FBR’s lack of agility

The problem with incompetence is its inability to recognise itself – Orrin Woodward, L.I.F.E. Living Intentionally For Excellence Over the last two decades, Federal Board of Revenue (FBR) has proved to be an epitome of inefficiency, corruption, indiscipline and highhandedness. It has failed on all fronts: collection targets, widening of tax base, countering tax evasion and avoidance, recovery of arrears, voluntary compliance, reform process and what not.

Tax-to-GDP ratio in 2012-13 dipped to 8.2 percent from 9.4 percent in 2011-12. From 2005-2011, FBR ruthlessly wasted borrowed funds of millions of dollars under Tax Administrative Reforms Programme (TARP) but could not compel 20 million potential taxpayers to file tax declarations. The majority of non-filers are rich and mighty, including 70% elected members of parliaments. FBR has not only failed to tap the actual tax potential of Rs 6 trillion, but is also guilty of shifting the tax burden from the rich to the poorer segments of society. It is serving as handmaid of the ruling elite – indomitable militro-judicial-civil complex, corrupt politicians and greedy businessmen.

According to Press reports, FBR in the first three months of the current fiscal year has miserably failed to force rich and mighty to file tax returns. It served 30,333 notices but only 174 people filed income tax returns with total tax payment of just Rs 7.3 million. Shahbaz Rana in his report, ‘Letdown: Tax base broadening plan gets cold response’ [October 22, 2013], remarked that “such a low rate of compliance underlines the deep-rooted corruption” in FBR. He added that “officers are allegedly receiving kickbacks far in excess of what has been deposited in the national kitty, underscoring the need to review the strategy of broadening the base through serving notices”.

FBR under the initiative, Broadening of Tax Base (BTB) has promised IMF issuance of 100,000 notices to tax evaders before 30th June 2014. Till 30th September 2013, in Karachi which is the largest city, the Commissioner Headquarters of FBR served 2005 notices but merely 15 people filed returns and paid a total amount of slightly over one million rupees. Lahorites received the maximum number of notices 7,000 but only 36 persons made compliance paying Rs 824,030. In Faisalabad, the country’s third largest city, about 1700 people were issued notices and only 23 filed returns paying just over Rs 100,000. In Peshawar, 3364 notices were sent and only 9 people filed income tax returns paying total amount of Rs 22,500.

In Multan, 2985 notices were served but returns received were 24 depositing Rs 1.6 million tax. In Rawalpindi, in response to 2434 notices, only 30 people filed returns paying Rs 2.6 million. In Islamabad, the FBR served over 1800 notices, 19 people came forward paying Rs 1.1 million. In Quetta, over 1000 notices were served and only two persons filed income tax returns without admitting any liability. Similarly, in Gujranwala, the FBR asked over 1400 persons to file income tax returns but only one person came forward with nil tax. In Sukkur 359 notices were served but none were complied with. In Sialkot, FBR served 2340 notices, only four filed returns and paid a meagre amount of Rs 12,835. In Sargodha, 1183 got notices, one complied and paid Rs 19,726. In Bahawalpur, over 1000 persons received notices, four filed returns with Rs 22,375 as income tax.

FBR’s data reveals that income tax collection from individuals has declined from 1.5 percent of GDP in 2000-2001 to less than one percent in 2012-13. At present, the ratio of individual return filers is only 0.5 of total population. In 2012, only 4143 people showed income of Rs 5 million or above. In 2011, only 6,152 individuals showed personal income tax liability exceeding Rs 5 million. It’s a proven fact that FBR instead of targeting the rich and mighty was facilitating them – Rs 1500 billion is the cost of the exemptions and concessions from taxation granted in just last five years under various Statutory Regulatory Orders (SROs) and revenue losses due to poor enforcement and corruption were nearly Rs 1200 billion.

The present tax scenario shows that an overwhelming majority of Pakistanis is paying income tax at source and in some cases the tax withheld is full and final discharge of liability (for example 10% tax withheld on interest income from banks and national saving centres). Since only a fraction of income taxpayers’ population files returns, a general misconception prevails that our income tax base is narrow. The fact is that millions pay income tax under various withholding provisions, but do not file returns or statements and if they do so the FBR would have to refund billions to those who earn income which is below taxable limit. This narrative is not available in any official and independent discourse – maligning the Pakistanis as a nation of tax cheats. The reality is that the rich and mighty are tax evaders and get state patronage for that.

The total number of income taxpayers in Pakistan is in millions. According to Pakistan Telecommunication Authority (PTA), Pakistan crossed the figure of 125 million mobile users in June 2013. A huge population, not less than 50 million (if we exclude multiple and inactive subscribers), is paying 15% adjustable income tax from 1st July 2013 for using this facility in addition to 19.5% sales tax – both pre-paid and post-paid customers bear enormous tax burden of 34.5%. In 2012, about 55,000,000 mobile subscribers paid 10% adjustable income tax, but only 1,443,414 filed income tax returns. FBR did not bother to issue notices to those who paid substantial amounts, say Rs 30,000 or more on this single utility by acquiring information from the telecommunication companies. One wonders how FBR can be absolved from such sheer ‘iniquitous negligence’!

Majority of the mobile users have income below taxable limit. They would not bother to claim the refund of tax withheld by filing tax returns – primarily because filing return would cost more than the amount withheld and secondly, for refund claim one has to file application electronically – for many illiterate Pakistanis, imposing such conditions by FBR shows its mindset of highhandedness which is highly deplorable. On the contrary, majority of the rich and mighty just pay a fraction of income tax by way of withholding tax on their colossal incomes. They never bother to file returns and wealth statements-in 2011 and 2012 as per admission of the FBR 70% of parliamentarians did not file tax returns and wealth statements! Can FBR tell the nation how many judges, generals and high-ranking civil servants filed tax returns in the last five years along with wealth statements as their annual income must certainly be more than Rs 500,000?

FBR should tell the nation how much tax was paid by the rich 1% of Pakistanis – judges, generals, bureaucrats, parliamentarians, politicians, professionals, industrialists and traders, during the last 5 years. It must explain to the nation how these wealthy classes have accumulated collossal assets without paying due taxes. Can FBR explain to the citizens what prevented it from issuing notices to the rich and mighty who received free plots and paid no tax under section 13(11) or section 39(1)(j) of the Income Tax Ordinance, 2001? People have the right to ask why FBR is reluctant to tap tax delinquents sitting in the parliaments having taxable income but failing to file tax returns and wealth statements under the law. In fact, FBR should enforce section 114, 115 and 116 of the Income Tax Ordinance, 2001 across the board, without any hesitation forcing those who qualify under law to file tax returns/statements or be prepared for suffering penal actions.

The above analysis confirms beyond any doubt the ineffectiveness and incompetence of FBR. Our tax base is not narrow as nearly 50 million persons are paying income tax at source, but the rich and mighty are not paying taxes on their enormous incomes and assets-look at the staggering amount of money stashed in Swiss banks alone [‘No will to tax the rich’, Business Recorder, June 14, 2013 and ‘Swiss ‘Return of Illicit Assets Act’: we can get billions back’, Business Recorder, October 1, 2010]. Unfortunately, the high-ranking officials of FBR have not been speaking truthfully. They intentionally hide the fact that where our actual problem lies. They have been more preoccupied in giving amnesty to their rich political masters, rather than taking them to task. Our tax base is distorted – the system protects tax avoiders and plunderers of national wealth as well as forgoes revenues of billions of rupees through exemptions, amnesties, concessions and immunities – most of the time using the wicked device of SROs-‘Onslaught of SROs continues’, Business Recorder, October 11, 2013.

Though measuring actual tax potential of Pakistan is a difficult task as size of informal economy is enormous yet it can safely be assumed that we have 6 million individuals (half salaried and half self-employed) having taxable income of Rs 1.5 million – total income tax collection from them, according to tax rates for tax year 2014, comes to Rs 627.5 billion. If super-rich, who about 0.2 percent of population (368,000) are taxed properly, tax collection from them would be around Rs 150 billion. If we add income tax due from corporate bodies, non-individual taxpayers (AOPs) and individuals having taxable income up to Rs 1,500,000, the gross figure would be nearly Rs 3000 billion. FBR collected around Rs 715 billion as income tax in fiscal year 2012-13. Similarly, due to rampant corruption in sales tax, federal excise and custom duties, the total collection is not more than 30% of actual potential. In fiscal year 2012-13, FBR collected Rs 830 billion under the head, sales tax. Estimates for customs and excise duties are Rs 235 billion and Rs 120 billion respectively. The total indirect collection of just Rs 1,185 billion was pathetically low. It should have been at least Rs 3500 billion. If prevalent tax gap is bridged, the total revenue collection would be around Rs 6500 billion without imposing any new taxes or raising existing tax rates as has been done by Ishaq Dar in the Finance Act 2013.

(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Faculty at Lahore University of Management Sciences (LUMS)