Under any tax code of the world, citizens are classified as filers and non-filers. In literal terms, non-filers are people who are breaking the law by not filing their annual tax returns and should be punished to a degree. Even individuals who have failed to file a tax return in a given year are seen as being non-filers.
Mind you, non-filer does not necessarily mean that the person is not paying any taxes. In cases where a return has not been filed, a salaried individual might still have his salary deducted at source, and still be termed a non-filer. Same individuals will also end up paying higher taxes as they will be seen as non-filers under the law. This story is not related to them as they are still depositing something to the exchequer and should be reaping the benefits of doing so. Their laziness is leading them to paying a fine which they can easily avoid.
This story concerns people who actively circumvent the tax code by wanting to maintain their non-filer status. Since 2014, the government has also looked to codify this status which gives these people legitimacy by paying a small fine which allows them to break the law. For many, this is a price they are willing to pay. Profit is here to try to make your blood boil.
A cosmic joke
Former PM of the country, Shahid Khaqan Abaasi, stands in front of a crowd at the “Reimagining Pakistan” Summit and claims that not even the parliamentarians of the country are filers. Rather than this statement being countered with derision and angst, the statement is meant with a murmur of laughter from the audience.
Experts on the tax code of Pakistan state that there is clear evidence that parliamentarians, bureaucrats and many government officials have huge amounts of assets and are able to bear huge expenses, however, the Federal Board of Revenue (FBR) fails to go after them. There are actual concessions that are provided to these non-filers that are not even available to mere mortals when they should be taxed to high heaven.
This leads to burning questions being asked in terms of why this category has been created and what is the cost of these non-filers to the country?
What is a non-filer, and why are they a different class of citizens?
Pick up any tax code from around the world and you will see that the term non-filer is used to describe an individual who is either not expected to file their taxes or are tax dependent on someone else who is liable to pay tax. In Pakistan, the meaning of the same word is much different. Here, a non-filer is someone who is legally bound to file a tax return but is not filing one. This can include people who miss the deadline to file their return. Lumping both these people together can seem a little harsh as the people who missed the deadline are not actively looking to stay non-filers.
These people have an intention but due to difficulties, they get to miss out on filing their return in time. These people actually have to suffer a double whammy at the end. They are being taxed in the form of their income being deducted at source and they cannot claim it as they have failed to file a return. In addition to that, as they are non-filers, they end up paying higher tax on transactions like cash withdrawals from banks.
The anger that should exist in the context of Pakistan is over the blase attitude that people have to filing their taxes. This has further been codified under the law as there is a strata of citizens who are filers while others are non-filers because they choose to be so. This attitude is due to the fact that the people are least bothered to become filers while the state machinery and institutions also do not do enough to change the status quo.
If you can’t beat them, tax them (higher)
It seems that the government has little intent to change the situation and is actively looking to provide rationale for non-filers to exist. The passing of the Finance Act of 2014 was the last nail in the coffin for the government in terms of its seriousness to correct the situation. This passing signaled the last effort that the government could have made to persuade people to become filers.
In simple terms, the government admitted that it could not go after the non-filers. This was the waving of the white flag which showed that rather than carrying out a tax reform in the country, the government will take paltry steps to make filing voluntary rather than force people to come under a tax regime formally.
An approval of their failure was the passing of the Act which added the definition of filer and non filer into the Income Tax Ordinance of 2001. This was nothing more than a band-aid that was placed over the gaping wound ailing the economy. The government was going to legitimize the existence of non-filers and charge them a little extra for not complying with tax laws of the country.
Cosmetic changes and a pat on the back
The terms of filer and non-filer were codified into the Income Tax Ordinance 2001 with a stroke of a pen and the government was patting itself on the back that non-filers were going to be “penalized”. The word in quotes has to be emphasised and read with a tinge of sarcasm as the government felt that they were levying a huge burden on the individuals who did not want to come under the tax laws. The truth of the matter is that these taxes are levied on income and expenses which are small in comparison to income many of the non-filers earn which is not taxed.
On top of that, the government was creating more undue burden on the withholding agents who now had to check the status of the individuals before these withholding taxes were applied. Now it was the job of withholding agents like banks to check whether the person was a tax filer or not and charge varying rates of tax on them. The government was not only legitimizing the existence of non-filers but increasing the burden on the withholding agents to determine the tax and then collect it from the filers and non-filers.
The government brought in a new regime as a last ditch effort that was carried out to give a slight push to the tax revenues while incentivizing people to become filers. Anyone can guess what happened after this measure was passed. Non-filers chose to stay non-filers even if it meant they were paying higher taxes on certain items. They carried out a cost benefit analysis for themselves and saw that they would rather pay the higher charges compared to becoming filers.
In order to make such a strategy work, Mohammed Sohail, CEO Topline Securities, feels that every year, the government should look to tighten the noose around non-filers by increasing tax incidence on them. This will make it arduous to avoid taxes and will incentivize more people to become filers.
Burdening the overburdened
While many citizens are able to stay non-filers and evade paying taxes that should be imposed on them, the government has a simple solution to plug the budgetary gap that exists. In order to meet their tax targets, the government continues to impose higher tax rates on people filing their taxes while not looking to tap into the potential taxpayers who should be brought into the net.
“A collection of tax where it is not due is as detestable as its non-payment when it is due” says Dr. Ikram ul Haq, a professor of taxes. In a developed country, tax payers are seen as being responsible citizens of the country who pay the dues accrued on them. This gratitude is extended to withholding agents who collect taxes on behalf of the government and the government allows them to deduct their expenses that they have incurred for the collection to be carried out.
In Pakistan, the roles are reversed. On one hand, the withholding agents are humiliated and insulted while taxpayers are penalised for asking for their rightful refunds. This all goes on while the taxation system looks to eek out the last rupee from the people who choose to be filers. The pressure and scrutiny which should be reserved for non-filers is actually taken out on the filers and taxation policy is used to penalize these people. Numair Liaqat, Country Economist for International Growth Centre Pakistan, states that “the underlying reason is that there are no actual incentives to become a tax filer in Pakistan.” He states that there are actual disincentives which need to be looked into.
Role of FBR in the mess
Most of the blame for the mess has to be placed on the shoulders of FBR in this case. Experts state that people are indifferent in terms of registering themselves as taxpayers and actively avoid doing so in the first place. They know that once they do become part of the system, FBR will do everything they can to make their lives miserable with unlawful orders, inhuman attitude and illegal demands.
People have lost faith in tax officials. They want to avoid becoming involved in this Kafka-esque tragedy where they have to follow up in courts and appellate benches. With FBR not tightening their noose around the non-filers, filers bear the brunt of the audits and checks.
In addition to not following through on their duty, the role of the FBR is to sit on the sidelines and hand out the duty of collection of tax to withholding agents. An estimate is that 90 percent of the tax revenue collected is through the withholding agents which means that the machinery is only able to do a measly 10 percent by its own efforts.
What makes the efforts of the FBR even more draconian is the fact that they hold the people responsible to pay income tax in advance. This means that they need to hand over a portion of the income even before they are able to determine their taxable income at the end of the year. This shows that there is a move to keep harassing the people who are willing and able to give these taxes rather than go after the people who choose to stay non-filers.
To a certain extent, the attitude of the non-filers can be considered as tax filers are harassed to such a degree. FBR looks to do all that is within its own powers to target and go after the filers. Seeing the treatment handed out, many non-filers feel that they would rather pay the higher rate of tax applicable on them. “Once you become a filer, the tax authorities will keep a close eye on you. Those not filing their taxes won’t face any such scrutiny.” states Liaqat.
Experts also believe that the complexity of filing a tax return means many people either cannot file themselves properly into the system or as the importance of filing is diminished, many feel that filing is not a necessary part of their civic duty. Making it easier to file taxes and facilitating them will encourage them to be part of the taxation system.
The government has designed incentive based schemes for filers and people do not even know their taxes are being deducted at source. There is a lack of knowledge and once they gain an understanding of the system, they will be able to file the taxes that are already being deducted from their salaries, phone bills, electricity etc.
Amnesty schemes
Tax amnesty schemes have been introduced in the country at different stages in order to bring people into the tax net and make them filers in the future. These schemes are given by the government in order to facilitate the citizens to declare any assets, accounts and income that they have hidden from the government. Once these assets have been legalized, the government is able to levy direct taxes on these people based on the income that they have declared.
Such schemes are beneficial in the short run and can lead to some boost in tax collection for the immediate future, however, these schemes can only be made successful if subsequent action takes place once the scheme has elapsed. Structural reforms are a requirement for the country where the tax code needs to be revised and overhauled. With investments being parked in tax havens, there is no incentive for the government to reach these bank accounts or look to make its tax code more efficient.
Such amnesty schemes are a slap on the face of tax paying individuals who are abiding by the law while non-filers are given special dispensation from time to time after breaking the law. Rather than improve or work on the deficiencies of the system, the best course of action is always to provide an amnesty scheme, show a jump in tax filers for the year and move on. This is not the first amnesty scheme that has been given.
It is interesting to note that the first such scheme was given in 1958 by the Ayub Khan regime. This shows that the issue of taxation management has plagued the country since the last seven decades. This scheme was able to add 266,183 to the roll of tax filers and a total of Rs 1.12 billion was raised. At the end of the scheme, Pakistan’s tax to GDP stood at less than 10 percent. Subsequent tax amnesties were given out in 1997, 2000, 2001, 2008, 2012, 2013, 2016, 2018 and 2019. Time after time, these schemes have been used in order to boost tax revenues and allow the country to collect a higher amount of tax. Sadly, most if not all of these schemes have failed.
The failure of these tax schemes is rooted in the fact that tax payers know that another scheme will be introduced at regular intervals while the FBR will do little to nothing to make non-filers compliant. This will happen while business community will be harassed which has become part of the tax net
Of amnesty schemes and taxation regimes
Even when steps have been taken to bring part of the economy into the tax net, there are concerted efforts to make sure such steps are unsuccessful. The fate of providing CNIC for purchases above Rs. 50,000 to be provided to retailers by the buyers in the PTI government faced severe protest. This led to the measure being revised to Rs. 100,000 and then scrapped altogether shows that there is an active movement to make sure no such measures are put into place.
The PDM government also faced the same results when they tried to introduce tax on electricity bills of shopkeepers in order to boost revenues and they failed as well. Any strict measure that has been put into place by any of the governments has faced outcry before being scraped in the end.
Whenever a measure is set to be introduced to make people fall into a tax net or to make them accountable within a tax regime, the participants look to protest and create an issue around the fact rather than pay their fair share. The recent uproar around tax on immovable property has also been criticized by the real estate industry and it seems this tax will see a similar fate of being slashed or eradicated totally.
The cost of non-filers
The cost of non-filers becomes apparent when reports come out which suggest that the salaries class of the country are paying a whopping 200% more tax compared to exporters and retailers of the country. The amount of tax paid was around Rs. 264.3 billion in FY 2023 which was 40% higher than the amount collected in the previous year.
The brunt of the taxation, hence, falls on the people who earn salaries as companies employing them are made withholding agents. This means that the withholding of tax falls on the company as an institution rather than the responsibility being on the individual to declare their income. As more and more pressure is piled on the salaried class, the Salaried Class Alliance (SCA) states that the country is “killing the goose that lays the golden egg.”
According to FBR’s own data, the salaried class is paying a total of 42 percent of income tax while it constitutes only 15 percent of total registered taxpayers. Compared to this the agriculture sector which contributes 20 percent to the GDP and pays less than 1 percent of income tax. Similarly, the real estate and retail sector can yield an additional Rs. 500 billion and Rs. 234 billion respectively, however, this area is left untaxed or under taxed at best.
As retailers are given additional relief, the government keeps withdrawing the relief given to the salaried class. With income being taxed at a higher rate and people facing unprecedented unemployment and inflation, it seems like something has got to give and the salaried class will soon not be able to bear this burden any longer.
With exporters, retailers and wholesalers making up 20 percent of the economy and paying less than 2 percent in their share of income tax, there is a case to be made for better tax management to be carried out. With the finance minister clarifying that no additional tax will be placed on real estate and agriculture, it is obvious that no structural changes are on the books for now.
Another setback that has impacted the government is the fact that the super tax levied in the Finance Act 2023 has been struck down by the Islamabad High Court and petitions will be heard in the Supreme Court now. This will lead to a prolonged legal battle. This simply means that the salaried class will again be on the chopping block.
