The only certainty in life is death and taxes, Benjamin Franklin is supposed to have said. In Pakistan, however, few things have been as uncertain as taxation. Not because people are not being taxed, they are and often unfairly so, but because in the more than seven decades since independence, all efforts undertaken under the guise of tax reform have fallen flat. With no serious thought or uniform goal being applied to the redesign and restructure of the tax system, the system we have as of now has been cobbled together with an assortment of different flavoured patchwork.
In December of last year, the International Monetary Fund (IMF) slashed the Federal Board of Revenue’s (FBR) tax collection target to Rs5.238 trillion from Rs5.503 trillion. The Rs265 billion reduction was some breathing space for the FBR, which faced a shortfall of Rs211 billion in the first five months of the current fiscal year.
As per the State Bank of Pakistan’s (SBP) annual report on the state of Pakistan’s economy for 2018-19, withholding tax has fallen from 43pc to Rs76.4 billion in 2018-19 as compared to Rs133.4 billion in the preceding fiscal year. The report further mentions that the overall collection of withholding taxes reduces by 8.2pc to Rs960.7 billion in the fiscal year 2018-19 as compared to Rs1,047 billion in the preceding fiscal year.
A very cursory glance at the revenue collections of the FBR shows that it requires around Rs2.828 trillion in the last five months of the current fiscal year to achieve the target of Rs5.238 trillion. But rather than doubling down, the FBR’s response has been desolate, asking the IMF to once again revise the tax target again to Rs4.8 trillion instead of Rs5.2trillion to help with the shortfall.
And while no decision has been taken on this matter, collecting the Gargantuan Rs5.2 trillion would mean having to collect an average Rs567.5 billion every month from now onwards to achieve the mammoth target..
In the wake of this doom and gloom and nail biting, Profit reached out to leading economists and tax consultants to find out just what i going on, and whether Pakistan and the FBR could still salvage something out of this reality, and achieve its revised collection target of Rs5.2 trillion?
The (qualified) hot takes
According to Sakib Sherani, even if the IMF gives Pakistan another breather and drops the target down to Rs4.8 trillion, there would still be some shortfall. The former member of the Prime Minister’s advisory council and acclaimed economist says that Pakistan is unlikely to collect taxes more than Rs4.7 billion, and that is if the FBR really picks up their game and takes the issue head on. And there are no unexpected events that take place in the meantime.
Sherani adds that the target under the Fund program required an increase of 45 percent over the previous year’s collection, and was highly unrealistic given the sharp slowdown in the economy as well as the steep fall in imports – a major source of tax revenue.
Sherani also pointed towards the protracted absence of FBR Chairman Shabbar Zaidi and the rumours surrounding his possible resignation or removal. If the FBR is to collect even the Rs4.7 billion that Sherani thinks they can manage as a best case scenario, they need an all hands on deck full guns blazing performance. Instead they have a plastic bag Chairman floating in the wind and a board authority that has been hostile to him from the very first day of his appointment. Not the best of starts.
Agreeing with Sherani, Senior Economist and Economic Advisory Council (EAC) member, Dr. Ashfaque Hasan Khan, set an even lower figure than Sakib Sherani’s Rs4.7 trillion figure. “If the FBR manages to even collect Rs4.4 trillion in the current depressing state of the economic landscape in the country, I will be the happiest person in the world” he said.
Nadeem ul Haque, the former Deputy Chairman of the Planning Commission, agreed with Mr Sherani and Dr Khan’s estimations, however took a more critical approach to the IMF policies. The career economist was of the opinion that that absurd target based on absurd assumptions were ignorant of economic thinking based purely on coercive tactics.
“In the west, they reduce taxes for kick starting economy. Here, they want to increase taxes. But who here is thinking about the details? We merely sign in a dotted line and then are stuck in the cycle all over again” he says.
Yasir Mahmood, an avid reader of political economy and technology, a former diplomat and London School of Economics (LSE) graduate who is presently running his own technology company, says that the Imran Khan led PTI govt agreed. The target was too ambitious according to Mahmood, and the government had agreed to the IMF’s demands without properly assessing the capacity of the FBR.
“The FBR will not be able to collect more than 4.7 Trillion despite record new taxes of 780 billion in the last budget” Yasir adds, miming the earlier figure estimated by Sherani.
He was also critical of the government’s anti-imports streak, adding that he believed that the import compression due to current account deficit has also led to revenue shortfall as over 50 percent taxes are collected at import stage. His final contention was that the FBR and PRAL lack the ability to run automatic forensic audits of filers.
“No agreement of any fixed tax has been reached so far with small retailers which make up the bulk of Pakistan’s cash economy, as the IMF is not in favour of fixed tax for small and medium retailers,” he says. Despite its claims, the government has not followed through on the crucial aspect of digitisation and documentation of the economy to formalize it. At this rate, they are simply repeating the mistakes of past governments.
Leading Economist and Professor of Economics at the University of Central Punjab (UCP) in Lahore, Dr. Qais Aslam, says that Pakistan’s government has envisaged the collection of Rs5.2 trillion in revenue collection. However, in January 2020 alone, the FBR could collect only Rs321 billion or 75.5pc of the envisaged target of Rs425 Billion that they were supposed to for the month if they wanted to stay on track. While this was still more than the amount they collecte in December 2019, Although this Rs321 billion was more than what FBR had collected in December 2019.
In the first six months of this budget year, the FBR had collected just Rs2.080 trillion, although they had already revised the target of collection downwards to Rs2.367 trillion, which the FBR could not achieve.
Dr. Aslam says the problem FBR is facing on one hand is its historic incompetence and inadequacies to actually tax the rich through direct taxes. He explains that although the FBR just over the past 6 months has been able to get 2.3 million tax filers, an unprecedented amount in Pakistan’s history, it has not amounted to much. Headlines celebrating the FBR’s historic collection achievements every month, steady increase and widening of the tax net is actually not that impressive at the end of the day, because the numbers still do not add up to a pretty picture.
He adds that it should be noted that according to the Census 2017 there are 32 million households in the country and 20 percent of which are rich households – which means that there are at least 6.4million households that should be tax filers and only 2.3 million have filed their tax returns, leaving anther 4 million households that should be filing their income tax returns.
The economist further states that the FBR has been claiming that it has all the information about the property, vehicles, school fees and foreign travel information of Pakistanis, but has as yet not used this information to bring the big fishes into the tax net.
The UCP Professor adds that the government has instead given a tax amenity scheme to the tax evaders, and has also tried to bring in an ordinance to give tax rebates to big businesses and investors that was hurriedly taken back due to political backlash.
In a first and controversial statement, Dr Aslam feels that NAB being declawed has also caused a shake up, since it has given a sense of security to future and past corrupt individuals, who have another opportunity to evade taxes or to embezzle the federal and provincial exchequer.
“The government can only tax the poor through indirect taxes, through increase in electricity and gas charges as well as through increase in petroleum prices where ordinary citizens cannot evade these indirect taxes and charges levied on energy and products of daily usages. This is no way to go about fixing a shortfall” he tells Profit,
“The PTI government in its present budget had also done away all the rebates given to professionals, professors and IT specialists by the previous regimes in order to increase its revenue, but failed to bring into the tax net the private practice of doctors, advocates and other such income generators that are not documented due to FBR’s own incompetence and corruption” he goes on. “My fear is that the bigger issue of tax collection would remain the decline in the growth rate of the economy.”
There are other fears as well, and none of them appetizing. In this time, agricultural production has come down from 21 percent of the GDP to 19 percent of the GDP. Large Scale Industry is only contributing 13 percent of the GDP and has declined from 20 percent contribution to GDP over the years.
The imports of luxury items has been reduced by the government’s policy of curtailing current account deficits and exports have only gone up by 5 percent as a result. The revenue from these paltry exports is depleted by the rupee- depreciation against the foreign currencies. It is, for all intents and purposes, a lose lose situation.
“All of this downward trend in the economy and decrease in income generating and profit making opportunities only decreases the ability of FBR to collect revenue from different sources,” Dr. Aslam says. “And if Shabbar Zaidi resigns in the middle of the budget year, it will have an adverse impact on the officials of the FBR who have become leaderless this month. We will be lost.”
Dr. Aslam’s observation is that that FBR seriously needs a pro-people restructuring for better service delivery under the five principles of fairness, simplicity, equity, revenue collection and good governance.
And while these economists are more or less on the same page, the Adviser to Chief Minister Punjab on Economic Affairs and seasoned Economist, Dr. Salman Shah, gives us a sense of just what the government is thinking and where they are trying to go with their current policies. “The real target is a primary deficit of 0.6 percent of GDP. If the revenue falls short of target, then proportional reduction in expenditures would be needed to still meet the primary deficit target” he tells Profit.
So what happens now?
All of the economists and tax experts that Profit reached out to were of the same opinion for once, that Pakistan cannot achieve its tax target of Rs5.2 trillion for the fiscal year 2019-20, and a more realistic figure would be somewhere around Rs4.5 trillion if all goes well.
The only exceptions, however, were Leading Tax consultants of Pakistan, and visiting faculty members at the Lahore University of Management Sciences (LUMS) Dr. Ikramul Haq and Huzaima Bukhari. Both are optimistic, but because they claim they have a plan that could help the FBR achieve its tax target by June 30, 2020 if implemented.
“We also gave the plan in September 2018 but thePTI ministers did not implement it. Otherwise we would have been collecting Rs.5 trillion even last year,” they say while speaking to Profit.
Prime Minister Imran Khan has constituted a committee headed by State Minister for Revenue, Hammad Azhar, to come up with a “massive and comprehensive reform programme before the close of the financial year”. But it produced nothing, even though it was required to meet once every fortnight to devise strategies for revenue collection.
“The new Tax Reforms Committee, claiming to comprise ‘best-minds’ of Pakistan, constituted by the then Federal Finance Minister Asad Umar on October 18, 2018 did not bother to consider the Action Plan given by us in a personal meeting with Finance Minister and Minister for State on September 12, 2018, for the eight months (November 2018 to June 2019) and the revenues of billions of rupees and year ended with record fiscal deficit of 8.9 percent of GDP and FBR registered negative growth of 0.4 percent” they said.
“If the PTI government wants optimum collection of taxes to meet revised target of Rs. 5.2 trillion without hampering business growth and investment clime, it still has time to implement the following agenda for the remaining months of the current fiscal year.”
In the article they wrote for The News on Sunday (TNS) on September 9, 2018, they mentioned the following:
- “Securing returns and finalising of assessments of all the persons who paid substantial tax in advance through withholding mechanism but have not filed returns till 31-03-2019.”
- “Till May 31, 2018, total companies registered with Security & Exchange Commission of Pakistan (SECP) rose to 86,876 whereas corporate income tax returns filed were less than 35,000. All companies that have not filed returns should be issued notices and assessments should be finalised before 31-03-2019 so that recovery can be made before 30-06-2019.”
- “Retrieval of tax loss by taking action against the beneficiaries of the loan-write offs under the law [Explanation to section 18(1)(d) of the Income Tax Ordinance, 2001].”
- “Recouping of sales tax losses due to under-invoicing and under-reporting.”
- “Recoupment of tax loss by transfer pricing of all, especially the following sectors:
- Pharmaceutical
- Telecommunication
- Beverages
- Automobiles
- Food
- “On the basis of following withholding tax information, all the persons who did not file income tax returns should be brought to tax net by the respective LTUs/RTOs:”
- “Tax deducted under section 236 of the Income Tax Ordinance, 2001 on mobile bills exceeding Rs. 48,000 annually.”
- “Tax deducted [section 235] on commercial electricity bills exceeding Rs.100,000 annually.”
- “Tax deducted [section 235B] on domestic electricity bills exceeding Rs. 120,000 annually.”
- “Amount of tax deducted on banking transactions [sections 231A, 231AA and 236P] exceeding Rs.25,000 annually.”
- “Tax deducted on profit on debt [section 151] exceeding Rs.36,000 so that FBR can know the amount of investment wherefrom this profit on debt was earned.”
- “Tax deducted on purchase and sale of immovable properties [section 236C, 236K and 236W] in immovable property exceeding Rs.10 million to know the source of investment.”
- “Tax deducted on purchase/registration of vehicles [section 231B(1), (2) and (3)] to ascertain the source of amount invested in purchase of vehicle(s).”
- “Tax deducted on lease of vehicles [section 231B(1A)] to ascertain the source of investment made and sources wherefrom monthly installments are paid.”
- “Assessments in the case of all non-filers positively by 31-03-2019 to ensure recovery by 30-06-2019.
- Scanning and X-raying of each and every incoming and outgoing container.
- Recouping of loss of custom duty by tracking down under-invoicing through data/information matching
- Crackdown on smuggled goods.”
Tax Policy Board
The bottom line, according to everyone, is that Pakistan cannot hope to come out of the prevailing fiscal mess if the present tax system and structure persist.
“We need tax policies that encourage investment and economic growth, especially leading to greater employment opportunities. Higher growth will lead to greater revenues,” Dr. Ikramul Haq and Huzaima Bukhari tell us.
They add that growth-oriented tax policy should be enforced through Policy Board envisaged in section 6 of the FBR Act, 2007—best brains should be included in it after fulfilling all the requirements mentioned therein.
“The government must concentrate on sustainable higher economic growth that will automatically increase taxes.”
Tasks for LTUs & RTOs
The recommendations from Bukhari and Dr Haq have been the immediate filing of returns/assessments of all the persons who paid substantial tax in advance through withholding mechanism but have not filed returns.
The tax consultants’ shares that SECP’s registered 107,062 companies till November 2019, whereas income tax returns filed are not even half of this number. “All companies that have not filed returns should be issued notices and assessments should be finalised by 30-04-2020,” they demand.
As per their plan for FBR, they recommend retrieval of tax loss by taking action against the beneficiaries of loan-write offs [under Explanation to section 18(1)(d) of the Income Tax Ordinance, 2001].
They further recommend recouping of sales tax losses due to under-invoicing, under-reporting and non reporting, recoupment of tax losses by transfer pricing of these sectors namely Pharmaceuticals, Telecommunications, Beverages, Automobile, Food and others.
Actions on basis of withholding tax
The tax consultants recommend tax deduction on Mobile bills [s 236] exceeding Rs. 24,000 annually; Commercial electricity bills [s 235] tax exceeding Rs.36,000 annually, Tax deduction on domestic electricity bills [s235B] exceeding Rs.60,000 annually; Banking transactions [sections 231A, 231AA and 236P] exceeding Rs.24,000 annually.
They also recommend tax deduction on profit on debt [s. 151] exceeding Rs.36,000 so that source of investment can be determined; Purchase/sale of immovable properties [sections 236C, 236K and 236W] to determine investment in immovable property exceeding Rs.10 million.
They further add Tax should also be deducted on Purchase/registration of car [section 231B(1), (2) and (3)] to know source of amount invested in purchase of car; Lease of car [s 231B(1A)] to ascertain the source of investment made and sources where from monthly installments are paid.
They recommend FBR to utilise available data (withholding statements)/collection of information, wherever required; Collation of data regarding non-filers; Securing income tax returns from non-filers by issuing notices and Assessments/amended assessments in the case of non-filers positively by April 30, 2020.
Tasks for Customs wing
The tax experts from Lahore recommend the custom wing to scan and X-ray each and every incoming and outgoing container; recouping of losses by tracking down under-invoicing through available data and information.
“Once this is done the IRS should recover evaded sales tax and income tax and custom wing should also conduct crackdown on smuggled goods,” they said in their answers.
The reviews are largely hopeless, with even the best case scenario a shortfall of some extent or the other. The few radical suggestions that are in are being ignored. Will the PTI government be able to achieve the revised target of Rs5.2 trillion by June 2020? It seems unlikely, but the plan of Dr. Ikramul Haq and Huzaima Bukhari aimed at reaching the said target might be a good shot. For now, there is just complacency.