FBR Division: Unviable Solution!

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The interim government has failed to broaden the tax base, with the number of income tax return filers shrinking 35% to just under 3.9 million compared to last year, amid challenges to achieve monthly tax collection targetsIncome tax filers drop by 35%, The Express Tribune, March 1, 2024

The data of the Federal Board of Revenue (FBR) showed that the total persons registered for sales tax are 312,800 and persons who filed sales tax returns are 189,700, reflecting a compliance level of 61 percent. Out of these who filed sales tax returns, “null filers” stood at 59,800. The number of “Nil “filers stood at 89,900. The sales taxpayers, who filed returns with payment amounted to 41,000Almost Half of Sales Tax Registered Taxpayers Paying Zero Sales Tax, propakistani, March 6, 2023

The FBR is one of dysfunctional official entities in Pakistan. The past few years have witnessed the worst kind of performance by it on all fronts—revenue collection, issuance of due refunds, plugging of leakages, widening of tax base, recovery of current and arrear demands, voluntary compliance, reform process, countering corruption and tax evasion etc. Despite FBR’s pathetic performance, finance ministers of successive regimes, civil and military alike, had been eulogizing FBR to beg for more money from International Monetary Fund (IMF) and others!  

According to a news report, the total number of individuals, association of persons (AOPs) and companies registered with FBR are 11 million. However, the total returns filed until March 1, 2024, for tax year 2023, were 3,350,000. The pitiable compliance rate of 30 percent speaks volumes about the efficacy of the apex revenue authority of Pakistan—it wasted millions on advertisements in print/electronic media for reminding the citizens/legal persons to discharge their obligation of filing income tax returns. 

It is worth noting that active income taxpayers on FBR’s Active Taxpayer List (ATL) in 2022 were 5,730,000, whereas in 2023 it dropped to 3,350,000. Those who filed returns in 2023, the new filers were only 840,000. The following message on FBR’s website about ATL confirms the level of deterioration, as the authorities even failed to update the text inserted in 2021:

ATL is published every financial year on the 1st March and is valid up to the last day of February of the next financial year. For example, Active Taxpayer List for Tax year 2020 was published on 1st March 2021 and will be valid till 28th February 2022. Similarly, Active Taxpayer List for Tax year 2021 will be published on 1st March 2022 and will be valid till 28th February 2023.

The ATL is updated on every Monday on the Federal Board of Revenue (FBR) website.

FBR’s performance over the years has been pathetically abysmal despite resorting to enormous withholding taxes and all kinds of highhandedness—tax-to-GDP ratio decreased from 10.3% in 2021 to 8.5% in 2023. FBR is overwhelmingly thriving on withholding taxes, advance tax, and voluntary payments with returns—constituting over 95% of total gross income collection [Rs. 3086 billion in fiscal year 2022-23 as per data provided in Year Book 2022-23 by Revenue Division of Finance, Government of Pakistan]. The contribution of field officers [collection on demand (Rs.141.44 billion) and arrears (Rs.2.86 billion) through investigation or audit by way of tax or penalty] was just Rs. 144 billion, 4.67 percent of total income tax collection in fiscal year 2022-23

The above figures prove beyond any doubt how unproductive FBR is. The crumbling, inefficient and corrupt tax apparatus is the root cause of the present fiscal mess. The officials persistently squeeze and penalize existing taxpayers on the one hand but on the other, join hands with and protect the big tax evaders, for example, massive over/under invoicing is not possible without their criminal culpability. The small business houses, already heavily taxed through withholding tax mechanism, are victims of their highhandedness. It is time to establish National Tax Authority—see details in Malice Towards None & All: Federal Planning & The Need For A National Tax Agency, Friday Times, October 21, 2023.

Financial wizards and tax managers sitting in the Ministry of Finance and FBR have been persistently claiming that tax base of Pakistan is disappointingly narrow and majority of the people do not pay income tax.  Actually, the reality is opposite. The poor people of Pakistan are one of the most heavily taxed in the entire Asian region. As far as tax base is concerned, not only total taxable population, but also millions of those having below taxable incomes are paying taxes at source or through voluntary filing of returns. In most of the cases, tax deducted at source is the full and final discharge of liability. For example, 40 million are paying 15% tax at source on profit (interest in reality) on bank accounts and non-filers at the rate of 30%. Since majority of these do not file income tax returns required under section 114 of the Income Tax Ordinance, 2001, a wrong impression emerges that that our income tax base is narrow.

The government, especially Revenuecracy, portray Pakistanis, before IMF and other lenders and donors, as a nation of tax cheats. It is true that in 2023, the new income tax filers were only 840,000, but advance income tax payers through withholding regime were 120 million unique mobile users, 60 commercial/industrial electricity consumers and 40 million earning interest on bank deposits.

According to Pakistan Telecommunication Authority (PTA), the total mobile cellular subscribers as on February 29, 2024 were 191 million (79.51% mobile teledensity). 132 million were broadband users (54.82% mobile broadband penetration), 3 million basic telephony users (1.07 fixed teledensity) and 135 million broadband subscribers (56.21% broadband penetration). Not less than 120 million unique mobile users (many having more than one SIM) have been paying advance/adjustable income tax of 15% with effect from January 15, 2022, imposed through Finance (Supplementary) Act, 2022

Total population of Pakistan as per latest census of 2023 was 241.49 million. The current population is 244,077,425, according to online data by Worldmeter accessed at 13:05 hours on April 4, 2024. Based on census of 2023, population between 15-64 years age group is 59%. The employment rate, according to official sources, is 47.9%. Thus, the total employed population is around 62 million (a very conservative estimate). However, the existing individual income tax return filers as per FBR’s Active Taxpayers List (ATL) as on April 1, 2024 were 2,403,628 and others (companies, firms and AOPs etc.) were 1,426,774 (total: 3,830,456). Among these “filers” (sic), over seventy percent have showed below taxable incomes or losses. 

While the number of individual income tax filers is pathetically low, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable income tax at source as mobile users. If they all file income tax returns, there will be refund payable to at least 90 million having no income or income below taxable limit though cost to claim would be much higher than amount withheld

According to a news report, FBR in February 2024 faced huge reduction “in the number of filers across all four categories: companies, associations of persons, business individuals, and the salaried class”. The major reduction in the number of filers, report reveals, was “in the case of business individuals, as about 1.6 million or 43% fewer persons filed their income tax returns this year”. In the last tax year, about 3.8 million business individuals filed returns, which have now shrunk to 2.2 million. This year, the report claims, “about 22% or 435,000 fewer salaried persons filed their returns…” As against “nearly 2 million salaried persons who filed returns last year, only 1.55 submitted their annual statements of wealth and income this year”, it further revealed. 

The real dilemma of FBR is that it has failed to force the rich and mighty to file returns, which proves beyond any doubt its incompetence and inefficiency. Shahid Javed Burki in Provincial Rights and Responsibilities [Journal of Economics, September 2010] opined, “About 40 million out of 170 million people in Pakistan have now succeeded in keeping their living standards from falling. Of these, about 15 million have improved their economic situation in spite of the sluggish economy”.  This figure must have doubled until 2023, but FBR is not taxing these rich 30 million resident Pakistanis according to their ability. 

Pakistan’s tax potential at federal level alone is Rs. 20 trillion and if we take informal economy into account it is Rs. 34 trillion (16% of GDP). Out of total employed population of 60 million as per official figures, around 10% [6 million] have monthly income exceeding Rs. 800,000 and 25% [15 million] between Rs. 600,000 and 700,000, and the rest below taxable limit (Rs. 600,000). Applying existing tax rates to 21 million potential taxpayers, the figure comes to Rs. 7 trillion. At present, out of total registered companies, sixty percent are not filing income tax returns. Assuming average tax of Rs. 5 million per company, tax potential comes to Rs. 3000 billion. Collection of income tax by FBR in fiscal year 2022-23 was Rs. 3086 billion (companies, individuals, firms and AOPs) making total income tax potential alone not less than Rs. 11 trillion. 

In fiscal year 2022-23, collection of sales tax by FBR was Rs. 2591 billion, whereas the actual potential is not less than Rs. 7 trillion. Similarly, potential of Customs Duty (using 5% rate on US$ 100 billion base could fetch Rs. 1300 billion). Federal Excise Duty (FED) even if kept at current position can fetch Rs. 700 billion. In fiscal year 2022-23, FBR collected Rs 370 billion under FED and Rs. 932 billion under custom duties whereas original targets were Rs. 402 and Rs. 953 billion respectively. 

Successive governments in Pakistan have failed to fulfill even their basic obligation of safeguarding life and property of people, what to talk of providing basic facilities of health, education, water and civic amenities. It is high time that an autonomous, automated, dynamic and professional federalised National Tax Agency replaces FBR (its restructuring; bifurcation into direct and indirect wings is not a viable solution being just a cosmetic change), with a simple tax regime applicable across the country—it would not only increase collection but also relieve people of an oppressive tax machinery.

 

 

 

 

Dr. Ikramul Haq
Dr. Ikramul Haqhttp://www.thescoop.pk
Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media and cyber laws, ML/CFT, IT, intellectual property, arbitration and international taxation. He holds LLD in tax laws with specialisation in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served in the Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). He has co authored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis). The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions available at: https://www.amazon.com/dp/B08RXH8W46 and https://aacp.com.pk/product/pakistan-tackling-fatf-challenges-solutions/ He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi poetry 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal). He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad. X: (formerly Twitter): DrIkramulHaq

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