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January 16, 2018

FBR and IMF: damned if you do, damned if you don’t


January 16, 2018

In the first round of discussion for current year, the IMF has appreciated revenue growth but also showed concern on levy of additional duty on almost everything other than POL and capital goods. It also stressed upon the broadening of tax-base through third party data.

The FBR’s ‘innovative’ skills are par excellence whenever it comes to the issue of tax-broadening. Easy way is found in increasing the tariff rates of different levies that it administer. On a question, how such measure broadens the tax base, the FBR comfortably points out that the objective is to increase tax collection and this is what the FBR does through tariff increase.

But it doesn’t answer criticism at different international forums, which point out less than 1% population is taxpayer. This obviously is serious as no country could survive without collecting due share from everyone in accordance with its income. What does the tax net means: (i) increasing the number of tax payers (ii) collecting due taxes, or (iii) simply increasing taxes irrespective the mode of collection?

On the use of data, Prime Minister Shahid Khaqan Abbasi being a filer of tax return went a step ahead and asked the FBR to register new taxpayers on the basis of computerized identity card data. The FBR acted swiftly and announced “to bring all Army officers in the tax net”. This made headlines in the frenzy media as if army officers are already not paying any tax. It is a fact or just a myth that only less than 1% of population is taxpayer. One fiscal analyst held it just a fallacy as actually 99% persons are paying taxes for one percent business elites.

Be as it may, who pays and who doesn’t, right at the outset, it is pertinent to mention the income tax is deducted at source on all kind of utilities that everybody availing. Recent data suggested that more than 150 million are mobile users. As we know there is tax deduction of Rs28 on Rs100 mobile card under different heads.

Will it be justifiable to treat such persons as not taxpayers or conversely should taxes be deducted from every user. Spokesperson of the FBR has strange logic when advised, to adjust such taxes in their return. He conveniently ignored that such persons earning roughly Rs12000 don’t fall in the tax-net.

It may also be pointed out that traders, shopkeepers operating in any posh area in any big cities are hardly paying any tax. One of the tax consultants said that most of the local corporate entities show losses which are managed by their accountants by managing figures of transaction.

On bringing army officers in the tax net, it may be pointed out that in every government or public department, income tax is deducted at source. It is different point whether they are filing tax-returns or not. Their deduction is what they are supposed to pay. The FBR however boasts of increasing the number of tax-filers. One consultant painfully pointed out that everybody in bureaucracy is concerned on how to earn good numbers from the bosses.

Tax paid on salary is mandatory on the private sector but one senior manager in the private sector too shared that some of the salary is paid through cheque and the remaining amount in cash.

Another tax expert pointed out the FBR has failed to ascertain the actual income and, instead of enhancing its capacity, it is rather focused on broadening the withholding regime. Its net impact is virtually converting direct taxes into in-direct taxes as incidence is passed on to the end consumers.

Every year, the rates of withholding tax are increased and thus the FBR boasts of increasing direct-tax share in the revenue pie. One may recall that in FY 2016-17, the FBR made three times changes in the law of property evaluation. Still the issue is unresolved and one of the most potential sources where dead investment is made is enjoying partial exemption from the ambit of the taxes.

Astonishingly, the FBR takes right step in wrong mode. For instance, it has imposed withholding tax on cash withdrawal in order to encourage transaction through banking channel. Consequently, banks made hue and cry as people now prefer to keep the cash in hand and utilise hundi system or make investments in prize bonds.

One big business man pointed out deals of sales to the tune of Rs1 Billion per day are made through chit-system where guarantors ensure 100% compliance on nominal charges. Strangely, the FBR has slapped federal excise duty on payment through visa cards whereas India has allowed depreciation in due taxes on such transaction.

The FBR has never bothered to realise that such levies are feeding informal economy; simply their withdrawal will adversely impact collection.

The city traders are considered political constituency of ruling party and thus “prudent” FBR keep its hand off from them. Interestingly, the manufacturers were asked to pay extra tax in lieu of the tax that has to be paid by retailers or traders. This is a huge sector where billion of rupees is made on daily basis. But in the country a poor worker pays on everything he buys.

The IFI’s are happy with the FBR 20% revenue growth but at the same time, it has expressed reservation on imposing different levies on the import. The FBR argues that such levies are not meant to discourage imports but the reality is contrary to this claim.

Can FBR increase the number of taxpayers? One of the fiscal expert replied affirmatively. On further question, whether increasing taxpayer number will increase tax collection, he replied in negative. On IMF reservations, one senior manager of FBR confessed “beggars can’t be choosers” as how collection is possible without additional levies.

The Prime Minister has asked to utilize the CNIC data for expending the space. His advice is in line with developed countries where a newborn baby is allocated identity number which is treated as tax number. But in a country, where roughly 35% of population lives below the subsistent level, should they be brought under the tax net? The tax numbers in the developed country entitled infant children’s to social benefits. Does the government in Pakistan provide any health and education coverage to the poor?

Tax broadening has been oft-repeated resolve by the FBR. However, FBR has to take the following steps for broadening the tax burden:

(i) Abolish withholding tax regime and instead tax the people in accordance with their incomes though a system which track down every transaction.

(ii) Creating linkages between different transactions.

(iii) For every sale payment, invoice should be electronically transmitted to FBR data base.

(iv) Ensuring return filing by existing tax payers.

The author is fiscal analyst and can be reached at [email protected] twitter @Chafqat

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