Distinction between filers and non-filers

A government, starved of resources, could adopt extreme and unconventional measures to increase its revenue receipts and narrow the budget deficit. Fiscal authorities of the country had initially imposed withholding tax on cash withdrawals from the banks for this very purpose on a uniform basis but have now sought to extend the scope of this measure to punish non-filers through a higher rate of 0.5 percent in the budget for FY15 as against 0.3 percent for filers of income tax returns under section 231A. In order to distinguish between the two categories of depositors, new definitions for "filers" and "non-filers" have been introduced in the Finance Bill 2014. However, as was to be expected, Pakistan Banks Association (PBA) is not in favour of the new measure and has commented that charging of enhanced rate of withholding tax from non-filers of income tax returns was practically impossible in the existing banking system. It should be understood that almost all the back-office functions of the banks are computerised and to comply with the amendment in the Finance Bill, banks would have to make significant changes in their systems. Each bank branch would have to identify filer/non-filer status after consulting each customer, which would be tagged with separate tax rates to calculate and deduct tax. According to the PBA, the change cannot be implemented without understanding operations of the banking system and mechanism of profit payment to the account holders. It was not clear whether profit/yield of Rs 500,000 for applying 15 percent tax rate in case of non-filers was for the year or per transaction. Currently, active taxpayers' list available at the FBR web portal was also incomplete. There was also a confusion about the definition of dividend income including on bonus shares and capital gains and the burden on banks would increase manifold due to the changes introduced in the Finance Bill in this respect.
As argued by the PBA, the new measure of charging higher withholding rate from the non-filers for cash withdrawal from the banks may not be totally impracticable but is largely unjustified and certainly difficult to implement. Moreover, it would affect saving behaviour of the households, encourage informal sector, which is the bane of the economy and promote cash transactions. This would create a formidable obstacle towards government's objective of documenting the economy and reviving growth. The move would also put pressure on the human and technical resources of the banks and reduce their profitability to a certain extent. Although the Federal Board of Revenue has issued an "Active Taxpayers List for Income Tax Deduction at Source", yet the list cannot be considered as complete or final due to frequent revisions in the change of status, which may not be amended instantly due to huge number of account holders, different profit payment intervals and frequent system changes. As such, the change could lead to imposition of penalty on banks for non-compliance and unwarranted litigation. No need to say that lack of efficiency in the FBR and uncertainty about the timely inclusion or exclusion of filers/non-filers in the list of active taxpayers would add to the confusion and force the taxpayers to run from pillar to post to persuade the tax officials to add their name in the preferred list and convey it to the banks in a timely fashion. All of this would spread confusion, constrain the concerned parties to enter into unnecessary arguments and, in extreme cases, could compel the taxpayers to approach the courts for the redressal of their grievances. The measure is also violative of the basic functioning of various organisations. Banks are supposed to be intermediaries between savers and investors and not tax collecting agents. It is basically the job of the FBR to plug the loopholes, encourage documentation of the economy, bring the tax evaders into the tax net and punish them in whatever way it deems fit without bringing other institutions into the picture and putting unnecessary burden on their resources. On the other hand, we fail to understand why the PBA has taken so long to make their case for the consideration of fiscal authorities and brought their concerns to their attention so late. Early approach would have given more time to the government to assess pros and cons of the measure. Anyhow, it would be gratifying on the part of the government to revert to the old system and continue to charge the previous rate on cash withdrawals, dividends etc as has already been done in the case of first class travellers by revising the tax proposal and subjecting them to a uniform rate of withholding tax. In our view, the FBR needs to be more bold, efficient and imaginative in widening the tax net and increase tax revenues than resorting to easy ways of involving the banking and other institutions into this business.