Failure on revenue front

Political will to enforce tax obligations and simple tax regime are imperative to get out of debt trap

Failure on revenue front

Like its predecessors, the present government has failed to collect taxes according to its own estimates leaving development programmes in doldrums and pushing the country further in the debt trap. The Federal Board of Revenue (FBR), for the last many years, has missed even downwardly-revised targets, what to speak of harnessing the actual tax potential of Rs. 8 trillion. The FBR, as expected, is not going to meet even revised tax target of Rs. 2691 billion for the current fiscal year -- the original was Rs. 2810 billion. It will be a repetition of last year’s performance when it collected Rs. 2254.5 billion against the second revised target of Rs. 2275 billion -- the original was of Rs. 2475 billion.

According to a report, the FBR collected Rs. 1755 billion from July 2014 to March 2015, "despite the government introducing four mini-budgets in the last five months." The report claims that even this abysmal collection was achieved by blocking refunds of taxpayers. It further adds: "As against Rs. 83.3 billion refunds that the FBR paid in the first nine months of the last fiscal year, the tax authorities released only Rs. 51.6 billion in the current fiscal year." It means that the FBR is also retarding the economic growth by denying liquidity necessary for businesses as well as forcing the ministry under which it works, to borrow from the banks to run day-to-day affairs.

The shortfall in the first nine months of the current fiscal year is huge. The FBR will have to collect Rs. 936 billion in the remaining three months, on an average, monthly collection of Rs. 312 billion, which appears impossible. Federal Finance Minister Senator Ishaq Dar, chairing a meeting on March 31, 2015, to review the progress on matters relating to the FBR observed that fiscal adjustment in the current year was underpinned by tax revenue measures and further realisation of energy subsidies. It was revealed in the meeting that the consolidated development programme was slashed to Rs. 917 billion from Rs. 1175 billion allocated. This is now a recurrent pattern and is therefore not surprising.

The successive governments’ unabated borrowing to meet the burgeoning budgetary deficit is hampering a potentially prosperous economy. One of the major weaknesses of economic governance is unchecked wasteful spending on the monstrous government machinery and inefficient Public Sector Enterprises (PSEs) -- there is no will to go for structural reforms to remedy the situation. Unwillingness to collect taxes from the rich and mighty is further worsening the country’s economic plight. There is no dearth of resources -- as propagated by the rulers to shift blame on others -- but issues are related to lack of management and necessary reforms on the part of political leadership and militro-judicial-civil complex, the de facto rulers.

There is a consensus that in order to overcome its fiscal and economic woes, Pakistan needs to strive hard to achieve sustainable growth of at least 7 per cent and a reasonable tax-to-GDP ratio of 15 per cent -- it is presently little over 9 per cent. The FBR has failed to improve tax-to-GDP ratio despite getting huge funds and best local and international consultancy.

Behind the present pathetic situation on fiscal front the main culprit is the FBR -- an organisation sleazing with infighting, inefficiency, incompetence and corruption. The main reason of low revenue collection is weak fiscal management and policies of appeasement towards tax evaders. There is general unwillingness to pay taxes, due to poor public service delivery and because of perceived unfairness in the tax system and then governments keep on appeasing the rich and mighty through various amnesty schemes -- a permanent one is available in the form of section 111(4) in the Income Tax Ordinance, 2001.

No tax reform agenda in Pakistan will succeed unless the FBR is restructured. For tapping our actual potential, there is an urgent need to run the FBR through a professional team, bring undocumented economy in the tax net, bridge tax gaps and distribute the incidence of various taxes judiciously amongst all segments of the society.

A close examination of the FBR’s performance would show that it has shifted the burden of collecting taxes to withholding agents, who are performing the essential state function of tax collectors without any reward, what to talk of getting reimbursement of exorbitant expenses incurred on performing this onerous task.

It is an admitted fact by the FBR that over 90 per cent of taxes are being collected through voluntary compliance and withholding tax mechanism. The corporate houses in general and banks in particular have virtually been converted into ‘FBR Collection Houses’. Withholding agents incur substantial costs on complying with tax collection provisions on behalf of the government (man-hours, infrastructure use and stationery, just to mention a few) and then face penal provisions under section 161/205 of the Income Tax Ordinance, 2001 (just another ploy by officers to either raise unlawful demands or in their attempt to mint gratification money).

The FBR keeps on misleading the public and legislators about the correct number of income taxpayers in the country. They think that only those who file returns are taxpayers. In fact, the total number of income taxpayers is over 50 million -- not less than 55 million pre-paid mobile users pay 14 per cent advance income tax. Every account holder of a bank, who receives any amount of interest, is subjected to 10 per cent withholding tax and is thus a taxpayer. It is worthwhile to note that in their case tax deducted at source is full and final discharge under section 169 of the Income Tax Ordinance, 2001. They are merely required to file a simple statement under section 115(4) of the Income Tax Ordinance, 2001 i.e. if they do not have any other source of income. There are over 50 million income taxpayers in Pakistan proving that our tax base in not narrow -- we are heavily taxed nation yet accused by the FBR as "tax evaders."

From over 1.2 million tax returns in 2011, the FBR received less than 825,000 in 2014. The main reasons: fear of highhandedness of tax machinery or their protection to non-filers, compulsory e-filing and complex tax return format. An ordinary citizen cannot even read it. No Urdu version of return is made available. The same is the case with Sales Tax Return. On the one hand, targets are not met and on the other concessionary Statutory Regulatory Orders (SROs) continue unabated. Income Tax, Sales Tax and Federal Excise Duty laws are full of exemptions -- mostly meant for the rich and mighty -- causing loss of billions to the national exchequer and opening vistas of corruption.

Due to lack of political will, the FBR has failed to enforce tax obligations. Banks, WAPDA, PTCL and mobile companies are fully computerised and collect taxes on behalf of the FBR. The Board, by using their database, can easily determine fair tax base. Provisional assessment can be made in respect of persons who are not filing tax returns but no such measures are taken and yet the Chairman FBR complains that professionals do not give "concrete proposals to enhance revenues."

One needs to remind the Chairman FBR that during 2013-2014, the FBR’s own effort in income tax collection was less than 9 per cent -- field formations collected Rs. 80.58 billion by creating demands whereas figure for 2012-13 was Rs. 89.4 billion. It exposes the efficacy of the FBR as collection by creating demands fell to 8.7 per cent against 11.5 per cent in the previous year. In Sales Tax, the performance was equally disappointing -- 47 per cent came from POL products, less than 50,000 registered persons contributed while the notorious refund mafia continued to rule. Nothing will improve unless a simple tax regime is introduced that is administered by a dynamic National Tax Agency.