majority of them do not file tax returns as their income is much below the taxable threshold of Rs 350,000.
Time and again we have pointed out that the FBR wrongly accuses the people of Pakistan without acknowledging that even poor people not liable to income tax are contributing through withholding taxes on mobile usage. The figure quoted by IMF and FBR of 1.7 million (less than 1% of population) filing returns does not depict the whole truth. They are return filers, but actual population of taxpayers is very huge. For example, under the income tax law, every account holder of a bank, who receives any amount of interest, is subjected to 10% withholding tax. Have the IMF and FBR tried to ascertain their actual number?
According to the latest figures, the total number of account holders of all Pakistani and foreign banks operating here, who paid income tax under section 151 of the Income Tax Ordinance, 2001, for the period ending 31st December 2011, was 28 million. According to the National Savings Directorate, the total number of persons who paid tax at source on different schemes during the period 1st July 2010 to 30th June 2011 was 26 million. It is worthwhile to note that in their case tax deducted at source is full and final discharge under section 169 of the Income Tax Ordinance, 2001. They are merely required to file a simple statement under section 115(4) of the Income Tax Ordinance, 2001 ie if they do not have any other source of income. Had the FBR allotted all of them National Tax Numbers (NTNs), it could have proudly claimed that total registered taxpayers in Pakistan are 45 million.
The figures quoted above prove beyond any doubt that our tax base in not narrow, but the FBR's counting and the IMF's orientation are fallacious. The huge population of taxpayers (mobile users and account holders) has been completely ignored by the FBR as well as the IMF. If only 1.5 to 1.7 million are filing tax returns out of the vast population of mobile users, the fault lies with the enforcement wing of the FBR. Undoubtedly, the greatest failure of the FBR is overlooking the number of people who are paying adjustable taxes through the mechanism of deduction of tax at source and that too not in thousands but in millions, yet not filing returns if income is Rs 350,000 or more. A case in point is the multitude of mobile users. The FBR must secure information from companies as to how many mobile users are paying Rs 50,000 and above as annual bill. If they are not filing tax returns, notice should be issued to them. It will instantly increase the number of taxpayers. The same is true for all the 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 FBR [the total number of industrial/commercial electricity consumers in Pakistan as on June 2011 was over 20 million as per official document, namely Economic Survey 2010-2011].
It is a matter of great pity that the apex tax collection authority itself, does not know how many people in Pakistan are paying income tax. The people of this country are accused of not paying income tax; whereas the reality is that even a petty shopkeeper in a town/village (whose total income is much below the minimum taxable limit of Rs 350,000) is paying income tax along with electricity bills as a commercial user. The total population of Pakistan, according to latest estimates, is 180 million. The percentage of the rural population is about 67%. Out of the total population, 45% are below the age of 15 years (being minor so majority of them cannot be taxpayers). The total labour force stands at 40 million, out of which 26 million comprise the rural labour force. Reading all these facts together, the income tax paying population of Pakistan cannot be more than 20 million, but more than 40 million paid income tax as mobile users and/or under section 151 of the Income Tax Ordinance, 2001during 2010-2011! Yet the FBR is engaged in a vicious and baseless propaganda that the people of Pakistan are not paying taxes and our income tax base is narrow!
The FBR, in its last quarter report for 2010-11 admitted that account holders alone paid over Rs 23.584 billion as income tax and people using mobiles and landlines at Rs 27.566. The FBR 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 audacity not to include them in the list of taxpayers. This is adding insult to injury. Huge claims are being made about the documentation of the economy and the preparation of taxpayers' roll whereas the very basic methodology and conceptual framework of the FBR regarding the counting of number of taxpayers is flawed.
It is painful to note that the present structure of presumptive taxation has complicated the poverty problem of Pakistan. According to a study of the Asian Development Bank, the tax system of Pakistan, which was progressive till 1990, was converted into a regressive regime in 1991 with the introduction of provisions like sections 80B, 80C, 80CC and 80D in the repealed Income Tax Ordinance, 1979 and VAT-type tax in the Sales Tax Act, 1990. The various presumptive taxes have not only been retained since 1991, but their scope has been enlarged manifold. The result is that during the last twenty years (1991-2011), the tax burden on the poorest households is estimated to have increased by 31.4%, while it declined by 36.9% for the richest households. This study of the ADB is an eye-opener for the target-oriented FBR's stalwarts, who are completely oblivious of the impact of their onerous tax policies. In their frenzy of showing higher figures they have imposed an extra burden of taxes on the poor of Pakistan, instead of taxing the rich and mighty. History will never forgive them for this insensitivity towards the poorer sections of society.
The banks, Wapda, mobile companies and the PTCL are fully computerised. Their systems can easily compute the total number of people on whose behalf these organisations collect and deposit income tax in the government treasury. The combined figure of such persons is between 40-60 million and yet the FBR is claiming "remarkable achievement" by adding merely 700,000 people on the NTN roll! It is a great tragedy of errors and perhaps one of the ugliest jokes with the people of this country. The FBR owes an open apology to the people of Pakistan for criminal negligence in reporting incorrect figures regarding income taxpayers in Pakistan. The FBR's own effort in tax collection is only to the extent of 10% of total collection, the rest is coming through withholding, advance tax and tax with returns. Taxpayers and withholding agents are victims of highhandedness of the FBR's unjust tax policies. It is high time that the FBR should put its own house in order and stop malicious propaganda against the people of Pakistan.
(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Tax and Pakistan), are Adjunct Professors at Lahore University of Management Sciences)