Sales tax collection

The remedy lies in lower rates of sales tax and a broad base with effective enforcement

In the last article, The missing disclosures, TNS Political Economy, The News, October 18, a promise was made to highlight more vital non-disclosures on the part of the Federal Board of Revenue (FBR) in its publications or website.

It is shocking that in the latest FBR Year Book (for 2019-20), there is no mention of persons registered under Sales Tax Act, 1990, until June 30, 2020. This information and more, like total number of income tax returns received, amount of refunds paid and payable, number of new cases detected, recovery out of current and arrears demands made, cases filed and their fate, etc, should be updated on a monthly, if not on a weekly, basis at FBR’s website so that citizens can adjudge the performance of the apex revenue authority.

It is their fundamental right under Article 19-A of the Constitution of Pakistan. It will help in promoting the tax culture — the hiding of data and lack of transparency in FBR’s affairs are highly lamentable. The Supreme Court and High Courts have passed strictures on many occasions, but no remedial measures have ever been taken by successive governments, including the government led by the Pakistan Tehreek-i-Insaf (PTI).

The FBR recently released four documents, namely: FBR Year Book for 2019-20, Parliamentarians’ Tax Directory for Tax Year 2018, Tax Directory of all Taxpayers for Tax Year 2018 and Tax Directory Analysis for Tax Year 2018. In 2020, they have yet to disclose historic data of sales tax registered persons. If income tax directories can be issued by the FBR, what is wrong with publishing one for sales tax as well, so that citizens can see how much tax taken from them under the sales tax regime on goods/services reached the treasury? The provincial authorities should also publish directories of sales tax on services collected and paid by various entities to show the tax base and collection.

Sales tax on goods and services operates as a tax on value addition after adjusting tax already paid at each stage of transaction: the following simple example is meant to illustrate the concept to a lay person:

Input Tax = Tax paid on purchases/services

Output Tax = Charged @ 17 percent (rate can be different for different goods/services) on taxable sales/services

Due Tax = Output Tax–Input Tax (already paid)

Verification of input tax already paid at each stage from raw material to disposal of finished product or services rendering to end customer is, no doubt, a major challenge even in developed economies, what to speak of Pakistan, where the FBR is almost dysfunctional, as its officers are not provided even basic facilities/logistics and training, and the governments, military and civilians alike, are always appeasing the rich and the mighty through amnesties, immunities, waivers and concessions.

The incumbent premier, in a case against him in Supreme Court for disqualification under Article 62(1)(f) of the Constitution, admitted to availing Tax Amnesty Scheme of 2000, issued under section 59D of the repealed Income Tax Ordinance, 1979, and paying Rs 240,000 for an undeclared flat (No.2, 165 Draycott Avenue, London) purchased for £ 117,000 in 1983 and sold in April 2003 at a net amount of £690,307). He admitted non-payment of tax under Wealth Tax Act, 1963, for 17 years. Can such a person still pass the test under the Constitution of being “sagacious, righteous and non-profligate and honest and ameen?”

The court in PLD 2017 SC 692 answered the question in the affirmative: “Declaration of the London flat in the Amnesty Scheme in 2000 followed by its disclosure in the Respondent’s wealth statement as of 30.06.2002 filed under Section 58 of the Ordinance, 1979 and reporting the same in the statement of assets and liabilities annexed by the Respondent with his nomination forms in the general election of 2002, he cannot be faulted for concealment or misdeclaration under the taxation laws of the country or the ROPA”.

In the wake of heavy economic toll of Covid-19 endemic, all businesses, especially small and medium enterprises [SMEs], are still being heavily taxed through sales tax on goods at imports and domestic sales.

This is our attitude towards tax compliance at the highest judicial and executive levels and practical demonstration of ethical values, where people remain in politics after confessing tax evasion and even become prime minister. Hence, the FBR alone cannot be blamed for its failure to enforce tax laws as it is admittedly not allowed to work independently, insulated from outside pressures, political or of any other nature.

The FBR Year Book for 2018-19, prepared and released under a renowned chartered accountant, posted from outside FBR, also fails to mention the number of persons registered under Sales Tax Act, 1990 for the fiscal year ending on June 30, 2019.

According to FBR Year Book for 2019-20, against original target of Rs 2,203 billion of sales tax, total net collection as on June 30, 2020, was Rs 1,596.8 billion. Against a revised target of Rs 1,427 billion, it showed a Rs 169.8 billion surplus. The Book notes: “Domestic sales tax collection recorded a growth of 11 percent, whereas collection of sales tax on imports recorded a growth of 8.1 percent”.

A detailed analysis of FBR Year Book for 2019-20 exposes the extremely narrow base of sales tax. Out of the total collection, the share of sales tax on imports is 55 percent and on domestic sales 45 percent. Interestingly, out of sales tax at import stage of Rs 876.3 billion, the share of POL products is 27 percent [Rs 231 billion]; in total domestic sales tax of Rs 720 billion it is 33 percent [Rs 235 billion]. Thus the share of one item alone is Rs 466 billion [29 percent]. The share of other major items also confirms the weakness of FBR’s enforcement vis-à-vis the indirect tax base.

At the import stage, Rs 652 billion [75 percent of total collection] came from nine items; all others contributed only Rs 217 billion [22 percent]. On domestic front, the share of 10 lead items is Rs 527 billion [73 percent of the collection] while all others contributed only Rs 193 billion [27 percent]. All these are officially released figures and details of items, their respective share in sales tax collection, as well as comparison with fiscal year 2018-19 can be seen at Page 18, 19 of FBR Year Book for 2019-20. The link is:

The World Bank in its report, Project Information Document (PID), updated on April 22, 2019, revealed that out of the 220,042 registered sales tax payers in fiscal year 2017-18 only 141,106 (64 percent) filed returns and only 43,355 (only 20 percent of registered persons) paid any tax. Another report claims that out of the total domestic sales tax collection, more than 89 percent was paid by less than 400 entities.

In other words, only 0.19 percent of the registered taxpayers contributed more than 89 percent of sales tax. The effective sales tax rate for total domestic sales is 4.5 percent. This rate is 6.8 percent, 7.9 percent, 8.3 percent and 13.6 percent for top 40, 30, 20 and 10 sales tax paying entities, respectively. This shows that domestic sales made by more than 99 percent of taxpayers contribute sales tax at an effective rate of less than 4.5 percent. It is now for the FBR to refute these reports and make public the actual figures. In the absence of any official figures, it is not possible to tell the truth to the readers/citizens.

At the completion of six-year long Tax Administration Reforms Programme (TARP), the World Bank, in its report titled Implementation, Completion and Result Report observed: “The current narrow-base of general sales tax (GST) in Pakistan remained almost entirely unchanged throughout 2005-2012, despite efforts to overhaul the indirect taxation structure by introducing a reformed GST featuring few exemptions and wide coverage of goods and services.”

In the wake of heavy economic toll of Covid-19 endemic, all businesses, especially small and medium enterprises [SMEs], are still being heavily taxed through sales tax on goods at import and domestic sales stage, collection of sales tax with commercial/industrial electricity connections, and sales tax on services by provinces with many withholding provisions. The main fault lies with the legislators for passing oppressive laws, and the governments giving officials at federal and provincial levels irrational targets that are achieved at the cost of business growth.

The remedy lies in a lower rate of sales tax on a broad base with effective enforcement. Presently, about 50 percent of federal taxes are collected at import stage and many more by provincial governments in advance, which is the real cause of hardship for businesses, especially SMEs.

The writers, lawyers, and authors are Adjunct Faculty at Lahore University of Management Sciences (LUMS)

Sales tax collection