The Federal Board of Revenue (FBR) has achieved the target of first eight months (July 2020 to February 2021) of the current fiscal year, which is commendable, especially when the economic growth is extremely slow in the wake of Covid-19 and there is contraction in imports as FBR collects bulk of taxes at the time of clearing of goods and through numerous withholding tax provisions. FBR also suffers from multiple institutional shortcomings, for example, lack of modern tools and trained staff to enforce the various anti-avoidance provisions in all the tax laws it administers—Income Tax Ordinance, 2001, Sales Tax Act, 1990, Customs Act, 1969 and Federal Excise Act, 2015.
In the previous articles (‘There’s need for new tax model’, Business Recorder, February 26, 2021 and ‘Restructuring the tax system’, Business Recorder, January 22-24, 2020), it was highlighted that the existing tax system needs complete restructuring to tap the actual tax potential and at the same time help economy to absorb the financial toll of Covid-19 and grow at a rapid pace.
The most critical area pointed out in ‘Restructuring the tax system’, Business Recorder, January 22-24, 2020 was:
There are over 5,000 effectively traded tariff lines and 2,448 tariff lines (33% are under 20% slab). In fiscal year 2019-20, additional customs duty (ACD) was charged on 5,521-tariff lines. On 2,075 tariff lines, regulatory duty (RD) was charged. The heavy taxation at import stage (50% of FBR revenue is collected at import stage) provides an incentive for smuggling, undervaluation, misreporting, mis-declarations and tax evasion. The SRO-based customs policy has rendered the actual tariff different from the standard tariff. As a result of this, customs tariff has multiple rates and several exemptions, and various “conditions and requirements” are to be fulfilled to avail those exemptions. This creates opportunities for the discretionary use of powers by officials, raising the cost of doing business and incentivising malpractices and mis-declarations for evading duties. Recognizing these problems, this simplified tax model proposes that there should be a single slab for all imports to end these undesirable practices.
In response to the above, Dr Manzoor Ahmad, ex-member Customs, FBR and Pakistan’s Ambassador and Permanent Representative to the World Trade Organisation (WTO), responded as under:
“With all the powerful lobbies, this is never going to happen. However, if it ever happens, Pakistan will be a different country. Our exports will diversify, multiply and productivity will increase substantially. Chile experienced this after bringing all rates to 10% in the 1970s”.
It is pertinent to mention that Dr Manzoor Ahmad has extensive experience in customs, international trade, and trade policy issues. As Pakistan’s Ambassador to the WTO, he chaired the WTO TRIPS (Trade-Related Aspects of Intellectual Property Rights) Council (Special Session), WTO dispute panels, and the WTO Committee on Balance-of-Payment Restrictions. He also served as Deputy Director at the World Customs Organization (WCO), Brussels. He has also been a member/leader of Pakistan’s negotiating teams in various trade liberalization and facilitation forums in South Asia and Central Asia, including South Asian Association for Regional Cooperation (SAARC), Economic Cooperation Organization (ECO).
It is hoped that all those engaged in the recently established Tax Policy Unit in Finance Division, taken away from the Revenue Divisions, headed by Chairman/Chairperson of FBR as Secretary in Grade 22, will give due weightage to the proposal given by Dr Manzoor Ahmad.
The FBR was also approached with the above question, responded by Dr Manzoor Ahmad, but till the writing of these lines no response was received. However, under the able leadership of Chairman FBR, all members have performed impressively, and who promised that Member Policy (Customs) will soon update on this. The retirement of the incumbent Chairman is due in April, 2021 and at the best he may get extension till June 30, 2021. He will be remembered as an outstanding officer, who contributed not only in meeting revenue targets of all months of the current fiscal year but also took many innovative measures, like E-Katcheri, tax awareness educational sessions and new complaints redressal forum [Circular 10 of 2021 issued by Member Operation (IRS) on March 1, 2021] and such others highlighted in FBR performance under the spotlight, Business Recorder, February 5, 2021.
It was conveyed to all those who matter in tax policy and enforcement that when Customs staff commit leakages, the national kitty suffers heavily as bulk of the sales tax, excise duty and income tax are collected at source. A question was posed: Can Inland Revenue Service (IRS) do audit of Customs as of any other withholding agent? They have never done this though law permits them. Trade with China alone has gap of average $6 billion a year. Even exempt items, under section 148 they are required to be treated as if not exempt and then calculate and recover advance income tax with GD. If rate is say 20% but due to Free Trade Agreements(FTAs) or exemption otherwise provided in the Customs Act, 1969 or through any statutory regulator order (SRO), the Customs officials clearing any consignment need to collect tax after applying the rate as provided in section 148(5) of the Income Tax Ordinance, 2001:
Advance tax shall be collected in the same manner and at the same time as the customs-duty payable in respect of the import or, if the goods are exempt from customs-duty, at the time customs-duty would be payable if the goods were dutiable.
The FBR in a Press release issued February 28, 2021 highlighted its various achievements as under:
“According to the provisional information, FBR has collected net revenue of Rs.2916 billion during Jul-Feb period, which has exceeded the target of Rs.2898 billion. This represents a growth of about 6% over the collection of Rs.2750 billion during the same period last year.
The net collection for the month of February was Rs.343 billion against a required target of Rs.325 billion, representing an increase of 8% over last February and 106% of the target. When finalized after book adjustments, the collection figures are likely to improve further.
On the other hand, the gross collections increased from Rs 2,823 billion during this period last year to Rs 3,068 billion, showing an increase of nearly 9%. The amount of refunds disbursed was Rs 152 billion compared to Rs 79 billion paid last year, showing an increase of 97%. This is reflective of FBR’s resolve to fast-track refunds to prevent liquidity shortages in the industry.
The improved revenue performance is a reflection of growing economic activities in the country despite facing the continued challenge of second wave of Covid-19. During March-June 2021, it is expected that this revenue performance would be improved substantially compared to 2020 when economic activities were disrupted.
Meanwhile, FBR’s efforts to broaden the tax base are expanding apace. Early signs suggest such efforts are bearing fruits. As on 28-2-2021, income tax returns for tax year 2020 have reached 2.62 million compared to 2.43 million last year, showing an increase of 8%. The tax deposited with returns was Rs 49.6 billion compared to only Rs.31.0 billion, showing an increase of 60%. It may be recalled that last year the final date for submission to returns was 28th February. FBR’s decision to adhere to 8th December as the last date has been vindicated as more returns and higher tax payments have been recorded during the tax year 2020 compared to 2019.
Besides, FBR has issued notices to nearly 2.1 million taxpayers who were supposed to file return, or have filed a nil return, or mis-declared their assets or have not been filing return for sales tax to comply with their legal obligations. The exercise is eliciting encouraging response. However, those who are not complying would be pursued diligently until compliance is achieved.
FBR has also released the information about Tier-I retailers who have been integrated with POS system. According to the information, 9952 sales points have been integrated with Point of Sales Linked Invoicing System.
Pakistan Customs has initiated a focused counter-smuggling drive. During February 2021, smuggled goods worth Rs 4.08 billion have been seized while in February 2020; smuggled goods worth Rs 3.02 billion were seized, thus showing a monthly increase of 35.18%. Similarly, during last 8 months (July 2020-Feb 2021) of current financial year smuggled goods worth Rs 39.52 billion have been seized as compared to Rs 25.10 billion from July 2019 to February 2020 of the last financial year thus showing an increase of 57.45%. Moreover, the value of seized goods of Rs 39. 52 billion in 8 months of current FY has crossed the total value of seized goods of last year. In FY 2019-20, smuggled goods worth Rs 36 billion were seized”.
In another Press release issued on March 2, 2021, FBR conveyed the following:
“Federal Board of Revenue (FBR) has uploaded the Active Taxpayers List (ATL) for Tax Year-2020 on 1st March, 2021. The ATL is available on the official website of FBR. Number of Income Tax Returns for Tax Year-2020 had reached 2.62 million on 28th February, 2021 as compared to 2.43 million for Tax Year-2019 as on 28th February, 2020. The amount of tax paid with returns for Tax Year-2020 at Rs 49.6 billion is 60% more than tax paid with returns for Tax Year-2019 up to 28th February, 2020.
FBR has added that 509,039 filers have not been included in this year’s ATL as they could not file their tax returns within due date or the date extended by the respective commissioners and ATL surcharge had not been paid by them. FBR has clarified that such taxpayers can get themselves automatically included in the ATL if they pay the necessary ATL surcharge. The amount of ATL surcharge for companies is Rs 20,000, Association of Persons Rs 10,000 and ATL surcharge for individuals is Rs 1000. FBR encourages such taxpayers to pay respective amount of ATL surcharge and take benefits of ATL.
Similarly, those taxpayers who could not file their returns for Tax Year-2020 till now, are also urged to avail benefit of ATL by filing their returns along with ATL surcharge”.
In a Press release, issued by the FBR, on December 10, 2020, it was claimed: “A total of nearly 1.8 million returns have been filed together with an amount of about Rs 22 billion. Last year at this time, 1.73 million returns were filed while about Rs 13.5 billion was deposited as income tax. Comparatively, the returns are higher by 4% and the tax deposited is higher by 63%”.
In 2019, FBR in a Press release issued after the extended date of filing of returns (December 31, 2019), claimed that 2,446,294 income tax returns for Tax Year 2019 were received showing increase by “45% compared to 1,687,000 returns filed in Tax Year 2018”.
The figure given for Tax Year 2018 of 1,687,000 in Press release is different from FBR’s Year Book 2018-19 [page 11, Table 7] showing total number at 2,666,256, claiming growth of 42.4% vis-à-vis total returns received for tax year 2017 at 1,797,903. In the latest FBR’s Year Book (2019-20), there is no mention of total income tax returns received for tax year 2019. FBR’s Press release of December 9, 2020 also mentions returns for Tax Year 2019 received till December 8, 2018.
The figures released by FBR needs to be authentic and to avoid any doubts must be updated weekly on its website.
(To be continued)
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS))
Copyright Business Recorder, 2021