The Anatomy of FBR’s Collections

Dr. Ikramul Haq

?For two countries with almost the same cost of living, income tax on salaried employees in Pakistan is up to 3 times that in India - see attached. Taxed employees in Pakistan certainly do not get better value for their contribution. Our tax system is far from equitable—Pakistan Business Council in a social media post of July 25, 2024

In line with the IMF agreement, the Federal Board of Revenue (FBR) has revised its annual tax collection target downward from Rs12,970 billion to Rs12,913 billion for the current fiscal year 2024-25—FBR revises down collection target to Rs.12,913tr after IMF nod , The News, July 28, 2024

Pakistan has one of the world’s lowest tax ratios, stemming from five main weaknesses: complexity, a narrow tax base, low compliance, inefficient tax administration, and low and declining provincial tax revenues. Complexity provides scope for discretion and corruption. A narrow tax base and low compliance are the outcomes of inequitable exemptions and preferential treatments, low tax registration or filing, and massive tax evasion by potential taxpayers that prefer to stay informal. Provincial taxation is low and declining. For its part, nontax revenue is also declining—Pakistan Policy Note 16: Mobilizing Revenue , Jose R. Lopez-Calix and Irum Touqeer, The World Bank

The Federal Board of Revenue (FBR ) has surpassed the revised target of Rs. 9252 billion for fiscal year (FY) 2023-24 and for the first time crossed the mark of Rs. 9 trillion by collecting Rs. 9311 billion (still provisional subject to final reconciliation with Auditor General of Pakistan). It is commendable but well short of the original target of Rs. 9415 billion set at the time of budget. It is not something new—except for the FY 2021-22 when FBR achieved a rare feat by meeting the originally-assigned targets. It is an undeniable fact that FBR has a unique record of even missing many times revised targets in many years resulting in more than anticipated fiscal gap by the budget makers.

It is worthwhile to mention that FBR never reveals accumulative figure of determined refunds not issued (deliberately blocked is better connotation) during a fiscal year. In other words, to that extent, collection is overstated —this aspect is highlighted repeatedly in these columns but till date no independent audit is conducted to this effect by the Auditor General of Pakistan, even though it is a constitutional responsibility that was reminded to him in the column published on July 6, 2024. ?????????

There exists a national consensus about huge tax gap in Pakistan partly because of weaknesses in enforcement and partly due to bad tax policy. On July 22, 2023, FBR’s website showed a total of 5,056,639 persons on Active Taxpayers List (ATL )—updated every Monday. It may be noted that December 31, 2023 was the last date for filing returns for all categories of taxpayers in Pakistan. The data available on ATL show individuals return filers at 3,392,309 and 1,664,330 returns filed by companies, firms and association of persons (AOPs) combined.

Unfortunately, till the time of writing these lines, FBR did not convey (though requested), the total returns filed for tax year 2023, tax paid with returns and refund claimed. Hopefully, these statistics will be made public by FBR soon—to acquire such information is the fundamental right of every citizen under Article 19A of the Constitution .?

The real performance of FBR in direct taxes should be judged on the basis of new taxpayers added and recovery out of current and arrear demands. It appears from figures quoted before the National Assembly’s Standing Committee on Finance & Revenue on July 12, 2024 for the FY 2023-24 that overwhelming portion of income tax collection (Rs. 4.5 trillion) is still coming through withholding provisions and advance tax [Rs. 3.8 trillion] plus admitted liability paid with return voluntarily. The collection with own efforts by FBR field formations out of current and arrears remain much below the mark of even 10 percent of total income tax collection. ?The figures related to income tax collection in the following Table testifies to this fact.

?No doubt that the FBR collects bulk of income tax through pass on withholding taxes, which in essence is indirect taxation or taxes at the time of clearing of goods and advance tax pertaining to the next fiscal year. The disproportional and cruel taxation of salaried persons in formal sector is the worst legacy of the apex revenue authority as highlighted by this scribe in a recent article .

This important institution suffers from multiple shortcomings, like basic logistics, lack of modern tools, no centre of excellence for fiscal research and administration, trained staff to enforce the various anti-avoidance provisions in all the tax laws it administers—Income Tax Ordinance, 2001, Sales Tax Act, 1990, Customs Act, 1969 and Federal Excise Act, 2015.

According to a news report : “Tax collection from contractors and service providers jumped by 27% to Rs498 billion in the last fiscal year–the highest contribution to withholding taxes. This also includes contributions by salaried individuals who provide services under certain contracts”. The report further revealed that “collection on profit on debt jumped 52% to Rs488 billion”, a direct impact of higher interest rates. “Importers paid Rs381 billion in income tax on various types of imports – the third-largest contributor to withholding taxes”, it added.

The real potential of taxable income tax payers and sales tax was highlighted in Budget 2024-25: Government Intent On Squeezing The Salaried Class , Friday Times, June 8, 2024, Fixing The Punctured Tax System , Friday Times, June 1, 2024, Making Sense Of The tax-To-GDP Ratio Debate , Friday Times, March 2, 2024. At present, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable income tax at source as mobile users, yet FBR, lender/donors/media call the people of Pakistan tax cheats . This is highly lamentable. Had this been the case, how did FBR collect so much tax at source (58% of total income tax collection in FY 2023-24)!

The State must collect taxes where due and not in advance or from those not chargeable to tax. Provision like section 236 and many others providing withholding of taxes on transactions rather than real incomes reflect a bad tax policy—anti-poor and contradictory to FBR’s claim of increasing direct taxes by diligently taxing the rich and the mighty.

The coalition government of Pakistan Tehreek-i-Insaf (PTI) resorted to oppressive taxation during its rule [August 2018 to April 2022] and its successors, alliance government of Pakistan Democratic Movement (PDM) and presently its version 02, are doing the worse. It is high time that the state stop taxing the less-privileged and downtrodden. Why are the poor still subjected to oppressive taxes like 15% advance income on mobile and/or internet use from July 1, 2022? The rich and mighty are yet enjoying tax-free perquisites and benefits of billions of rupees.

Heavy taxation on electricity bills and a number of food items and those of daily use by the citizens is completely unjustified when tax expenditure remains as high as four trillion in FY 2023-24 if calculated by including hidden tax benefits to militro-judicial-civil complex .

Tax credits for senior citizens and special people that were available before the enhancement of tax rates by Finance Act, 2019 should have been restored by the incumbent government in 2024 budget, but it had failed to do so.

The fixed and turnover on traders are ill-advised. Many years back, on query about such unfair taxation, Dr. Ehtisham Ahmad , renowned economist and having rich experience of restructuring tax systems of various countries commented: ?“It may also create incentives for larger firms to masquerade as SMEs, or hide value chains by transacting with untraceable SMEs. Much depends on how the GST/VAT is applied. The Mexicans solved the problem by effectively dropping the VAT registration threshold to zero, bringing in complete value chains without the possibility of manipulation by the SMEs or the larger firms using the SMEs (important in textiles for example).” ?

On proposal of harmonized sales tax on goods and services, single national tax agency and National Tax Court, Dr. Ehtisham Ahmad responded: “I strongly support the three issues mentioned, but would add that it is useful to consider a different administration model to that recommended by the IMF which focuses on primarily on large taxpayers. Integrating SMEs into the regular tax regime is critical—also for their uplift, including electronic invoicing and greater efficiency and integration with global value chains. Also, the more accurate and timely information would help to block leakages in the income tax, including by large taxpayers who hide productions, employment and profits by transacting with invisible smaller taxpayers/suppliers—so whole chains disappear (as in textiles). It is a mistake to keep beating up on middle income wage earners…..is in the IMF program. This is regressive at best, since non-wage income remains notoriously difficult to tax. You also need an arms’ length administration with information based audits. And impartial tax courts as you propose”.

Prime Minister Shehbaz Sharif must take personal interest in the above recommendations and also order FBR to pay refund of adjustable tax collected in advance from million mobile users having no or non-taxable income during the last 10 years. Tax refunds to the needy will be a great gesture on the State’s part in helping all those earning no income or income below taxable limit in these very difficult days when oppressive taxation , imposed through the Finance Act, 2024, can push millions more below the poverty line.

Originally published by Fiday Times at: ?https://thefridaytimes.com/27-Jul-2024/the-anatomy-of-fbr-s-collections and that time Pakistan Business Council (PBC) did not revise its post on X. This version provides the final corrected version of PBC.

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Dr. Ikramul Haq , Advocate Supreme Court, specialises in constitutional, corporate, media and cyber laws, ML/CFT, IT, intellectual property, arbitration and international taxation. He holds LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn . He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law. He is Chief Editor of Taxation .? He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD ) and member of International Fiscal Association (IFA ). He is Visiting Faculty at Lahore University of Management Sciences (LUMS ) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE ).

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review , Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition , ?Pakistan: Enigma of Taxation , Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax , Law and Practice of Corporate Law , Law & Practice of Federal Excise , Law & Practice of Sales Tax on Services , Federal Tax Laws of Pakistan , Provincial Tax Laws , Practical Handbook of Income Tax, Tax Laws of Pakistan , Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 ( with judicial analysis ) .

The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions

available at:?

https://www.amazon.com/dp/B08RXH8W46 ? and

https://aacp.com.pk/product/pakistan-tackling-fatf-challenges-solutions/

He is author of Commentary on Avoidance of Double Taxation Agreements , Pakistan: From Hash to Heroin , its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax . Two books of poetry are Phull Kikkaran De (Punjabi poetry 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).

He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

X: (formerly Twitter): DrIkramulHaq

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