Illogical taxes

The row over imposition of withholding tax of 0.6 percent [reduced to 0.3% till September 30, 2015 through a Presidential Ordinance] on all banking transactions by non-filers has taken a new bizarre turn as a report published in Business Recorder of September 11, 2015 exposes the claim of the government that this provision is aimed at widening tax net. The official spokesperson of Federal Board of Revenue (FBR) has, however, contested the report and claimed that "the withholding tax on banking instruments of non-filers is a documentation measure and it should not be considered as a short-term revenue generation measure". The report, quoting a senior officer of FBR on condition of anonymity, revealed that this provision was inserted "to meet the government's expenditure requirements and fiscal deficit target agreed with the International Monetary Fund under the $6.64 billion Extended Fund Facility". If the claim of FBR is correct, the question is what it has done with already available data (eg withholding statements) to widen the tax net.
The FBR has been insisting that revenue impact of this levy is not more than Rs 35 billion. The report contests this projection showing that actual collection under this head would be much more than Rs 35 billion. It has been mentioned in these columns time and again that such erratic measures are counterproductive for widening of tax net. On the one hand, the government protects the rich and mighty (who do not file income tax returns and pass on withholding taxes on the end users) and on the other, it keeps on increasing the rate of sales tax on items of daily use. The exorbitant tax rates on petroleum products are highly lamentable, more so, as these are increased through Statutory Regulatory Orders (SROs) bypassing the Parliament in utter violation of Article 77 of the Constitution.
Neither the government nor the Parliament is ready to acknowledge that the major reason for income tax avoidance/evasion is section 111(4) of the Income Tax Ordinance, 2001. Due to this blanket immunity, tax administration is helpless to enforce tax obligations. The members of Parliament are not ready to withdraw this obnoxious provision of law that gives free hand to tax evaders. They pay a very small premium to exchange companies and get foreign remittances (sic) in their accounts about which no question can be asked by the FBR. FBR alone cannot be blamed for low income tax collection and non-filing of returns by the mighty sections of society as long as this provision exists. The political masters extend concessions and immunities to the looters of national wealth and tax evaders, and then blame FBR for inefficiency. This is not all justified. Since 1977, this has been the modus operandi of our rulers, both civilian and military, that has reduced our tax culture to a mockery.
FBR's stalwarts also do not realise that unjust, excessive and exorbitant withholding taxes, like section 236P, in fact, protect the rich and mighty non-filers. By paying "higher" rates of withholding (for them these are peanuts) they never disclose their actual incomes! Is this taxation on income? The rich non-filers, who do not file tax returns, pass on the burden of higher withheld taxes on customers and clients. They are much better off than those who are diligently filing tax returns and paying tax on actual incomes-majority of whom belong to the salaried class.
The real dilemma of every government in Pakistan has been ruthless wastage of resources, regressive taxes, unabated borrowings to meet budgetary deficit, perpetuation of elitist structures. Billions are wasted annually on the monstrous government machinery (have a look at tax-free perks and benefits given to high-ranking officials) and inefficient Public Sector Enterprises (PSEs). Funds are available for futile projects, ones politically rewarding, but there is no will to spend adequately on human capital, social sector and infrastructure improvements. The biggest hurdle in the way of progress of Pakistan is control of businessmen-turned-politicians and militro-judicial-civil-complex over the State apparatus and economic resources. There is not a single political party in assembly that is interested to dismantle elitist structures and bring meaningful reforms for socio-economic justice and to bridge increasing rich-poor divide.
The poor are victims of oppressive indirect taxes (even under income tax in the garb of presumptive, minimum and transactional taxes). The economic managers have failed to realise that excessive and illogical taxation on savings does not increase government revenues. Once income has been taxed then savings and transactions should not be taxed. Is there any country in the world where banking transactions and withdrawal of cash are being taxed like in Pakistan?
Due to a lack of political will and existence of provisions like section 111(4) of the Income Tax Ordinance, 2001, FBR has failed to enforce tax compliance and collect potential tax revenues. FBR keeps on blaming the ordinary masses, who are victims of 'fiscal terrorism', but takes no action against the ultra-rich though only a fraction of them files tax returns and/or declare actual incomes. It is not difficult to get hold of them as they have palatial houses, expensive vehicles, army of servants and lavish life-styles. Their children go to costly educational institutions and they spend family holidays abroad. They are not bothered to paying "enhanced" withholding tax as "non-filers", and FBR is also happy with this arrangement. The small traders are target of so-called "documentation drive" and no action is taken to confiscate untaxed assets of the rich and mighty.
All service providers, shopkeepers, traders and businessmen as commercial electricity users are paying advance income tax with electricity bills and their data is available with FBR. Non-filers can be issued notices using the data of electricity distribution companies. Why FBR has failed to do so is not understandable. This exposes the claim of FBR that real motive behind section 236P is widening of tax base and documentation. The so-called policy of "penalising the non-filers" is a hoax as it is nothing but to grab more income tax which in substance is transactional tax. It cannot be called a direct tax.
The FBR bosses, loyal to their political masters, are happy that in lieu of filing returns, the rich and mighty are only being asked to pay "extra" withholding taxes, the burden of which can be passed on the customers. Why FBR is not prosecuting non-filers even though it possesses complete record of advance taxes paid by them and amounts collected by educational institutions, banks, WAPDA, telecommunication companies, travel agents, airlines, just to mention a few. This inaction speaks volumes about FBR's performance about which our worthy Finance Minister is proud of! In reality, the government of Nawaz Sharif, as expected, is helping the rich to amass more wealth and is shifting the tax burden of taxes on the poor. The disgusting act of increasing sales tax rate on petroleum products when prices are falling internationally testifies to this fact.
If the government is sincere in widening the tax base, why is it not forcing the ultra-rich to file tax returns? Millions of Pakistanis having incomes below taxable limit have been compelled to pay advance income tax through obnoxious withholding provisions, both adjustable and non-adjustable. There are now over 30 provisions in the Income Tax Ordinance, 2001. Why should people pay taxes even before the computation of their taxable incomes? Why should businessmen be deprived of cash flows necessary for business growth through such illogical taxes? We all know what happens once excess advance tax paid through withholding taxes is claimed as refund. FBR is not ready to pay even any compensation for funds utilised by it for years in the name of advance tax paid in excess of actual tax liability by citizens. These are brazen violations of fundamental rights guaranteed under the Constitution of Islamic Republic.
Constitutionally, the State cannot demand advance tax from a person who has no income or whose income is below taxable limits. Why should a citizen engage a tax adviser to file return and pay "bhatta" (extortion) money to get refund? Why is State unlawfully extorting funds in the name of withholding adjustable tax when no tax is due from a person? A poor widow is subjected to 10% non-adjustable withholding tax on her mark-up income of Rs 300,000 [taxable limit is Rs 400,000] from a bank account, which she is maintaining with the funds she had received from pension/gratuity funds on the death of her husband. Is this kind of taxation (sick) justified? Why is she being discriminated vis-à-vis a businessman who pays no income tax on income of Rs 300,000?
Over 75% taxes collected by the federal and provincial governments are indirect in nature, the burden of which is borne by the poor and middle-class having scanty resources and little or no ownership of assets. This is today's Pakistan where the rulers keep on crying for more taxes, while borrowing continues unabated along with wastage of resources by them. There is no justification to further fleece the citizens by rulers in the name of taxes. The government has no right to ask for "more and more" taxes unless it ensures that the same are spent as per commands given in the Constitution and priorities for socio-economic justices laid therein.
At the moment out of total mobile users of about 116.5 million, not less than 50 million (if we subtract multiple subscribers and inactive ones) are paying 14% advance income tax. Majority of them have no income or have incomes subject to zero tax. Every account holder of a bank, who receives interest even on any amount below Rs 400,000 [basic threshold for tax] is subjected to 10% withholding tax, which is full and final tax. Is this income tax in the strict sense? They are merely required to file a simple statement under section 115(4) of the Income Tax Ordinance, 2001, if they do not have any other source of income. Should they file statements just to get back refunds? The cost of filing a return through an adviser (many cannot understand what FBR has provided online and in tax forms) is much more than amount is due as refund. The rich and mighty, not filing returns, are enjoying life of luxury by just paying "higher" (sic) tax rate prescribed for non-filers, while the poor are paying what is not at all due from them as income tax. This is a gross violation of Article 4 and 25 of the Constitution.
The rich are not paying income tax due on their actual incomes as total number of people showing tax exceeding rupees ten million for tax year 2014 is 3,663. If our tax-to-GDP ratio is one of the lowest in the world, it is not because of the fact that income tax filers are small in number, but due to the rich who are not paying tax on their actual incomes. If all 50 million active mobile users file tax returns, there will be a further reduction of at least Rs 40 billion in the collection of FBR as majority of them will claim refunds. With no wealth tax levied on moveable assets by the federal government and on immovable by the provincial governments in terms of item 50, Fourth Schedule to the Constitution after the 18th Constitutional Amendment, the rich are accumulating wealth and avoiding income tax on actual incomes using section 111(4) of the Income Tax Ordinance, 2001 as a legal tool of whitening untaxed money. This tool is provided to them by the State, which is highly lamentable act. It is unconstitutional, but superior courts are also indifferent. This is not a matter of suo motu choice for them, though they claim to be champions of rule of law and supremacy of Constitution.
There is a gradual decrease in the number of income tax filers, though over 50 million Pakistanis are paying advance income tax at source. FBR claims that over 300,000 notices have been issued to non-filers (potential taxpayers) but only about 60,000 filed returns with payment of only about Rs 450 million. No explanation is given by FBR as to why the number of return filers has decreased from 1,443,414 in 2011 to about 900,000 in 2014. There was a time when FBR used to get over nearly two million returns! FBR needs soul-searching to find out what has gone wrong and where these taxpayers have vanished. Can FBR stalwarts explain why out of registered companies of nearly 67,000, only 24,188 filed returns for tax year 2014? For tax year 2013, total number of companies that filed returns was 25,152. Law requires that every company has to file tax return irrespective of whether it is earning any income or not.
It is obvious that the government of the day is not sincere in collecting taxes from the rich. It is also a fact that due to corruption and inefficiencies, FBR every year faces revenue shortfall of billions of rupees. Pakistan's actual tax potential is Rs 8 trillion at federal level and Rs 4 trillion at provincial levels (Real tax potential, Business Recorder. August 26, 2009). Like federal government, provincial governments also lack the will to tax the rich and mighty. The provincial assemblies and governments protect the interests of the privilege classes and shift burden of taxes (mainly through sales tax on services) on the less-privileged classes. Provincial governments, getting more funds from divisible pool, are least pushed to improve the lot of have-nots and provide them basic facilities of health, education, housing and transport.
The responsible governments all over the world utilise revenues for the benefits of the less privileged and for welfare of all citizens. On the contrary, our rulers are utilising the same for their luxuries and comforts. They are destroying local industries and opening markets to foreign goods-look at the free and abundant availability of smuggled goods everywhere. This has paralysed our local units.
Taxation serves as a catalyst for industrial expansion and economic growth creating more jobs. In Pakistan, the ill-directed, illogical, regressive and unfair tax regulations are causing a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets, without evaluating its impact on the economy, has crippled trade and industry. Had the successive governments concentrated more on economic growth, there would have been a substantial rise in taxes as a consequence. Taxes are by-product of growth. It is impossible to enhance revenues with stagnation in economy. Over-taxing ailing economy, as has been done in Pakistan, is bound to destroy revenue system as well.
Economic managers must concentrate on increasing productivity, efficiency and growth as these alone can ensure more revenues for the State. Successive governments' onerous tax and regulatory policies have pushed millions of people below the poverty line. Pakistan will have to move quickly and decisively to reverse this trend.
(The writers, lawyers and partners in law firm HUZAIMA IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences)