Pakistan, for the last many decades, has been grappling with the problem of raising adequate taxes to meetneeds of both the people and the state. The perpetualand burgeoning fiscal deficit, coupled with deadly debt trap and mounting debt servicing, needs to be tackledon emergent basis. In the fiscal year (FY) 2023-24, the ratio of tax-to- GDP was just 9.5 percent—one of the lowest in the world.
According to the Summary of Consolidated Federal and Provincial Fiscal Operations, 2023-24, Federal Board of Revenue (FBR) collected Rs. 4.53 trillion as direct taxes, Rs. 3.99 trillion as sales tax, Rs. 1.10 trillion as custom duties and Rs 577.4 billion as federal excise duty. It is well-established that many withholding provisions in Income Tax Ordinance, 2001 bear the nature of indirect taxes that not only adversely affect salaried class and the poor but are also among the factors triggering high inflation that reached 31.5% in February 2023.
The dozens of high rate taxes and non-tax levies, both at federal and provincial level, yielded the low revenues at national level of Rs. 13.27 trillion against total expenditure reached Rs. 20.48 trillion. This is our real malady and dilemma.
In the FY 2023-24, the debt servicing alone was Rs. 8.159 trillion. The federal government had net revenues (tax and non-tax) of Rs. 7.079 trillion, after transferring Rs. 5.263 trillion to the provinces. It borrowed funds of Rs. 1080 billion to meet burgeoning shortfall in debt servicing alone—thus entire defence expenditure of Rs. 1.859 trillion and others expenses were met from expensive borrowed funds.
Obviously, the successive governments, military and civilian alike, were least pushed to go for lower taxes with broader tax base. Unless, it is done, collection will remain far below the potential that is not less that Rs. 34 trillion. The entire business climate is destroyed by employing over 50 provisions with respect to advance/withholding taxes, easy collection from petroleum products and big firms. Failure to harness the real tax potential is the main issue.
The FBR in 2021 launched a comprehensive initiative for reforms and modernisation for which a separate wing and full-time, Member Reforms and Modernisation, was appointed. This wing was to ensure monitoring and evaluation of reform process to ensure effective implementation of time-bound goals and objectives, and consolidation of efforts to transform FBR into a modern, progressive, Information and Communication Technology (ICT)-based and resulted-oriented organisation. It was also claimed that it wouldfocus on four key areas: policy measures, structural reforms, automation and modernisation and revamping of human resource management”.
The Member Reforms and Modernisation must get anindependent evaluation of level of achievements for all the goals for which this independent wing was created. We all know that such initiative get bogged down even within few months!
The perpetual failure of the FBR to meet the assigned targets, even when revised downwards, is highly lamentable, as it is also after blocking refunds of billions of rupees and taking advances, not even due, of coming tax years. Despite calling the attention of the Auditor General of Pakistan towards this figure fudging, no action is taken till today to ascertain the factual position.
The economic managers of successive civil and military governments have failed miserably to use automation and ICT for revenue mobilisation. Paradoxically, their pre-occupation with more and more revenue collection hasmade them neglect the infrastructures required to administer these very taxes. They are caught in a dilemma; on the one hand there is mounting pressure to lower the fiscal deficit and on the other all attempts to increase revenue from the existing taxpayers is proving detrimental to the already collapsing economy.
The performance of the FBR in enforcing the law [section 114 of the Income Tax Ordinance, 2001] requiring all persons having taxable income to file income tax returns is pathetic! It is evident from the simple fact that about 120 million citizens paid advance adjustable income of 15% as mobile users—both prepaid and post-paid—during the fiscal year 2022-23, but the active individual taxpayers (who filed returns for tax year 2023) as per FBR’s website (the list is updated on ever Monday) was 3,680,813 as on August 26, 2024. Over sixty percent of these “filers” (sic), showed NIL income or below taxable limit, just to avoid higher rate of withholding tax applicable to non-filers! The total number of return filers as per latest update on the active taxpayers list (ATL) by FBR was 5,418,226.
According to Pakistan Telecommunication Authority (PTA), the total cellular/broadband subscribers as on June 30, 2024 were 193 million (79.44% mobile density), 135 million mobile broadband subscribers (55.61% mobile broadband penetration), 3 million fixed telephone subscribers (1.06 teledensity) and 138 million broadband subscribers (57.05% broadband penetration).
The figures for July 31, 2024 are: total cellular/broadband subscribers 193 million (79.46% mobile density), 136 million mobile broadband subscribers (56.15% mobile broadband penetration), 3 million fixed telephone subscribers (1.06 teledensity) and 140 million broadband subscribers (57.61% broadband penetration).
Around 120 million unique mobile users paid advance/adjustable income tax during the FY 2023-24 while 100 million had no income or income below the taxable limit! FBR failed to register all taxable individual [there number cannot be less than 20 million based on available data for FY 2023-24] after getting information from telecoms about their handset, travelling history and quantum of bill etc. Had FBR done this, the monstrous tax gap in income tax returns filers could have been bridged. It could have also helped in registering the entire taxable population as return filers. This step was deliberately avoided by the FBR to retain a justification for extorting 15%/75% oppressive advance income tax from the poorest of the poor.
The above figures prove beyond any doubt that with effect from July 1, 2024, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable 15% income tax as filers and 75% as non-filers, being prepaid or postpaid mobile/broadband users. In the face of this undeniable factual position, the FBR and others part of their bandwagon are still labelling Pakistanis, especially the traders these days, as tax cheat!
The ongoing tussle of government with the traders around so-called ‘Tajir Dost’ [traders’ friendly scheme] is also due to imprudent and faulty approach of FBR’s self-styled and self-acclaimed wizards! This scribe, as coauthor of an article, has highlighted it as under:
“The scheme’s major flaw lies in its disregard for the nature and scale of different businesses, highlighting a noteworthy oversight by the FBR. The S.R.O. 1064 (I)/2024 exemplifies the inefficiency and outdated methods of FBR officials in expanding the tax net. For instance, the scheme imposes the same rate of advance tax on a photocopy shop and a motor vehicle showroom situated in the same location, despite their vastly different business operations and income levels.
This ill-conceived approach of FBR fails to account for the distinct dynamics and economic realities of various industries and business segments. By applying a uniform indicative income across diverse business types, the scheme overlooks the unique characteristics and financial capacities of each sector. As a result, it not only creates inequitable tax burdens but also demonstrates a lack of nuanced understanding and adaptability from the FBR in addressing the complexities of modern business environments”.
The proposed simplified bilingual (English & Urdu) income tax return for the retailers by FBR, who failed to file tax returns for tax year 2023, has conveniently ignored what was proposed in a column: “The real potential of retail outlets in Pakistan, if taxed at sales tax rate of 4% and income tax at 1% of gross receipts, could net US$15 billion annually”. This write-up takes cares of both income tax and sales tax at retail stage and collection can be phenomenal as well as documenting the economy.
It may be highlighted that what keeps the traders and others away from FBR is naked and brutal abuse of sections 122(5A) and 177 of the Income Tax Ordinance, 2001 to extract maximum revenue from existing taxpayers, which further alienates compliant taxpayers, increasing public discontent. It calls for reconsideration of FBR’s approach to tax collection, moving beyond outdated practices and focusing on modernizing the system. Key initiatives include implementing advanced automation system and developing a centralized database to improve audit efficiency and data accuracy.
It is clear from above that real problem is faulty tax system and crisis of competence in FBR. Pakistan needs to learn from the experience of many developing countries of the world that managed to raise revenue by improving theirtax administrations and using various automation tools. In 1992, Richard M. Bird and Milka Casanegra de Jantscher presented a marvelous book, Improving Tax Administrations in Developing Countries (this was IMF publication based on a conference held in Spain in 1991). Since 1992, there has been growing awareness that more efforts are required to improving existing taxadministration if a developing country is to optimise tax collection.
The old saying, “tax policy is only as good as its administration”, is outdated. Today’s consensus is: “Goodtax administration is good tax policy” [Stanley S. Surrey, Tax Administration in underdeveloped countries, University of Miami Law Review]. Many well-intentionedlaws have been made ineffective by inefficient, indifferent, corrupt and incompetent tax administrations. Pakistan is a classic example of this phenomenon. FBR, apex administrative body for federal taxes, has proved time and again ineffective, non-professional and oppressive.
Taxation requires pragmatic thinking and is most effective when developed from a practical and possible agenda for building a sound tax administration, for which it is necessary to start its foundation from a Tax Intelligence System (TIS). The widest possible tax-basewith low-rate needs to be identified for any tax systemto be equitably spread across the whole taxpayer population. Even a small tax at a lower rate spread over a wide taxpayer base will invariably yield more revenue than a higher tax on a narrow base.
The levy of General Sales Tax (GST) at 18% in Pakistan (at import stage its impact after adding regulatory duty, customs duty, compulsory value added tax and income tax at source ranges between 45% to 65%) has failed to bring the desired results as it is a higher tax on a narrow base. Had it been 10% harmonised levy on goods and servicesacross the board, it could have been enforceable/acceptable as well as successful in terms of yielding more revenue being a low rate tax spread on a wide taxpayer base.
How can Pakistan succeed in improving revenue collection when it lacks basic data collection and its storage what to speak of developing a modern, fully automated system creating and updating the profile of every citizen/taxpayer? The efforts in the past to create a taxpayer’s profile through National Document Surveyfailed. No software has been developed for achieving this goal till today by Pakistan Revenue Automation Limited (PRAL), a subsidiary of the FBR engaged in IT projects though a project under the name of NEXUS started way back in 2005 (CBR Quarterly Review, Volume 6, No. 2, October-December 2006).
The fundamental element of tax reforms is providing an efficient and competent administration. This is nowhere visible in Pakistan. Tax machineries at federal and provincial levels lack requisite level of digitization, professionalism and human skills.
Reconfiguring and restructuring the tax system is a daunting task. Broad based tax reforms cannot be undertaken the way we have been doing. The 2016Report prepared by Tax Reforms Commission (TRC) has yet not been made public—it is marked as confidential by then government of Pakistan Muslim League (Nawaz)! TRC was notified on September 25, 2014 for suggesting tax reforms in all areas—from tax administration to tax legislation and related matters.
Till today, FBR has not implemented any major proposal of TRC. It is strange, rather shocking, that even minutes of meetings of implementing committee of TRC have not been made public for comments and debate. Reforms cannot be a closed door affair. They should be formulated through public debate.
Automation through TIS is the area that should be given the topmost priority by the new Chairman of FBRas recently done by many countries to provide an IT platform for faceless assessment and faceless appeal. Through structural reforms, initiated by the present government, the Taxpayers’ Bill of Rights should bepassed respecting and protecting the honest taxpayers and punish the delinquents. It must focus on making tax-paying seamless and faceless. Faceless as it shouldnot matter, who is paying tax and who is tax officer, moving away from territorial jurisdictions to IT-based platforms.
Taxpayers should be given the trust and respect they deserve. The faceless assessment, audit and appeals would involve random allotment of cases and electronic replies, zero physical interfaces of authorities and recording of alladjudicating and appellate proceedings ensuringtransparency and trust.
TIS is not a new idea. It was implemented even in countries like Botswana in the 1980s and helped in its rapid increase of diamond revenue as well as proved extremely beneficial for other areas of the economy to expand simultaneously (Botswana’s New Corporate Tax Intelligence System by K.L. De Silva, Bulletin, official Journal of the International Fiscal Association, Volume 53, Number 7, 1999, page 302).
We have better human resource in IT and yet could not even achieve what a small African State managed as early as in 1985! Botswana’s Tax Revenue reportedcollection after this initiative of US$ 4.515 billion in December 2019. This recorded a decrease from the previous number of US$ 5.218 billion for December2018. Botswana’s Tax Revenue data is updated monthly—it reached US$ 496.639 billion in June 2023 (34% of its GDP). Our tax-to-GDP ratio was just 9.2% on June 30, 2023, and for FBR it was pathetically low at 8.5%!
TIS will process a large volume of informationleading to increase dramatically the number of new persons that should be registered as taxpayers as well as expose those who are filers but engaged in avoidance/evasion/under-reporting etc.
The potential of TIS can only be fully exploited when motivated and trained staff is employed. FBR must therefore prepare an integrated system and not resort to piecemeal efforts (so-called digitization of tax collection), which are being done these days by local and foreign experts (McKinsey et al), engaged by FBR. Even the International Monetary Fund or World Bank have neither competence nor insight, to suggest any workable solutions to make FBR an effective and efficient entity that can educate and help those liable to pay due taxes. Taxes should also be made fair and simple to complywith, even through simple IT Application. The present system is complex and e-filing is highly cumbersome.
