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Punctured tax base

The Chairman of Federal Board of Revenue (FBR), while talking to Associated Press of Pakistan on 17th February 2012, conceded that “Pakistan has one of the lowest tax-to-GDP ratios in the world”. There is a difference between a “taxpayer” and “return filer”.

We have mentioned time and again in these columns [‘The tax base’, Business Recorder, November 2, 2012 and ‘Ailing tax system’, Business Recorder, November 16, 2012] that there are at least 40 million income taxpayers in Pakistan but return filers are pathetically low. Ali Arshad Hakeem said that during the year 2010-11, only 3.1 million National Tax Numbers (NTNs) were issued which constituted only 0.92 percent of population. He further revealed that “82 percent of all sales tax and federal excise duty is paid by the top 100 companies”. He made a deplorable disclosure that “only 269,770 individuals filed returns admitting any tax liability consistently from 2009-2011 while 3.1 percent of the government’s total tax revenue is collected from the income tax on salaried individuals”.

According to Chairman, “about 7.7 percent of the country workforce, approximately 4.5 million, earned enough money to pay the income tax during tax year 2011 when the minimum taxable income was Rs 300,000. However, out of 1,021,669 tax return filers in 2011, 394,169 paid income tax less than Rs 10,000”, he added. Chairman FBR said that Pakistan’s tax yield from individuals was extremely low compared to other countries and there had been continuous decline since early 2000 – Pakistan ranks 23rd from the bottom of a list of 176 countries, whereas 4.7 percent of Indians contribute towards income tax and for Canada, ratio is as high as 80 percent.

Ali Arshad Hakeem said that income tax collection from the individuals declined from 1.5 percent of GDP in 2000-2001 to less than one percent in 2010-11. He revealed that at present the ratio of individual return filers is only 0.5 of total population. In 2011, only 6,152 individuals showed personal income tax liability exceeding Rs 5 million. If the figure for imports is excluded, since most of the goods are headed for other parts of the country, 37.8 percent of all taxes are collected from Karachi while 37.5 percent of all taxes are collected at the two sea port in the country. According to Chairman, “Rs 650 billion is the cost of the exemptions from taxation granted in just last four years under various Statutory Regulatory Orders (SROs)”.

Chairman FBR, in his analysis, overlooked the fact that an overwhelming majority of our population is paying income tax at source, though they earn much below the taxable threshold. In most of the cases, the tax withheld is the full and final discharge of liability and they are not required to file tax return as envisaged in section 115(4) of the Income Tax Ordinance, 2001. Since only a fraction of income taxpayers file returns or statements, a myth prevails that our income tax base is narrow. The fact is that in Pakistan millions pay income tax under various withholding provisions, but do not file returns or statements. It is, therefore, wrong to say, as claimed by the Chairman FBR, that “only 0.9 percent of the population of the country pays income tax”. The number of income taxpayers, in fact, is in millions. According to Pakistan Telecommunication Authority (PTA), there were 115 million mobile users as on 30th June 2011. A huge population, not less than 40 million (if we exclude multiple and inactive subscribers), paid 10% income tax for using this facility in tax 2011 (both pre-paid and post-paid connections), but only 513,044 individuals filed income tax returns. FBR did not bother to issue notices to those who paid substantial amount, say Rs 30,000 or more.

Majority of the mobile users might not have taxable income yet they never bothered to claim the tax withheld as refund by filing tax returns – primarily because it would have cost more than the amount withheld. On the contrary, majority of the rich just pay a fraction of income tax on their colossal incomes – in 2011 as per admission of the Chairman FBR only 6,152 individuals in Pakistan filed tax returns showing taxable income exceeding Rs 500,000! This confirms beyond any doubt the ineffectiveness and incompetence of FBR. Our tax base is not narrow as nearly 40 million persons are paying income tax at source, but the rich and mighty are not paying taxes on their actual incomes. Our tax base is not narrow, but punctured – tax system protects the rich and mighty, tax revenue of billions was forgone through SROs, as admitted by the Chairman FBR.

If Pakistan has 10 million individuals having taxable income of Rs 1.5 million (a very conservative estimate), total income tax collection from them should have been Rs 3750 billion. If we add income tax collected from corporate bodies, other non-individual taxpayers and individuals having taxable income up to Rs 1,000,000, the gross figure would be nearly Rs 5000 billion. FBR collected only Rs 716 billion as income tax in fiscal year 2011-12 – it shows a whopping gap of Rs 4,984 billion in income tax alone.

FBR has been apologetic, specifically before the IMF and the World Bank, that total income taxpayers in Pakistan is less than 1.5 million in a population of 180 million. This is a blatant lie. The truth is that since July 1, 1992 all commercial electricity consumers (including about 5 million retail outlets in urban areas) are paying income tax whether their income is chargeable to tax or not. In 2007, this tax was converted into minimum tax, except for companies and from 2008 with the threshold of Rs 20,000. Any business outlet receiving electricity bill of exceeding Rs 20,000 is to pay 10% as advance income tax. The total number of commercial and industrial electricity consumers in Pakistan is more than 20 million. It means that during the tax year 2011, the total number of persons who paid income tax under section 235 of the Income Tax Ordinance, 2001 was not less than 20 million. The FBR in its Year Book 2010- 2011 admitted that tax collection from telephone/mobile and electricity users during the financial year 2010-11 was Rs 27.56 billion and Rs 14.31 billion respectively. It is worthwhile to mention that total number of mobile and land-line telephone users, subjected to withholding tax, in this period was in excess of 40 million and yet FBR says that our tax base is narrow! In fact, FBR is hiding its own failure of not taxing the rich to whom concessions and exemptions worth billions of rupees were granted through innumerable SROs.

The poor people of this country are accused of not paying income tax; whereas the reality is that even a small shopkeeper in a village (whose annual total income is much below the minimum taxable limit of Rs 400,000) is paying minimum income tax of Rs 960 per annum. On the contrary, the absentee landlord of his village, who is earning millions by leasing his fruit orchards, is paying negligible amount, if at all, as agricultural income tax. This shows the real dilemma faced by Pakistan – the poor widow pays 10% income tax on meagre bank profit but rich property owner enjoys concessional rate of tax on enormous rental income.

Out of total population of Pakistan, according to Economic Survey of Pakistan 2011-12, 45% are below the age of 15 years (they are not income earners, hence cannot be taxpayers). The total labour force stands at 57.2 million, out of which 40 million is rural labour force. Reading all these facts together, the income tax paying population of Pakistan having taxable income during the tax year 2011 could not have been more than 25 million, yet over 40 million paid income tax as mobile users alone. Thus entire taxable population and even those who having below taxable incomes are already paying income tax at source, yet the FBR is engaged in a vicious propaganda that people of Pakistan are not paying income tax and that our tax base is narrow! Can FBR’s Chief divulge to people how much tax was paid by the richest 1% of Pakistanis during the last 10 years? They accumulated colossal assets without paying due taxes.

FBR has failed to allot NTNs to all those who paid income tax under section 148,149,150,151,152,153, 153A, 154,155,156, 156A, 156B, 231A, 231AA, 231B, 233, 233A, 233AA, 234, 234A, 235, 236, 236A, 236B and 236C of the Income Tax Ordinance, 2001. Can FBR explain what prevented it to issue notices to the rich and mighty having taxable income to file tax returns under section 116 and/or tax statements under section 115(4) of the Income Tax Ordinance, 2001? Had the FBR done so by using data of banks, PTCL, WAPDA, DHAs, telecommunication companies, provincial excise departments – just to mention a few – we would have over 20 million income tax filers. It is high time that FBR should put its own house in order, enforce tax laws and stop extending unprecedented exemptions and concessions to the rich and mighty segments of society. If Chairman is really sincere in his endeavours to increase tax-to-GDP ratio and number of return filers, he must take stringent action against the richest 0.2 million about whom he promised before the Senate Standing Committee on Finance that proposed amnesty schemes would not be extended. What has he done about them so far is not visible at all?

(The writers, tax lawyers and authors of many books, are members of Adjunct Faculty of Lahore University of Management Sciences)

Huzaima Bukahri and Dr. Ikramul Haq, "Punctured tax base," Business recorder. 2013-02-22.
Keywords: Economic system , Economic policy , Tax policy , Income Tax , GDP growth , Taxpayers , Taxation , Taxes , Pakistan , FBR