Contrary to the prevailing perception, Pakistanis are not undertaxed but overtaxed. Millions of Pakistanis are subjected to over 65 withholding taxes. Resultantly, millions having no taxable income are subjected to taxation. Taxpayers are not less than 95 million, but return filers are very low – only 1,492,507 filed income returns for tax year 2018 whereas the number was 1,756,982 for tax year 2017. In 2006-07, the FBR received 2.1 million returns.
Prime Minister Imran Khan, at a meeting on FBR reforms early this year said: “A country where 30 percent of the country’s budget is being spent on payment of interest on loans, ignoring loopholes in the present tax system is a criminal negligence. In the past, due to harassment caused to the public and business community, complicated system of tax recovery, corruption and spending of tax money on the lavish lifestyle of the rulers, the ordinary citizens had lost their trust in the system and the FBR that we need to restore”.
According to the 2017 official census, the country’s population is an estimated 212.7 million. The dependent population of children under the age of 15 years as on June 30, 2018, was 35.4 percent, and 4.2 percent of people were above 65 years. Out of the total population, 40 million were below the poverty line, earning less than two dollars a day. Our labour force was around 70 million – the majority of it in rural area (42.3 percent) that earned below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance. In terms of these numbers, individuals liable to income tax could not be more than 5 million in tax year 2018.
According to available data, the FBR collected 12.5 percent advance, adjustable income tax from 95 million mobile users during the fiscal year 2017-18. Out of them, only 1,492,507 (0.98%) filed tax returns for tax year 2018 till the last extended date (December 17, 2018) after availing many months of relaxation. The figure may go up to 1.6 million till December 31, 2019, but it will remain below the level of 1.7 million as on December 31, 2018. But the majority of the mobile users do not have a taxable income, hence, are not legally required to file tax returns.
The problem lies somewhere else. The rich and powerful classes are not paying taxes according to their ability. From tax year 2013 to 2017, less than 40,000 paid tax between Rs 1,000,000 and Rs. 10 million, and less than 5,000 declared tax over Rs 10 million. At present, millions having below taxable incomes are paying income tax at source, yet the FBR says that people of Pakistan do not pay taxes. It is relevant to note here that small traders using commercial electricity connections are paying advance income tax under Section 235 of the Income Tax Ordinance, 2001. It is an undeniable fact that the FBR has failed to get due tax from the rich, its main emphasis being on withholding taxes. As per FBR’s Year Book 2017-18, direct tax collection during 2017-18 was Rs. 1536.6 billion – withholding taxes: 68.5 percent, advance tax: 21.9 percent and paid with returns 2.7 percent. FBR’s own efforts through demand and collection yielded 6.9 percent.
We have a skewed taxation system which penalizes the poor while turning a blind eye to the shenanigans of the rich. Sparing the ultra-rich, who are deliberately avoiding tax obligations, and taxing the millions having incomes below taxable limit, is a gross violation of the Article 3, 4 and 25 of the Constitution. Why should poor people hire a tax adviser to file returns and pay money to get refund? The extreme injustice in the tax system demands a widow and a senior citizen to pay 10 percent income tax on gross yield earned from Bahbood Certificate or Pension Account of National Saving Scheme. On the other hand, rich and mighty landowners, absentee landlords are paying meagre or no tax.
The fact is that the FBR has failed to tax those who have amassed vast illegal wealth. Had they been taxed at normal tax rates, collection could have reached Rs. 8 trillion. The target is still achievable provided collection is 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 the FBR are fully computerised. By using their database, he FBR can easily determine a fair tax base. Provisional assessments can be made in respect of persons who are not filing tax returns and recoveries can be made. This is one way to solve the problem of non-filers.