Huzaima Bukhari and Dr Ikramul Haq

“Pakistan’s tax revenue remains very low relative to comparator developing countries and the tax effort expected for the country’s level of development. This reflects narrow tax bases, overgenerous tax concessions and exemptions, weak and fragmented revenue administrations………” — Unlocking Pakistan’s revenue potential by Ms. Serhan Cevik, Country Report 16/2 (January 2016), IMF.

At present, Pakistan’s public debt is almost 600 percent of tax revenues and development spending is significantly less than interest payments”— Unlocking Pakistan’s revenue potential by Serhan Cevik, Country Report 16/2 (January 2016), IMF.

In fiscal year 2015-16, Federal Board of Revenue (FBR) claimed to have surpassed the target of Rs 3104 billion. As per details released by FBR on its website, it made “a net collection of more than Rs 3130 billion for the year ending June 30, 2016 as against Rs 2589 billion collected in the year ending June 30, 2015 thereby registering a 21% increase over the last year”. On August 23, 2016, Prime Minister personally handed over refunds cheques of Rs. 21.44 billion to exporters. The Ministry of Finance asked the Auditor General to debit this amount from collection of 2015-16. It is not notified by FBR to public till today that actual collection was not Rs. 3130 billion as claimed!!

Many quarters, including the Senate’s Committee on Revenue & Finance, expressed serious reservations regarding authenticity of figures showed by FBR and methodology used to show what they allege “ fake and inflated collection”. English daily Pakistan Today, in a report, ‘At long last FBR achieves the revenue targets, July 1, 2016, claimed that “after withholding all the tax refunds during the last fiscal year and forcing companies to pay advance income tax, the Federal Board of Revenue (FBR) announced on Friday that it had achieved the tax revenue collection target of Rs 3.1 trillion set for Fiscal Year 2015-16.” The report further claimed: “FBR was holding more than Rs 250 billion in tax refunds during the last fiscal year. The tax refunds were kept to maintain the tax revenue target agreed with the IMF.”

Although the government has been taking credit of “extraordinary” performance, the fact remains that 92% of total collection in 2015-16 came through indirect taxes, withholding of taxes, advances made under section 147 of the Income Tax Ordinance, 2001 and voluntary tax paid with returns. Over 22,000 personnel of Inland Revenue collected just 8% tax through their own efforts by way of audit of declarations or by bringing new taxpayers in the net or unearthing underreporting or non-reporting using data and employing modern information technology tools. The figures confirm that FBR did not bother to bridge tax gap as pointed out by the IMF in its report, [Unlocking Pakistan’s revenue potential, Ms. Serhan Cevik, Country Report 16/2, January 2016]. Tax gap of a country is measured by the amount of tax that remains uncollected due to non-compliance with tax laws. In Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology, a joint study of FBR, Andrew Young School of Policy Studies at Georgia State University and World Bank, provides in detail tax gaps by type of tax and describes the methodologies and data used for such estimates. The report prepared in December 2008 by Rubina Ather Ahmad (FBR) and Mark Rider (Andrew School) says that views expressed “are of the authors and not of the Government of Pakistan”.

Tax collection figures for fiscal years 2014-15 & 2015-16

Income tax collection in fiscal year 2014-15 was Rs 1033.7 billion and projection for 2015-16 was Rs 1307 billion. The actual collection, reported by FBR, is Rs 1220 billion—showing shortfall of Rs 87 billion. Collection of sales tax in 2014-15 was Rs 1088 billion and projection for 2015-16 was Rs 1230.3 billion. By raising sales tax on POL products from 17% to 30-50%, the government managed to collect Rs 1329 billion in 2015-16. Customs collection in 2014-15 was Rs 306 billion and projection for 2015-16 was Rs 348.5 billion. After levying regulatory duty on over 300 items, it was increased to Rs 404 billion in 2015-16. Federal Excise collection in 2014-15 was Rs. 162 billion. Against projection of Rs. 200.9 billion, actual collection for 2015-16 was Rs 177 billion.

For fiscal year 2004-2005, according to this report, Pakistan’s federal tax gap was Rs 409.5 billion or approximately 69% of actual tax receipts of Rs 590.4 billion. Terming this as “conservative estimate”, the report claims direct tax gap at Rs 262.8 billion (around 143% of actual collection of Rs 183.1 billion) and indirect tax gap at 146.7 billion (36% of actual tax collection of Rs 407 billion). In 2008, the data selected was for fiscal year 2004-2005 and tax gap was estimated at 45%. Since then tax gap has increased and according to FBR’s own admission it is not less than 70% of actual tax potential. Pakistan faces significant challenges in realizing its tax revenue potential and thereby providing the much-desired fiscal space for growth-enhancing priority spending on infrastructure, education, healthcare, and targeted social assistance. As per ‘Unlocking Pakistan’s revenue potential’: “While the tax revenue-to-GDP ratio has increased by 1.5 percent over the past three years to 11 percent in 2015, it remains significantly below comparator emerging market economies and the tax effort expected for the country’s level of development. The historical development of tax ratios confirms underperformance in revenue mobilization, with the tax-to-GDP ratio currently 1.4 percentage points below its peak of 12.4 percent of GDP in 1996. Pakistan has the potential to mobilize additional tax revenues by an amount as much as, if not more than, it currently collects: its tax capacity is estimated to be 22.3 percent of GDP, which implies a tax revenue gap of more than 11 percent of GDP. Although its estimated tax effort—the ratio between actual revenue and tax capacity—improved from 0.43 in 2011 to 0.49 in 2015, Pakistan is still significantly below the average of comparator developing countries (0.64) and high-income countries (0.76)”.

Millions of Pakistanis by virtue of nearly 70 types of withholding taxes, both adjustable and non-adjustable, imposed under the Income Tax Ordinance, 2001, are paying advance income tax. These income taxpayers include not only persons liable to tax, but millions having either no income (e.g., students, wageworkers, unemployed, etc) or having incomes below taxable limit.

There are 90 million unique mobile users in Pakistan that pay 14% adjustable income-tax [only 1.5% out of them file returns]. According to FBR’s own admission, it received 1,039,291 returns till March 9, 2017. An earlier disclosure by FBR confirms that return filers in 2016 were 1.1 million. It is pertinent to mention that in 2011 this number was 1,443,414. Jorge Martinez-Vazquez and Musharraf Rasool Cyan in their book, ‘The Role of Taxation in Pakistan’s Revival’, mentioned at page 676 [Figure 36] that 2.1 million Pakistanis (individuals) filed income tax returns in 2006-07. This shows that FBR has lost one million return-filers since 2006-07. FBR needs to conduct a study to find out what has gone wrong. Where have one million return filers vanished?

According to Pakistan Telecommunication Authority (PTA), in December 2016, total mobile users in Pakistan were 136,489,014 (prior to biometric verification, there were 140,022,516 mobile users which number fell to 114,658,434 in 2014-15). During the financial year 2015-16, this number went up to 133,241,465. According to latest report of GSMA, there are 90 million unique mobile users (47% of the country’s population), that paid both 14% income tax and 19.5% sales tax during fiscal year 2015-16, but about 1.5% of mobile users filed income tax returns.

Pakistan’s real dilemma is that the rich and mighty are not paying taxes according to their ability. In 2014, 2015 and 2016, less than 4000 persons paid tax between Rs 1,000,000 and Rs. 10 million. In 2014 just 3,663 declared tax of over Rs 10 million and this position worsened in 2015 as per Tax Directory 2015, recently released by FBR. In Pakistan, the ultra-rich are avoiding tax obligations but millions having no income or incomes below taxable limit are being forced to pay advance income tax in gross violation of Article 4(c) of the Constitution assuring that the State cannot force a person to do what the law does not require him to do.

By the end of 2015, our population, according to Economic Survey of Pakistan 2015-16, was 195.4 million, out of which 77.93 million constitutes urbanites while 117.48 million live in rural areas. The dependent population of children under the age of 15 years was 35.4 percent whereas 4.2 percent people were above 65 years. Out of total population, 30 million were below poverty line earning less than two dollars a day. Our labour force, among the tenth largest in the world, was around 61 million, out of which 57.42 million were employed. Rural labour force of 42.3 percent was earning below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance, 2001. Reading all these figures together, the total persons liable to income tax could not be more than 10 million whereas the government is extorting income tax in the form of withholding tax from over 90 million mobile users alone!

All traders pay advance income tax with electricity bills under section 235 of the Income Tax Ordinance, 2001, and if monthly bill is up to Rs 30,000, tax paid is treated as minimum tax with no claim to a refund! In the presence of this section, read with section 181AA, was there any need to impose tax on banking transactions by non-filers? Even the affluent domestic electricity users are subjected to withholding tax if bill amount is Rs. 75,000 or above [the limit was Rs 100,000 prior to July 1, 2015]. It is an undeniable fact that FBR has failed to get due tax from the rich and mighty and thus its main emphasis is on withholding taxes. FBR Year Book 2014-15 concedes that in fiscal year 2014-15 withholding taxes constituted 63.2% of total income tax collection of Rs 1094.284 billion. 26.3% came from voluntary payments, advance tax and tax with returns. FBR’s own efforts (collection on demand) yielded only 10.6%. It confirms negligible efforts on the part of FBR to tap the actual tax potential as it would be hurtful to the rich, majority of which are non-filers, despite having undeclared, untaxed wealth and the audacity of ruling this country as a matter of right.

Pakistan’s tax potential at federal level alone is Rs 8 trillion. According to Household Integrated Economic Survey (HIES) 2011-12 conducted by Pakistan Bureau of Statistics, 5 million individuals have annual taxable income of Rs 1.5 million. If all of them file tax returns, income tax collection from them at the prevalent tax rates would be Rs 1650 billion. If income tax collected from corporate bodies, other than non-individual taxpayers and individuals having income between Rs 400,000 to Rs 1,000,000 is added, the gross figure would not be less than Rs 4500 billion—FBR in 2015-16 collected only Rs 1216.9 billion as direct taxes (which includes almost 40% of indirect taxes in the garb of income taxation). 

* “The number of companies and Association of Persons (AoPs) filing annual income tax returns has declined in the tax year 2015.

* The number of income tax return filers increased by just 10,745 in tax year 2015. FBR was supposed to bring in 300,000 additional people in the tax net by serving them tax notices.

* The number of income tax filers stood at 1.064 million in tax year 2015 as against 1.053 million of the previous year. In a population of about 200 million, only 3.7 million are registered taxpayers in the country. Out of these, only 1.064 million filed their returns during the tax year 2015.

* The FBR registered 135,139 more people in 2015 but only 10,745 or 8% of them filed their tax returns, highlighting weak enforcement.

* Out of total 3.5 million registered individuals as of June 2015, only 991,538 filed their tax returns—up by 12,686. A major reason behind increase in number of individuals filing their returns was the government’s decision to give tax amnesty scheme to traders. As a result of this scheme, 9,090 traders came into the tax net, against the official aim to bring one million.

* As against 157,268 registered AOPs, as many as 44,539 AOPs filed their returns—1,704 less than even in 2014. Similarly, against registered 57,186 companies only 28,031 filed their returns. As many as 237 companies that were filing their returns earlier became non-compliant in tax year 2015.

After coming into power, the present government introduced a policy of two separate tax rates for filers and non-filers of income tax returns. It set significantly higher income tax rates on dividend income, interest income, cash withdrawals, and all kinds of banking transactions and withholding taxes on almost every kind of transaction. These measures, it was estimated, would generate extra Rs 54.5 billion in fiscal year 2015-16. The total collection from them in fact exceeded Rs 85 billion, suggesting that non-filers were ready to bear the extra cost (in most of the cases passed on to their customers/clients) but not willing to expose themselves to the tax authorities.

(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)