Huzaima Bukhari and Dr Ikramul Haq

An unusual decline in revenue collection and a steep rise in current expenditures caused a deterioration in all major fiscal indicators during FY19. The overall budget deficit during the year stood at a historic high of 8.9 percent of GDP, which was also in excess of the 4.9 percent target set in the Budget 2018-19. Meanwhile, the primary and revenue balances worsened substantially, highlighting growing debt stress for the government and a shrinking space for the needed development expenditures—State Bank of Pakistan, Annual Report 2018-19—The State of Pakistan’s Economy

In ‘Flawed tax reforms agenda’, Business Recorder, 15 & 21 November, 2019, it was mentioned that Federal Board of Revenue (FBR), under the leadership of Syed Muhammad Shabbar Zaidi, a renowned chartered accountant and tax expert, failed to publish its annual year book for fiscal year (FY) 2018-19 even after a lapse of many months. It is now uploaded—online version is available on the website of FBR. It needs to be highlighted that Shabbar Zaidi has only served for less than two months during the last fiscal year 2018-19—he took charge on May 10, 2019 in pursuance of a notification issued on May 9, 2019, appointing him Chairman FBR for two years on honorary/pro-bono basis. His performance for the full year will be reflected in Year Book 2019-20 when published after close of the current fiscal year.

The target assigned to FBR for FY 2018-19 was Rs. 4435 billion, which was revised downwards twice [first to Rs. 4398 billion and then to Rs. 4150 billion]. According to FBR Year Book 2018-19 , FBR collected Rs. 3828.5 billion which was “0.4% lesser than the collection of previous fiscal year”. This has pushed the fiscal deficit to all time record of over Rs. 2.5 trillion for fiscal year 2018-19. It has nothing to do with the policies of the Government of Pakistan Tehreek-i-Insaf (PTI)—in fact baggage was passed on to them by the so-called economic wizards of Pakistan Muslim League (Nawaz) who ruled Pakistan from 2013-2018. They have many self-acclaimed experts, most notable, Muhammad Ishaq Dar (now a fugitive) and Ahsan Iqbal, claiming to make Pakistan Asian Tiger by 2020 and to become 10th largest economy through Vision 2025!!

In our article (Flawed tax reforms agenda) we observed as under:

FBR closed fiscal year 2018-19 under renowned tax expert, Syed Muhammad Shabbar Zaidi, and it is hoped that for the first time correct disclosure of collection figures will be provided to the nation after deducting the actual amount of refunds payable—withheld for years merely to show ‘extraordinary performance’ (sic) by stalwarts of FBR. Not only is true disclosure essential but all due refunds should be paid with compensation without any further delay. Stringent action should also be taken against those who criminally avoided giving appeal effects in favour of taxpayers, blatantly violating order of the higher courts and Tax Tribunals.

It is strange that FBR in its annual year books does not give total number of income tax filers and total number of registered sales tax persons on the closing date of every financial year for which it highlights its performance. For the sake of transparency, they must give on website historic and current up-to-date data of return filers and sales tax registered persons as early as possible. Hopefully, Shabbar Zaidi will take a serious note!

In the light of above note, for the first time, FBR disclosed details of income tax returns filed historically as under:

The trend for filing of income tax returns has not been satisfactory in Pakistan. Keeping in view very low compliance, FBR had initiated a Broadening of Tax Base (BTB) drive a few years ago, which has not started paying dividends in the shape of growth in the number of filers. The income tax returns which were just 1.5 million in TY 2016 have crossed the two million mark first time in the history of FBR. During TY 2017, the number of income tax filers reached 1.9 million and in TY 2018 2.2 million. During TY 2018, the number of return filers increased by 17.1% or 316,526 in absolute terms. This performance in terms of number of returns is satisfactory but payment with returns has a meager growth of 3.0%, which is the matter of concern. The desk audit of filed returns can be helpful in increasing the amount paid with returns.

An analysis of FBR Year Book 2018-19 reveals the following:

* “The target for FY 2019-20 i.e. Rs 5,503 billion requiring around 43% growth, is highly challenging, which would be possible only through extraordinary concerted efforts by the senior FBR management and field formations”.

* FBR has collected Rs. 3,828.5 billion during FY 2018-19 against Rs. 3,843.8 billion during FY 2017-18, indicating a negative growth of 0.4%. The revised revenue target of Rs. 4,150 billion was achieved to the extent of 92.3%. The direct taxes, sales tax, FED and customs missed their respective targets by 12.9%, 2.1%, 10.5% and 6.7%, respectively.

* During FY 2018-19, FBR has missed the target by around Rs. 321.5 billion mainly for the following major reasons:

* Petroleum (-) Rs 96 billion

* Telecom—Suspension of withholding tax by Honorable Supreme Court (-) Rs 55 billion

* Reduced Government Spending (-) Rs 80 billion

* Import compression (withholding at import stage) (-) Rs 16 billion

* Reduced rates on salary income announced in the Budget 2018-19 (-) Rs 50 billion

* Reduction in Customs Duty (-) Rs 50 billion

* As per the collection FY 2018-19, sales tax is the top revenue generator with 38.1% share followed by direct taxes with 37.8%, customs 17.9% and FED 6.2%. During FY 2018-19 the share of customs duty and FED has increased, whereas the share of direct taxes and sales tax has decreased slightly.

* The overall growth in collection remained dismal during FY 2018-19. The overall collection ended at (-) 0.4%, which is Rs 15.3 billion lesser than the collection of FY 2017-18.

* During FY 2018-19 refunds of around Rs 121.6 billion were paid, as compared to around Rs 154.7 billion in FY 2017-18. The refund amount paid during FY 2018-19 is 33.1 billion less as compared to previous fiscal year (PFY).

* Direct taxes have contributed 37.8% to the total tax collected during FY 2018-19. Net collection stood at around Rs 1,445.4 billion reflecting a growth of (-) 5.9 % over the PFY collection of Rs 1,536.6 billion. An amount of Rs 83.9 billion has been paid back as refund to the claimants in FY 2018-19 as against Rs 69.5 billion during FY 2017-18. Collection of income tax comprises withholding taxes (WHT), Advance Tax/Payments with Returns and collection on demand (COD). Collection from arrear demand and current demand has been Rs 18.7 billion and Rs 84.2 billion, respectively, during FY 2018-19. Collection from current demand showed a negative growth of (-) 1.1%.

* Advance Tax/Payments with Returns under the head income tax: Rs 384 billion was collected during FY 2018-19 as compared to Rs 374 billion in the FY 2017-18. Major component of this mode of payment is Advance Tax where a sum of Rs 344.2 billion stood collected as against Rs 335.8 billion in FY 2017-18 registering a growth of 2.5%. The second component is payment with returns, where a sum of Rs 39.3 billion has been collected during FY 2018-19 against Rs 38.1 billion in FY 2017-18 registering a growth of 3.0%.

* WHT contributes a major chunk, i.e., 67% of the total collection of income tax. The WHT collection during FY 2018-19 has been Rs 960.7 billion against Rs 1,047 billion indicating a negative growth of 8.2%. The nine major components of withholding taxes that contributed around 80% to the total WHT collection are: contracts (Rs 235.4 billion), imports (Rs 221.8 billion), salary (Rs 76.4 billion), telephone (Rs 17.1 billion), dividends (Rs 57.0 billion), bank interest (Rs 58.1 billion), cash withdrawal (Rs 32.0 billion), electricity (Rs 35.5 billion) and exports (Rs 34.4 billion). As far as growth is concerned, collection from bank interest grew by around 27%, exports (22%), electricity bills (5%), imports (1%) while rest of the items recorded a negative growth in collection. The highest contributor in withholding taxes is contracts with 24.5% share, followed by imports (23.1%) and salary (8%). Further break-up reveals that the share of only two heads of WHT – contract and imports – is around 48% and further addition of withholding tax on salary raises the share of these three items to more than 55% of the total withholding taxes, showing high reliance on fewer heads.

* Higher reliance on withholding taxes and within withholding taxes a high concentration on a few items makes the income tax revenues vulnerable. Moreover, taxing the already taxed, is a regressive approach which creates burden on the compliant taxpayers hence, FBR is focusing on working out a plan to diversify the base of income tax in the country.

* Direct taxes are collected from manufacturing, services, construction, whole sale and retail trade, transport and mining and quarrying. Major contributor is manufacturing sector with around 34.5% share in direct tax collection. Second major contributor is the services sector with around 24.2% share in collection. The share of wholesale & retail trade and transport sector is 2.9% and 2.3%, which is in fact very low as against the existing potential in the country.

(To be continued)

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