Tax Collection in Pakistan| How To Make FBR More Efficient
The government of Pakistan Tehreek-i-Inaf (PTI), as per reports, is “trying its best to fill the gaps in the economy through new ways of revenue collection”. The recent idea “after the research of the Federal Board of Revenue (FBR) is to tax all high-end individuals who are paying meager taxes in the country despite earning a lofty sum”, According to FBR’s spokesperson, Dr Hamid Ateeq. These, he said, “include high-net-worth dress designers, beauticians, and stylists, photographers, artists, doctors, etc”.
Perpetual failure of FBR to meet assigned targets is well-established. A large part of the blame goes to political masters, who keep on giving amnesties, waivers and immunities. During the last fiscal year, negative growth was the result of policies of appeasement on the part of Government of Pakistan Muslim League (Nawaz) and then coalition Government of PTI.
Every year FBR fails to collect downward revised target what to speak of originally assigned one in the budget estimates. This widens fiscal deficit resulting in more borrowing and taking away a large part of the budget for debt servicing/payment of principal amount. Fiscal consolidation is one of the daunting challenges faced by Pakistan. Successive governments have failed to enforce tax obligations, end harmful tax policies and reduce wasteful expenses. No serious effort has been made by any government to broaden the tax base through lowering of rates and effective enforcement.
It is an undisputed fact that FBR has not only miserably failed to tap the real tax potential despite imposing all kinds of oppressive taxes, it has been single handedly destroying Pakistan’s growth by anti-business actions, courtesy anti-growth policies of the successive governments. The economic managers of all governments since 2008, gave free hand to tax officials to block bona fide refunds, take undue advances from large business houses, use negative tactics like raising unjust demands and freezing bank accounts for recovery. Exporters and other taxpayers even under the PTI Government are still waiting for refunds within stipulated time. Had successive governments concentrated on growth above 6%, as done by China, India and Bangladesh in the region during the decade of democracy [2008-18], Pakistan could have avoided the present fiscal and economic mess. Tax is a byproduct of growth and harsh taxation only hampers expansion and prevents investment in existing and new businesses. Will Dr. Abdul Hafeez Shaik take corrective measures and reverse this trend? So far nothing has come from him in this direction and for the last many months, FBR is without a competent head. Medical leave of Shabbar Zaidi is causing further uncertainty and chaos.
FBR revised target of Rs. 5.2 trillion [original was Rs. 5.5 trillion agreed with IMF] is much below than our actual potential which is not less than Rs. 8 trillion on federal level alone. It can be achieved provided collection is made fully automated, tax machinery is overhauled, leakages are plugged and all exemptions/concessions to the privileged classes are withdrawn. Banks, WAPDA, PTCL and mobile companies that collect advance taxes on behalf of FBR are fully computerised.
By using their database, FBR can easily determine fair tax base. Provisional assessments can be made in respect of persons who are not filing tax returns and recoveries can be made after determining their liabilities from expenditures that are easily ascertainable.
The target assigned to FBR for FY 2018-19 was Rs. 4435 billion, which was revised downwards twice [first to Rs. 4398 billion and then to Rs. 4150 billion]. According to FBR Year Book 2018-19 , FBR collected Rs. 3828.5 billion which was “0.4% lesser than the collection of previous fiscal year”
The FBR in FBR Year Book 2018-19 has not disclosed total number of registered sales tax persons and how many are actually paying tax. It should be done on the closing date of every month on website for the sake of transparency and showing FBR’s performance. The tall claims of FBR of expanding tax base, extraordinary growth in collection and improving tax-to-GDP ratio to a satisfactory level (9% in FY 2013-14 to 11.2% in FY 2017-18 to only 12.6% in 2018-19) is a hoax. The reality is quite evident to all—higher (sic) collection has been due to exorbitant sales tax on POL products, due to over 70 withholding income tax provisions and enhancement of their rates, blocked refunds of billons and by taking advances from taxpayers.
The sordid story of collection through withholdings and advances continues even under the government of PTI as it has taken no corrective measures after coming into power. The main reliance of FBR since 1991 has been on indirect taxes, even under the Income Tax Ordinance, 2001 that after Finance Act, 2019 contains over 75 withholding tax provisions, many of which constitute minimum tax liability. Out of total collection under withholding provisions of Rs. 1047 billion in FY 2017-18, the element of full and final taxation (indirect tax in substance) was 64 percent! In FY 2018-19 and the current fiscal year, the same trend continues unchanged
It is an undeniable fact that FBR has failed to get due tax from the rich and mighty and thus its main emphasis is on withholding taxes (WHT). FBR Year Book 2018-19 concedes that “WHT contributes a major chunk i.e. 67% to the total collection of income tax”. Out of total collection of Rs. 1445.5 billion [it was Rs. 1536.6 billion in 2017-18], with returns came Rs. 39.2 billion [2.7%] and advance tax of Rs. 344.2 billion [23.8%]. FBR’s own efforts (collection of demand created) yielded only Rs. 84 billion (5.8%, it was 7% last year) and from arrears Rs. 18.6 billion (1.3%, it was 1.2% last year). It confirms negligible share [7.3%] on the part of FBR.
FBR has failed to tap the actual tax potential but main fault lies with political masters who have been giving unprecedented amnesties to the rich and majority, despite having information about their undeclared incomes and. As many as 135 persons, named in the OECD database, availed the 2018 tax amnesty scheme of PML-N and declared Rs. 62.4 billion in assets. They paid only Rs. 2.9 billion whereas, their actual liabilities without the tax amnesty could have been Rs. 43.7 billion, getting a relief of Rs. 40.8 billion from the last government. About 56 people, whose data was shared by the OECD, availed PTI’s tax amnesty scheme and declared Rs. 31.8 billion worth of assets. They paid only Rs. 1.7 billion and got a relief of Rs. 20.6 billion.
If PTI Government is serious to tap the real tax potential, reduce fiscal deficit within the agreed limit of 6% of GDP, the following holistic measures are needed. Criticising the tax machinery alone as the key issue is not enough. There is a need to revise the huge wasteful expenditures and un-tapping of non-tax avenues.
- For reducing fiscal deficit to the level of 6% of GDP, it is imperative to (i) curtail unproductive and wasteful expenses by 30%, (ii) increase non-tax revenues by leasing out valuable state lands and assets e.g. GORs and palatial government houses etc through public auction for specific activities to generate employment/boost economic activity and (iii) taxes at all levels—federal, provincial and local—should be made simple, low rate, broad-based, payable with ease as the Punjab Government recently decided to abolish around 50 taxes.
- All individuals having taxable income or below taxable limit should be facilitated to file simple tax returns [no wealth statement]. Those earning below taxable limit should be paid income support [negative tax]. Return form should be in English/Urdu/all regional languages. Reporting of real income by all will help create data bank at national level of all households—about 37 million as per last census. Their earning levels will determine who need to pay and who should be entitled to social benefits under Ehsaas and other like programmes.
- All entities—individuals, association of persons/firms/companies/artificial juridical persons—should be offered to pay income tax/sales tax for any tax/assessment year/tax period for any past lapse under National Tax Clemency Scheme. They should be encouraged and facilitated to pay past liabilities and thereafter would not face any penal action—prosecution, penalties, additional tax, default surcharge etc.
- The State must not offer any amnesties/immunities—these are incentives to the dishonest and penalising the honest taxpayers. Those who filed but underpaid be offered to make up deficiency paying due tax with no penal action/audit. It would bring in much-needed revenues—even exceeding the revised target of FBR at Rs 5.2 trillion.
- In the next three years’ time, the businessmen instead of being overburdened with advance/heavy taxes/duties/other charges should be facilitated by improving all indexes of ‘Ease of Doing Business’ that must also include reducing cost of doing business. They should be given tax credits/incentives for compulsorily investing in human resource so we have trained and qualified workforce in all areas—providing employment and paying them decent/livable wages.
- We must encourage and offer all possible facilities and incentives to all kinds of entrepreneurs, especially Small & Medium Enterprises (SMEs) to concentrate on growth and productivity.
- All the governments—federal, provincial and local—should join hands and prepare national level data of all citizens determining their economic and social status. There should be universal pension, social security and food stamps for the needy at the same time empowering them to come out of poverty trap.
- In three years, after achieving consensus through consultation with all stakeholders we should have National Tax Agency manned by members of All Pakistan Unified Tax Services having professional expertise in all related fields. This Agency would be in a position to communicate to all citizens what their income/expenditure levels are—it will determine tax obligations as well as who needs income and social support from the State.
- After national debate and taking input from all stakeholders national and provincial legislators should go for simple, predictable and low rate taxes—there should be income tax on all incomes including agricultural income to be under the exclusive domain of federal government and harmonised sales tax on goods and services to be given exclusively to the provinces—it will create fiscal consolidation and make federal and provincial governments self-reliant.
- We must abolishmultiple taxes and collect local taxes e.g. property, vehicle taxes etc to meet the needs of local residents by allocating funds to local governments to provide services of health, education, civic amenities of all kinds, and recreation etc.
- All citizens and other entities should be given a chance to declare all untaxed assets for any past year, at home or abroad, by paying due tax liability in full or in installments to overcome cash liquidity problems—of course paying additional tax for grace period(s). After the deadline, stringent action under the law should be taken including confiscation of property, fine and/or imprisonment.
Somebody needs to tell the Prime Minister that the iniquitous prescription of IMF of more taxes, austerity and high interest rate will not solve our problems—this has miserably failed in the past.
The best solution is to reduce wasteful expenditure, right-size the monstrous size of the government, monetize all the perks of bureaucracy and make taxes simple and low-rate. State lands, lying unproductive, should be leased out for industrial, business and commercial ventures. It will generate substantial funds and facilitate rapid economic growth.