Taxes are important but they are not more important than the imperatives of rapid and sustainable economic growth. It is widely accepted that more taxes retard the growth of the economy. Many economies in the past collapsed under the burden of heavy taxation. On the other hand, it has been found that low tax rates not only encourage compliance but also result in the growth of revenue.
Needless to say, our tax system is complicated, outdated and punishes the honest taxpayer. Procedural bottlenecks breed corruption. There is an urgent need to simplify the taxation system and reduce the number of taxes. Every year, the Federal Board of Revenue (FBR) asks citizens to file their tax returns in the month of September but has to extend the final dates because the return filing forms are so complicated that most people cannot fill them without the help of accountants and tax lawyers.
The e-filing system in a country where digital literacy is very low has given rise to additional difficulties. Recently, the FBR extended the tax submission deadline by 15 days as the system choked in the last two days. In recent years, tax filing dates have become a joke with so many extensions. This time around, the FBR tried to stand its ground to not extend the date, but had to give in owing to its system constraints. The question is, whether 90 days given to file returns is enough in a country where filers are too low relative to the potential. In the UK, the tax year ends in March and the filing is allowed till January, while in Canada the filing time is nine months. Then the filing is easy with better documentation and system interface, and there is no need to file wealth returns in those countries. In other words, the FBR should allow at least six months to file the returns after the close of the financial year.
The FBR should also simplify its tax filing process. Filing systems must be swift and easy with enough server capacity to withstand load. There are so many direct taxes in indirect form where even a salaried person or consultant must go through painstaking processes to extract data from various sources and reconcile with the FBR filing process and to update the wealth statement by even incorporating buying, like furniture, in the last year.
Much of the information for filing tax returns is not available easily. The basic bank statement including withholding tax deduction is provided by banks through email in September. But some banks ask for branch visits to get it as their online systems are either not available or in a moribund state. Then, one needs to get certificates on the phone, kids’ education fee and a few other sources. Think of the life of a small businessman. Wouldn’t they prefer to remain a non-filer given all the hassle around filing?
Last year, 2.9 million persons filed tax returns in a country of 220 million. The successive governments have used the carrot and stick approach for people to file, but they keep on shying away. The FBR keeps on asking the filers to give their due share, but they keep on siphoning part of the income out of the documented net. Then every now and then an amnesty scheme comes for them to wash hands clean and then get back again to their old ways. Now traders and retailers are demanding amnesty before coming to the FBR POS system.
Corruption is endemic in the taxation system and procedure. Merely by acting like a draconian institution on filing time while ignoring officers being hands and gloves with non-filers is a recipe for failure. The filing of a wealth statement is a difficult task and unwarranted. Think about the process of compiling and filing a wealth statement for the very first time. An ordinary filer would shy away from filing the wealth statement, so difficult the whole process is.
The FBR must first put its house in order. It must give up its punitive approach. An ordinary businessman works hard the whole year to run his business and earn a living. And the FBR treats him as he has committed a crime. Tax follows the working of a business or the daily grind of a salaried person. If there is no business, there will be no tax. The FBR must understand this dynamic. It must give due respect to the tax filer, not put them in the dock. The latter is the situation at the moment. It must change.