Federal budget: A question mark on FBR’s capacity

Taxes are collected not because of Federal Board of Revenue (FBR) but despite of it. These are the words of none else but the former chairman FBR Riaz Malik. Tax reforms were launched under his watch. Unfortunately, nothing has changed as of today.
Looking at the current finance bill, it appears as if FBR has accepted this as its policy statement and accordingly tax everything at source. It has opted to widen the scope of withholding tax regime through the use of technology.
Let’s appreciate for a moment the government’s strategy of raising taxes over Rs500 billion without any major change in the new budget. It therefore seems appropriate to look at fiscal strategy the government has opted for generating an ambitious amount of revenue.
The budget document uploaded at FBR website contains following figures on budgetary measures:
(Rs. in millions)
s. no Tax Description Net effect
1 Customs Duties 41,950
2 Sales Tax & Federal
Excise 54,000
3 Income Tax 142,250
238,200
The budget figures indicate that out of Rs238 billion, the tax machinery has only been assigned to collect Rs15 billion that is less than 10% of budgetary measure. “Is it not appropriate on the part of finance minister’s strategy to collect Rs238 billion at source without disturbing and bothering the huge machinery of FBR,” asked a fiscal expert. Such feelings are shared by different trade organisations as well.
The FBR thought it easier to enhance revenue by using banking instrument for withholding tax 0.6% on the non-filers. Similar is the strategy for collecting tax from the various sources of banking companies. One of the officers involved in budget-making remarked that the junk of the revenue should accrue from these levies. The private banking management, however, differs with this approach. It is not the role of the bank to act as agent of FBR, they argue, as people will prefer to keep their deposits away from banks. The logic of finance minister that decrease in the cost of electricity has necessitated the increase in withholding tax has not generally been well-received by the small traders. One measure that goes unnoticed by the media is that it has also been taxed as the levies have been imposed on the advertisement to print/electronic media. One of the prominent members of Lahore Tax Bar remarked that this tax has been imposed to keep the “unguided missiles” within the media industry in control.
The supply or sale to unregistered person has been made subject to 2% further tax. One of the tax practitioner pointed out that similar tax was imposed before 2003 resulting in the fake invoices to the registered persons. Fraudsters used to make dummy firms; get them registered to avoid 2% further tax and made sales to them issuing fake and flying invoices. It made compliance uncompetitive as they used to pay extra tax. One wonders as to what stops FBR from learning the past experiments.
All power-distribution companies have been assigned broader role to collect taxes with electricity bill from all the non-filers. Isn’t it ridiculous to collect 2% extra tax from poor person consuming only 50 or less than 50 units of electric city, asked a small farmer from southern Punjab.
As many as Rs42 billion will be collected at source through custom duty. Sharing the philosophy of taxing at source, senior FBR officers explain that this has been adapted in order to (1) curtail informal economy (2) save the tax payers from the taxman fleecing their pockets and (3) to broaden the tax base. Asked if such kind of taxation at source has been experimented elsewhere in the developed world, the answer is the African and few of the Latin American countries.
They further argue that the economy of scale is not relevant as we are facing fiscal deficit. To an another question that is it fair to tax a person on his electricity/mobile phones, cells cards, the answer was quiet surprising. “They can make adjustment against their final liability.”
It is hard to believe that FBR management is unable to understand that the poor don’t fall in the tax net, let alone making adjustment in the final liability. One of the CEO of a company however is of opinion that any person who can afford to use mobile phones can very well pay the tax. Such is the “amazing” world of riches.
Does this budget provide the rational of retaining FBR especially when taxes are collected at source? What is the use of 24 FBR tax formations across the country with an army of officers? Will taxing the non-filer result in compliance or broadening the tax base? These are the core questions that policy makers must answer. Carlos Salvani, pioneer of withholding-tax regime in VAT and World Bank guru had once stated that unless FBR goes through surgical changes to tax actual liability, it has to put up with taxing at source. Instead of FBR, it appears, the government has decided to collect taxes through banks, power-distribution companies and through import duty that virtually showed its lacks of confidence in FBR capacity to collect taxes. Is anybody listening in FBR lest it is practically privatized?
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