FBR’s ‘Year Book 2012-13’

The Federal Board of Revenue (FBR), in its Year Book 2012-13, issued on September 23, 2013, conceded colossal failure on meeting the assigned target, but as usual blamed it on worsening law and order situation and energy crisis. The report admits that the “growth in net revenue collection has been 3 percent over the collection of FY: 2011-12 which is the lowest during last 13 years and similarly the tax-to-GDP ratio dropped from 9.1% in the preceding year to 8.5% in 2012-13”. A cursory look at Year Book 2012-13 reveals another disturbing fact – FBR’s main reliance (85%) is on indirect taxes, burden of which is borne by the poor, the weaker and the less privileged sections of society. This fact has been concealed in the jugglery of figures showing many indirect taxes as part of income tax collection. The report also fails to mention why the ex-chairman and many others received six months’ salary as honorarium for the worst-ever performance in the last three decades!

Other than failure to meet the targets, what makes the situation more painful is the fact that the ruling party begs for IMF bailouts but its leaders defy tax obligations with impunity – ‘The Swiss accounts’, Business Recorder, September 9, 2013. On the contrary they get enormous tax concessions for their businesses. This aspect is concealed in the report as to what was the quantum of tax forgone due to concessions announced time to time. Political leaders make tall claims about reforming the tax system but when in power they brazenly use FBR as their handmaiden in getting tax-free benefits of billions of rupees though infamous Statutory Regulatory Orders (SROs). There exists an unholy alliance between militro-judicial-civil complex and politicians. Through concessionary SROs, non-collection of agricultural income tax (military and civil bureaucracy also represent absentee landlords being beneficiaries of state land grabbed in the name of awards and rewards), meagre or non-taxation of luxury and commercial properties eg clubs and golf courses, unprecedented exemptions given to generals, judges and high-ranking civil officials, the national kitty suffers a colossal loss – if these are recouped our tax-to-GDP ratio would be between 12% to 14%.

The oft-repeated narrative that Pakistanis do not pay taxes – popular with analysts, TV anchors, academicians, policymakers and foreign donors – is highly lamentable. The ground reality is that the poorer Pakistanis are the most over-taxed people, whereas the ruling elites not only enjoy tax breaks but also thrive on labour and taxes of the downtrodden – ‘Beggars cannot be choosers’, Business Recorder, September 13, 2013. Can the new zealous and competent Chairman of FBR overturn this scenario? Obviously it is not his domain.

These are political issues that only a mass-oriented party having commitment for the poor masses and true representative of the downtrodden can solve by bringing major changes in economic structure. Since no such party is active and popular in national politics, it is still a distant dream in the prevailing Pakistani milieu.

Massive indirect taxation [16 to 19 percent sales tax and presumptive taxation under the garb of income tax on a number of transactions] without evaluating its impact on the economy and the lives of the middle class and the poor is the worst crime one can imagine in any country. But our Riasti Ashrafiya – militro-judicial-civil complex, landed aristocracy, industrialist-turned-politicians and public office holders – are thriving on national resources and are not ready to pay taxes due from them. They openly indulge in vulgar and ostentatious show of money and power, but their contribution in total taxes is less than 1%. Pakistan’s economy is captive in the hands of these privileged classes.

The militro-judicial-civil complex (higher echelons and not the lower staff) represents less than 1% of entire population but enjoys unprecedented perks, perquisites and benefits at the expense of taxpayers’ money – ‘An elitist Pakistan’, Business Recorder, July 26, 2013. The mighty landowners exploit labour of landless tillers and unscrupulous industrialists and traders exploit poor urban workers to amass more and more wealth. Additionally, they create artificial hike in prices of essential items to snatch back whatever little is earned by the poor and the fixed-income classes. The prevalent tax system protects them and shifts burden on the working classes of Pakistan – ‘FBR: new chairman, old challenges’, Business Recorder, August 2, 2013 and ‘Politics of plots and perks’, Business Recorder, July 12, 2013.

The regressive taxation retarding growth has resulted in rapid shrinking of middle class in Pakistan. Presently just a few families have per capita income of $4,286 – the minimum benchmark set by the World Bank to qualify as a middle class person. Average family size of middle class is four to five and according to the World Bank’s definition, a four-member family collectively earns $17,144 (Rs 1.83 million) a year or Rs 152,867 per month. During the budget speech, Ishaq Dar while imposing higher tax on persons earning above Rs 500,000 per month proudly claimed “it would affect only 3,500 individuals”. He should have been concerned about the shrinking size of middle class in Pakistan, but he was telling us we have only a handful of them!

In any society, middle class, comprising professionals, scientists, doctors, and engineers, plays a pivotal role in the growth of a country but our ruling elite does not want them to grow as they can challenge their monopoly over resources. India is striving to increase the size of its middle and even upper middle class-expected to be 39 million by 2015. But our ‘Riasti Ashrafiya’ (‘Budget for the ashrafiya, Business Recorder, June 8, 2012′) is bent upon to pushing the middle class to the poor class and the poor class to below the poverty line. If Pakistan’s economy remains captive in the hands of Riasti Ashrafiya, it will never turn around. Pakistan will have more and more people below the poverty line what to talk of increasing the size of middle class, which is considered as the backbone of any economy. It is in the interest of Riasti Ashrafiya as the poor can be exploited and forced to vote for them whereas educated middle class cannot be coerced for “engineered electioneering” paving the way for a sham democracy.

Reduction in the size of middle class is causing a negative impact on contribution of direct taxes in the overall revenue of Pakistan. The share of income tax, according to official figures, as percentage of GDP is continuously declining; it was merely 2-1% in 2012-13, 2.2% in 2011-12, 2.4% in 2010-11, 2.5% in 2009-10, 2.6% in 2008-09, 2.9% in 2007-08, 3.2% in 2006-07, 3.3% in 2005-2006, whereas in 2004-2005 it was 3.5% [source: YEAR BOOKS 2004-05 to 2012-13 of FBR and Economic Surveys].

FBR’s Year Book 2012-2013 is completely silent about the mammoth gap in collection of income tax in Pakistan. According to Pakistan Telecommunication Authority (PTA), there were 120 million mobile users as on 30 June 2013. A huge population, not less than 50 million (if we exclude multiple and inactive subscribers), in 2012-13 paid 10% income tax (from 1st July 2013 rate is enhanced to 15%) and 19.5% sales tax on mobile bills (prepaid or post paid), but less than one million filed income tax returns in 2012-if statements filed for presumptive taxes and salary returns are excluded, the actual number of business returns was below 500,000. Majority of the mobile users may not have taxable income yet they are burdened with undue liability. On the contrary, majority of rich just pay a fraction of income tax (withheld at source) on actual taxable incomes without bothering to file even income tax returns – in 2012 less than 200,000 non-salaried individuals declared income exceeding Rs one million! This exposes effectiveness and competence of FBR, but Year Book 2012-13 does not utter a single word about it.

If out of total population of 180 million, there are 5 million individuals having taxable income of Rs 1.5 million, total income tax from them should be around Rs 1600 billion. If we add income tax collected from corporate bodies, other non-individual taxpayers and individuals having income between Rs 500,000 to Rs 1,000,000, the gross figure would be nearly Rs 3500 billion. FBR collected only Rs 715 billion as income tax in 2012-13 (total direct tax collection is shown at Rs 739.7 billion which included income tax and other direct taxes ie capital gain tax, workers welfare fund and workers profit participatory fund. The contribution of income tax in total direct taxes is around 97%). About 35% of direct taxes are indirect taxes collected under the garb of presumptive taxes. Thus not only is there a whopping gap of Rs 2784 billion in income tax alone, but the actual contribution of direct taxes much lower than what is claimed by the FBR: “direct taxes have contributed 38% in the total tax receipts collected during FY: 12-13”. In the income tax collection of Rs 716 billion, presumptive taxes are at least Rs 250 billion, thus actual income tax collection is not 716 billion but Rs 466 billion – its share in total revenue comes to around 24% and not 38% as claimed by FBR.

Another shocking fact contained in Year Book 2012-2013 is the dismal performance of FBR field officials in collecting taxes through their own efforts by employing forensic audit techniques, using third party information or utilizing data collected by FBR over a period of time, about the rich and mighty who do not even bother to file tax returns. Figures contained in FBR’s Year Book 2012-2013 show that out of total collection of Rs 739.7 billion under the direct taxes, collection on demand was just Rs 89,427 billion – a decline of 31% as compared to collection on demand of Rs 130 billion in 2011-12. This alone confirms the pathetic state of affairs prevailing in FBR where officers are getting double salary, bonuses and honorariums – ‘Politics of plots and perks’, Business Recorder, July 12, 2013.

Out of total direct tax collection of Rs 739.7 billion, FBR received Rs 436 billion (59%) from withholding agents. In this area as well, massive corruption is prevailing with the connivance of tax officials – the withholding agents collect/deduct taxes and do not deposit in the government treasury, or the payer and the payee join hands to deprive the exchequer of billions of rupees with the connivance of corrupt tax officials. The real potential of withholding taxes, based on estimates for total GDP for FY 2012-13, was not less than Rs 1200 billion.

Similarly, due to rampant corruption in sales tax, federal excise and custom duties, the total collection is only 25-35% of actual potential. In fiscal year 2012-13, FBR collected Rs 841 billion under the head of sales tax, Rs 119 billion under federal excise duty and only Rs 239 billion under customs duties. Total indirect collection of Rs 1939 billion is pathetically low. It should have been at least Rs 5000 billion [for bridging the tax gap we have already given concrete proposals in ‘Recouping tax losses’, Business Recorder, July 13, 2012].

If existing tax gap is bridged, our revenue collection can reach Rs 8500 billion (Rs 3500 billion direct taxes and Rs 5000 billion indirect taxes) which could change the entire fiscal scene and fate of the nation. By collecting this amount, we can easily meet current expenditure, development and public welfare outlays – government requiring no internal or external borrowing would be able to retire debts in a few years as done by the Hungarian government – ‘Learn from Hungarians’, Business Recorder, August 16, 2013. However, the dream of making Pakistan a self-reliant economy can never be realized unless the mighty sections of society (Riasti Ashrafiya) are taxed as per Article 3 of the Constitution which says: “The State shall ensure the elimination of all forms of exploitation and the gradual fulfilment of the fundamental principle, from each according to his ability to each according to his work”.

FBR’s Year Book 2012-2013, though contains many lies and conceals a number of facts, yet proves beyond doubt that despite resorting to all kinds of highhandedness (blocking refunds, getting billions in advance, raising illegal demand and collecting them through coercive measures), FBR failed to improve the tax-to-GDP ratio – it fell to 8.5% from 9.1%. It does not tell that low tax-to-GDP ratio is because of rampant corruption and giving unprecedented benefits and perks to Riasti Ashrafiya because of which the main burden of taxes is on the poor and the rich are becoming richer.

Through presumptive and transactional taxes levied under the garb of income tax law (which are nothing but indirect taxes) the tax incidence has been shifted from income earners to consumers and clients. These indirect taxes have not only distorted the entire tax system and destroyed economic growth but even failed to bridge the fiscal deficit, which is soon to cross the mark of Rs 2500 billion. FBR in 2012-13 failed to collect the paltry target of Rs 2381 billion, whereas actual tax potential as shown above is at least Rs 8500 billion. It hardly matters even if FBR this year collects Rs 2400 billion (Chairman Tariq Bajwa says it is an uphill task!) as fiscal deficit would be more.

Pakistan will never progress unless Riasti Ashrafiya is divested from its control over the resources and exploitative tools through a mass movement. The growth of economy for the welfare of the masses – providing people jobs, decent life and universal entitlements – alone can guarantee the progress and prosperity of any State. Presently, taxes collected in Pakistan from the poor are utilised to extend extraordinary benefits to military complex, high-ranking civil bureaucracy and judiciary and businessmen-cum-politicians. If these classes are properly taxed (all benefits, concessions and free perquisites should be withdrawn replacing them with a taxable consolidated pay package) on their colossal wealth and income, government cuts down wasteful expenditure, the military, judicial and bureaucratic hierarchy foregoes extraordinary personal perquisites and benefits (which includes grabbing state lands), the common citizens would certainly be motivated to discharge their tax liabilities diligently as well.

(The writers are Adjunct Faculty at Lahore University of Management Sciences (LUMS) and partners in law firm, Huzaima & Ikram (Taxand Pakistan)