Huzaima Bukhari and Dr Ikramul Haq
Wholesale and retail trade sectors together paid Rs 48.2 billion: Large retail trade (Rs 7.9 billion), small retail trade (Rs 9.7 billion) and wholesale trade (Rs 25.1 billion).
* During FY 2018-19, sales tax remained top revenue generating source of federal tax receipts after direct taxes. It constitutes around 38.1% of the total net revenue collection. Collection during FY 2018-19 has been around Rs 1,459.2 billion against around Rs 1,485.3 billion in the PFY. Overall sales tax collection registered negative growth of -1.8% and around Rs 26.1 billion of lesser amount has been collected during FY 2018-19 as compared to the collection of previous year. The downward revised target of sales tax has been met to the extent of around 97.9%. Major reasons of shortfall in the collection of sales tax domestic and imports during FY 2018-19 are following:
o A sharp reduction in the GST rate on petroleum products at both import and domestic stages
o Reduced GST on natural gas
o Import compression
* Domestic sales tax collection recorded a negative growth of 1.9%, whereas collection of sales tax on imports recorded a negative growth of 1.7%. The overall net collection of Sales Tax Domestic (STD) was Rs 648.9 billion against Rs 661.1 billion in the PFY and the net collection grew by (-) 1.9%. In absolute terms, Rs 12.2 billion less amount of revenue has been collected in FY 2018-19 as compared to PFY. The POL products, the top revenue generating source, with 38.3% share, its collection grew by 4.9% during FY 2018-19. The collection from sugar, cigarettes, withholding agents, food products and electrical energy recorded a growth of 31.8%, 12.6%, 9.9%, 9.6% and 7.5%, respectively, during the period under review. On the other hand, negative growth was recorded in cement, aerated waters, iron & steel and motor cars.
* Sales tax on imports (STM) is a significant component of federal tax receipts. The share of STM in total sales tax net collection has reached around 55.5%. The net collection of STM during FY 2018-19 stood at Rs 810.4 billion against Rs 824.2 billion in FY 2017-18, registering a negative growth of 1.7%.
* Top 10 commodities of sales tax import have contributed a major chunk, i.e., 76.5% in STM collection. The detailed data indicates that more than 59.6% of STM is contributed by POL products (Ch: 27), machinery (Ch: 84 & 85), iron & steel (Ch: 72) and vehicles (Ch: 87).
* Like sales tax (domestic), petroleum is the leading source of sales tax collection at import stage as well. Its share in sales tax imports is around 27.3%. During FY 2018-19, collection from POL products was Rs 221 billion against Rs 264 billion during FY 2018-19 reflecting a growth of (-) 16.2%.
* Customs duty constitutes around 28.7% and 17.9% of the indirect taxes and federal taxes, respectively. The share of customs duties in FBR collection is gradually increasing. The net collection from customs duty during FY 2018-19 has been around Rs 685.6 billion indicating a growth of 12.7%. The healthy growth in customs collection has impacted the overall FBR revenues positively. Out of total net collection under the head Customs of Rs 685.575 billion, the share of vehicle (non-railways) is Rs 81.459 billion. POL products are the second major contributor of customs duty (Rs 79.3 billion), machinery & mechanical appliances (Rs 42.5 billion) and electric machinery (Rs 42.4 billion).
* Collection from Federal Excise Duty (FED) was Rs 238.2 billion. FED constitutes 10.0% of indirect taxes and 6.2% of total federal taxes. The major sectors which contribute in FED revenues are tobacco (Rs 91 billion), cement (Rs 56 billion), beverages (Rs 23 billion), natural gas (Rs 10 billion) and edible oil (Rs 6 billion) and some of the services. The tobacco (cigarette) is the top source of FED collection with around 38% share in FED revenue. The collection from cigarettes grew by around 36% during FY 2018-19. The second major sector is the cement which contributes about 24% in FED revenue. Nearly 94.6% of FED collection is realised from five items.
Once again, the FBR in its Year Book 2018-19 has not disclosed total number of registered sales tax persons and how many are actually paying tax despite others and ours asking repeatedly. It should be done on the closing date of every financial year. For the sake of transparency, FBR must provide on website historic and current up-to-date data of return filers and sales tax registered persons — hopefully Syed Shabbar Zaidi will take a serious note of it! FBR Year Book 2018-19 exposes the tall claims of the apex revenue authority of expanding tax base, extraordinary growth in collection and improving tax-to-GDP ratio to a satisfactory level (9% in FY 2013-14 to 11.2% in FY 2017-18 to only 12.6% in 2018-19). The reality is quite evident to all—higher (sic) collection has been due to exorbitant sales tax on POL products, due to over 70 withholding income tax provisions and enhancement of their rates, blocked refunds of billons and by taking advances from taxpayers.
It is clear by now that the sordid story of collection through withholdings and advances continues even under the government of PTI as it took no corrective measures after coming into power. The main reliance of FBR since 1991 has been on indirect taxes, even under the Income Tax Ordinance, 2001 that after Finance Act, 2019 contains over 75 withholding tax provisions, many of which constitute minimum tax liability. Out of total collection under withholding provisions of Rs 1,047 billion in FY 2017-18, the element of full and final taxation (indirect tax in substance) was 64 percent! In FY 2018-19, the same situation remains unchanged.
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 (WHT). FBR Year Book 2018-19 concedes that “WHT contributes a major chunk, i.e., 67% to the total collection of income tax”. Out of total collection of Rs 1,445.5 billion (it was Rs 1,536.6 billion in 2017-18), with returns came Rs 39.2 billion (2.7%) and advance tax of Rs 344.2 billion (23.8%). FBR’s own efforts (collection of demand created) yielded only Rs 84 billion (5.8%, it was 7% last year) and from arrears Rs 18.6 billion (1.3%, it was 1.2% last year). It confirms negligible share (7.3%) on the part of FBR. It has failed to tap the actual tax potential as it would have hurt the rich, majority, despite having substantial undeclared, untaxed wealth and the audacity of ruling this country as a matter of right and adding insult to injury got enormous benefit through two assets whitening schemes of 2018 and 2019. As many as 135 persons, named in the OECD database, availed the 2018 tax amnesty scheme of PML-N and declared Rs 62.4 billion in assets. They paid only Rs 2.9 billion whereas, their actual liabilities without the tax amnesty could have been Rs 43.7 billion, getting a relief of Rs 40.8 billion from the last government. About 56 people, whose data was shared by the OECD, availed PTI’s tax amnesty scheme and declared Rs 31.8 billion worth of assets. They paid only Rs 1.7 billion and got a relief of Rs 20.6 billion.
Perpetual failure of FBR to meet assigned targets is not something new. A large part of the blame goes to political masters who keep on giving amnesties, waivers and immunities. During the last fiscal year, negative growth was the result of policies of appeasement on the part of PML-N and then PTI. Every year, FBR fails to collect downward revised target what to speak of originally assigned one in the budget estimates. This widens fiscal deficit, resulting in more borrowing and taking away a large part of the budget for debt servicing/payment of principal amount. Fiscal consolidation is one of the daunting challenges faced by Pakistan. Successive governments have failed to end harmful tax policies and reduce wasteful expenses. No serious effort has been made by any government to broaden the tax base through lowering of rates and effective enforcement.
It is an undisputed fact that FBR has not only miserably failed to tap the real tax potential despite imposing all kinds of oppressive taxes, it has been single handedly destroying Pakistan’s growth by anti-business actions especially during 2013-18. The then finance minister Ishaq Dar gave free hand to tax officials to block bona fide refunds, take undue advances from large business houses, use negative tactics like raising unjust demands and freezing bank accounts for recovery. Exporters and other taxpayers, still waiting for refunds, have been denied their lawful right of payments/compensation within stipulated time. Had Ishaq Dar concentrated on growth above 6%, as done by China, India and even Bangladesh in the region, we could have avoided the present fiscal and economic mess. Tax is a byproduct of growth and harsh taxation only hampers expansion and prevents investment in existing and new businesses. Will Dr Abdul Hafeez Sheikh and Syed Shabbar Zaidi care to take corrective measures and reverse this trend?
The target of Rs 5.5 trillion is still achievable provided collection is fully automated, tax machinery is overhauled, leakages are plugged and all exemptions/concessions to the privileged classes are withdrawn. Banks, Wapda, PTCL and mobile companies that collect advance taxes on behalf of FBR are fully computerised. By using their database, FBR can easily determine fair tax base. Provisional assessments can be made in respect of persons who are not filing tax returns and recoveries can be made in the remaining months of the current fiscal year.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)