Prime Minister Shahid Khaqan Abbasi recently asked the Federal Board of Revenue (FBR) to increase revenue collections under the existing tax laws as well as broaden the tax net. This is not the first time that such directives have been issued but little has so far been done to implement tax laws and broaden the taxation base. The main issue is sloth on the part of the taxation machinery. For instance, under the Income Tax Ordinance on those who own urban land or a flat above a certain covered area, as well as several professional groups, including members of chambers of commerce and industry, engineering council and medical associations, etc., are required to file income tax returns annually even if all their income is exempt from imposition of income tax. This includes even those whose income is sourced to agricultural income (which remains outside the ambit of the FBR according to the constitution).
The objective was to enable the FBR to assess whether the entire income of the filer is from a source that is not subject to tax or whether part of it is taxable. But, according to a report, the Federal Board of Revenue (FBR) is delaying on reform measures which were originally designed to block all loopholes in the tax administration system leading to revenue losses. The reform measures were evolved as part of the Tax Reforms Commission’s recommendations and were tasked to the Tax Implementation Reform Committee. This committee which has a representation from the private sector was not taken on board seriously by the tax authority’s top management. Several meetings were held on all crucial reform measures but they still await approval for implementation despite the lapse of several months.
One of the reform measures relates to the introduction of forensic audit for major companies, especially the telecom sector. The second big reform proposal was the introduction of electronic monitoring of tobacco products. Originally, it was agreed to introduce a track and trace system for the tobacco industry from the start of the current fiscal year.The committee also finalised the system for curtailing tax evasion in the tobacco industry but some FBR officials are blocking the proposal. It is estimated that more than Rs30 billion per annum revenue was lost due to tax evasion in the tobacco industry. It was also agreed to establish data connectivity with other departments for bringing more people under the tax net but progress on this account is very slow.
According to the source, State Bank of Pakistan is willing to provide data on withholding taxes to the FBR. However, the response from the FBR is negative. The withholding agents withhold taxes but do not submit the same into the government exchequer. Another proposal was regarding the offer from Pakistan Banking Association on data sharing with the tax department. TIRC also recommended registration of Rs25,000 and Rs40,000 bonds to check whitening of black money through these bonds. But the government has not yet moved to implement this reform measure. The FBR high ups are also opposing the introduction of single page income tax return form. The current FBR team is only interested in temporary measures to raise money for achieving the revenue target.
Those who do not file returns are subjected to payment of 0.6 percent , a component of the 2015 Finance Act which was initially reduced but is now charged at that rate. This rule stipulates that every “banking company shall collect advance adjustable tax from a non-filer at the time of sale of any instrument” (inclusive of cheques and pay orders) and “transfer of any sum” through paper or electronic means “where the sum total of payments for all transactions … exceed fifty thousand rupees in a day”. The application of this law has led to lower bank deposits and fuelled a cash economy that has increased the size of the informal economy. The non-filers prefer to pay the non-filer rate (with the differential between filer and non-filer increasing with each subsequence Finance Act) on a number of transactions/services rather than file their returns as they not only complain about the complexity of the form for filing returns (and the continued duration of filing when the filer is technically no longer eligible to file, for example, after retirement) but also have extreme reservations of the abuse of power of FBR staff.
The question is how to raise revenue so that the government is able to reduce its reliance on borrowing (domestically and from abroad) to meet its growing development and other expenditures. There are several ways to broaden the tax base. Agriculture is a major window. Another important source is the income of professionals like doctors, accountants and lawyers. Research studies have als shown that our collections from the stock market are very low – around 5 to 6 billion rupees per annum. India for example, generates more than 100 billion rupees from its stock market. The overriding need is to reform the tax structure and improve the tax administration to boost revenue in the long run.
According to experts, the main reason for failure to raise tax revenue is that the focus has been on raising total tax collections by any means, instead of trying to improve the tax structure by making it more fair, easy, simple and equitable. The effort should be to increase the number of income taxpayers rather than put more the burden on the existing taxpayers who are mostly salaried persons and have their tax cut at source as well as on the corporate/productive sector). Increasing the withholding tax which is mainly on transactions rather than on income and which now accounts for 75 percent of all direct tax collections is in effect a sales tax which is an indirect tax whose incidence on the poor is greater than on the rich.