Forcing a person not earning taxable income to pay advance tax or file tax returns is a blatant violation of Article 4(c) of the Constitution
“One slogan that is not raised enough by the economic or political agents in the country is: taxpayers ko izzat doe. The matter cannot be overemphasised.”—Ali Khizar, Respect the taxpayers, Business Recorder, November 1, 2020.
The writer in the above op-ed aptly emphasised reforming all the tax agencies, especially the Federal Board of Revenue (FBR) and respect the taxpayers.
Tax agencies keep on making rules and issuing statutory regulatory orders (SROs) creating more and more difficulties for citizens and increasing the cost of compliance. Legislature is also indifferent towards making tax codes simple and free from cumbersome rules/procedure to facilitate citizens.
The author, thus, pertinently observed: “The perceived cost of documentation for many is too high. That is why neither higher interest rates nor higher taxes on non-filers are working. The culture of tax collecting agencies (especially the FBR) must change. The trust deficit between the government and taxpayer must also be reduced. For that, overall public service delivery (governance) and the FBR’s way of operation have to improve. All that is easier said than done.”
Revenue-cracy [the term was coined by Dr Pervez Tahir in Giving FBR a decent burial, (The Express Tribune, November 8, 2019), keeps on maligning the citizens as tax dodgers. Unfortunately, the bandwagon is joined by the so-called “informed” analysts and all-knowing (sic) TV anchors calling Pakistanis “tax cheats” whereas the reality is quite the opposite — read details in e-book [Tax Reforms in Pakistan: Historic & Critical View] recently published by Pakistan Institute of Development Economic (PIDE) and available free at its website [https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf].
The often-repeated popular phrase that only“1 percent of the population pays income tax” has become a ‘truth’ in Pakistan that nobody is ready to challenge. It exposes the hollowness of all those who subscribe to it. Collection under withholding income tax was Rs 1,092 billion out of total direct tax collection of Rs 1,514 billion in fiscal year 2019-20, according to the FBR’s Year Book 2019-20, an official document. Advance tax paid was Rs 351 billion and with returns Rs 61 billion. The FBR collected only Rs 61 billion (arrears of Rs 14 billion and out of current demand Rs 47 billion) with its own efforts, which is only 4 percent of the total income tax collection. They say the problem lies with appellate authorities/courts for quashing genuine tax demands created by them.
The claim by Inland Revenue Service (FBR) that it contributes by monitoring of withholding taxes is fallacious as major contributors are: contracts (Rs 237.4 billion), imports (Rs 199.6 billion), salaries (Rs 129.4 billion), bank interest and securities (Rs 128.1 billion), dividend (Rs 55 billion), telephone (Rs 54.6 billion), electricity (Rs 45.4 billion), technical fee (Rs 40.1 billion), exports (Rs 38.4 billion) and cash withdrawal (Rs 15.1 billion)—Table 10, Page 15 of FBR’s Year Book for 2019-20.
It is pertinent to mention here that no breakdown is given for the remaining 56 withholding tax provisions prevalent during the relevant year. The FBR claims that withholding taxes need strict monitoring for which it made “extraordinary” efforts. One wonders what strict monitoring they do when the other arm of the FBR (Customs) admits the fact of under-invoicing, wrong declaration and smuggling —to mention just a few.
If this is true then defaulting withholding tax agents that include officers/staff of Customs must have been penalised. No disclosure is available in any official document about what action was taken against them and how much of the lost revenue was recovered. It is still open for the FBR to post on its website the details of any such actions as well as make public the number of income tax returns and sales tax registered persons, category-wise, as on June 30, 2020, and December 31, 2020, so that a performance evaluation can be made.
The FBR must also post on its website on a monthly basis, details of increase in income tax filers, sales tax registered persons, and collection figures of all taxes —income tax, sales tax, customs and federal excise duty —along with quantum of refunds due and not actually paid as is done in Year Book 2019-20. The FBR admitted before National Assembly’s Standing Committee on Revenue that total refunds due on June 30, 2020 were Rs 710 billion [Tax refunds balloon to Rs 710b, The Express Tribune, September 3, 2020]. If the admitted refunds payable are deducted from the total tax collection of FBR for fiscal year 2019-20, the net figure comes to Rs 3,287 billion or just 7.7 percent of the GDP.
Millions of citizens pay advance income tax despite the fact that a majority of them has no income or income below taxable limit. Law does not require them to file returns but under the lenders’ agenda to retard growth and in the name of so-called documentation drive, the FBR wants to bother them. Members of parliament pass tax laws proposed by the executive without proper public debate and their critical review by independent professionals [who should be summoned by the Standing Committee on Finance and Revenue]. The parliament and judiciary have failed to protect the fundamental rights of citizens. Forcing a person not earning taxable income to pay advance tax or file tax returns is a blatant violation of Article 4(c) of the Constitution.
Another wrong notion is that traders do not pay income tax. About 4 million consumers having commercial electricity connections have to pay advance income and sales tax with electricity. Section 235(4)(a) of the Income Tax Ordinance, 2001 says that in the case of a taxpayer other than a company, tax collected up to Rs 43,200 of a commercial electricity user shall be treated as minimum tax and no refund shall be allowed even in case of suffering losses, especially in the wake of Covid-19 endemic/lockdowns. Law recognizes payers of advance income tax with electricity bills as “taxpayers”, yet FBR/lenders/donors and all-knowing TV anchors call them “tax cheats”.
A majority of mobile phone users, subjected to 12.5 percent advance/adjustable income tax, has no taxable income. The law requires them to file complicated income tax returns, wealth statements and refund applications electronically.
About 60 percent of our population comprising the youth is not yet employed, but the FBR is extorting income tax from 100 million unique mobile phone users. The latest data available on the website of Pakistan Telecommunication Authority (PTA) shows the total number of cellular phone subscribers as on August 31, 2020, 169 million, out of which 85 million are 3G/4G subscribers, 3 million basic telephony users and 87 million broadband subscribers.
For eliminating the trust deficit between tax collectors and taxpayers, the following steps are required:
All tax laws/rules/procedures should be made simple, fair, and easy to comply [Urdu text of all should be made available to public]. Existing tax codes/rules are complicated, ambiguous, vulnerable to diverse interpretations, thus, leading to undue litigation.
Honest taxpayers should be respected and “tax evaders” should be punished under the law promptly to create deterrence for all.
In the taxadministration, sense of justice will come FROM stringent accountability. An independent authority must award damages for any excesses.
Citizens have to deal with multiple tax agencies. These should be merged, manned by professionals creating conducive and friendly environment for taxpayers.
Instead of being given unreasonable targets, tax authorities should be equipped and supported to collect the right amount in accordance with law without fear and favour.
Tax collected must be used for public welfare and other legitimate needs of the state and not for tax-free perks and benefits of the affluent.
Maximum income tax rate should be 10 percent or 2.5 percent on net wealth exceeding Rs 10 million, whichever is higher. Companies should be taxed at 25 percent.
Withholding taxes should be on real incomes (salary, dividend, rent, interest etc) and not on transactions, except for non-residents or as per rate under a tax treaty, if applicable.
Reciprocity of taxes is essential in the formof social security and pension for all citizens.
Honest taxpayers get discouraged when the dishonest are offered amnesties and waivers. The influential enjoy tax-free perquisites/benefits, palatial bungalows, servants, free medical facilities abroad and plots at lucrative places either free or at concessional rate. This dichotomy is lamentable and must end.
The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)