FeaturedNationalVOLUME 14 ISSUE # 21

Tax system’s threats to economy

The newly-appointed Federal Board of Revenue (FBR) Chairman Shabbar Zaidi has termed the existing system a serious threat to the economy. The accumulation of untaxed wealth, flawed taxation policies and administrative loopholes have led to a situation where Pakistan finds it hard to put the economy on the path to recovery.


In a letter to Prime Minister Imran Khan, the FBR chairman has pointed out flaws in the tax system, which have led to substantial accumulation of untaxed wealth. “Pakistan’s tax collection system generates less than 10 percent of GDP. Even that collection is made through indirect taxes, not being the real income. The system is not workable and it poses a serious economic threat to the country,” he added. His observation comes at a time when Pakistan faces a huge revenue shortfall. The FBR collection during the first 11 months of the outgoing fiscal year posted a historic shortfall of nearly Rs447 billion during the July-May period. The provisional figures show that the revenue collection was recorded at Rs3.303 trillion during the 11 months of the outgoing fiscal year as against Rs3.751tr projected for the period. The government has projected a revenue collection target of Rs4.398tr for year 2018-19.


According to estimates, only one percent people carry the burden of the entire state. Despite hectic efforts, less than two million people – out of the 220 million population – have so far been encouraged to file returns. Only three hundred companies in Pakistan pay 85pc of the tax. Over 90pc industrial consumers of electricity do not pay sales tax. Over 50pc companies registered with the Security and Exchange Commission of Pakistan (SECP) also do not pay sales tax. Over 100,000 companies are registered with the SECP but only 50,000 file returns. There are more than 3.1 million commercial electricity connections but more than 90pc of them are outside the tax net. The banking data shows that there are 50m account holders in the country but just 400,000 are paying taxes. The government is collecting data from 28 countries and has already received data about 152,000 people. The International Monetary Fund (IMF) has asked the government for a target of Rs5.5 trillion for 2019-20. However, the FBR asked for it to be lowered to around Rs5tr or Rs5.2tr.


The government’s plan to increase next fiscal’s revenue target to Rs5.550 trillion is almost 35.4pc or Rs1.450tr higher than the outgoing year’s revised estimate of Rs4.100tr. The government aims to bring fiscal consolidation, austerity and additional revenue mobilization. According to Prime Minister’s Adviser on Finance and Economic Affairs Dr Hafeez Sheikh, a roadmap will be announced to set the stage for about 12 months of stabilisation followed by recovery and then to move on to the growth trajectory.


In the situation, the FBR has planned schemes to bring millions of retailers into the tax net. All retailers, with a covered area of 1,000 square feet, will have to install cash machines linked with the tax department to ascertain the exact sale value and then deduction of tax on it. The FBR will also bring distributors of motorcycles, cars, ghee, cooking oil and others into the tax system. Three schemes are ready for small, medium and big retailers. Small retailers, with covered areas of 240 square feet, will pay fixed tax as all shopkeepers would have to come into the tax system by paying a fixed amount of tax. Medium-size retailers, with a covered area of more than 240 sq feet but less than 1000 sq feet, will have to pay their tax according to their electricity bills. The scheme was also announced in the 90’s but failed to provide desired results. However, the power distribution companies will be directed to provide electricity connections to only those who are registered with the tax system. For big retailers, with covered areas of 1000 sq feet, cash machines would be mandatory.


In another development, the FBR has been authorized to get information from banks. It will receive withholding data from all banks and use it into a databank developed with the help of the National Database Registration Authority (NADRA) to broaden the narrow tax base. The databank possesses all kinds of information about potential non-filers but it had a missing link of banks data. The FBR is confident that the data of withholding deductions will help broaden the tax base.

The government believes the documentation of the economy, bringing untaxed sectors into the mainstream through various measures, including an assets declaration scheme and data gathering, will help recover historic high revenue. The government has decided to launch a movement for increasing tax collection equitably on all the taxable income. It is acquiring data of economic transactions from third parties, including banks, excise and taxation departments and other offices to net tax evaders.


Undoubtedly, the present system is not sustainable for Pakistan and its people. Social services can only be provided when there is adequate collection of revenue. In the presence of the massive loopholes in the system and a large number of companies and individuals out of the tax net, there is no wonder Pakistan failed to gain self-reliance even after 70 years of its inception. Successive governments relied on internal and foreign loans to run the affairs of the country. The tax collection figures are horrible but they also provide a huge opportunity to the government to collect record revenue by bringing all potential individuals and companies into the tax net. However, people should not be harassed for it.