The Federal Board of Revenue (FBR) has set an ambitious Rs5 trillion plus revenue collection target for the next fiscal year. The FBR will surely have to take some pro-active and extraordinary tax measures to achieve this target as it has already missed the Rs4.3 trillion revenue target for the current fiscal year. Historically, we have hardly witnessed such a high tax revenue growth in a single year in our country. As I am writing this column today, the federal government has yet not formally presented Federal Budget 2019-20 in the National Assembly. However, according to provisional information available to us through the media, the federal government intends to enhance revenue collection through its conventional focus on the indirect taxation. And as usual, it appears that the government’s strategy to broaden the tax base is just revolving around the ‘filers’ and ‘non-filers’ of income tax returns.
Since Pakistan’s economy is currently not performing well, the government should avoid taking any harsh taxation measure which would adversely affect the country’s economic growth and business activities that are already at a low ebb. It is, therefore, advisable the government shouldn’t make those bear the burden of more taxes who are already paying taxes in some way. Instead, the government should focus on plugging the loopholes in the existing tax system to prevent tax evasion and leakages. At the same time, there should be taken some serious and effective measures to significantly broaden the direct tax base by bringing the affluent but non-tax paying individuals into tax net. So, there should be a massive crackdown against the tax evaders and tax dodgers.
Reportedly, the FBR, as part of its strategy to detect and nab potential tax evaders, is currently endeavouring to collect data of certain wealthy Individuals from the relevant authorities. It has sought detailed information about persons who possess luxury vehicles of 2400cc or above engine capacity, or live in 2-Kanal or larger houses, or have at least five hundred thousand rupees bank deposits. Similarly, it is also collecting information about industrial and commercial consumers of electricity, and those who frequently make foreign trips. It is, indeed, a significant move in the right direction by the FBR to broaden the direct tax base. The success of such drive, however, is contingent upon how seriously and how far it goes after the tax evaders. The FBR has also been collecting similar information about tax evaders in the past. And Prime Minister Imran Khan has also frequently been referring to such data collected by the FBR. Therefore, it is now incumbent upon the PTI government to launch a crackdown, as promised by it, against affluent and willful tax evaders across the country.
As a matter of fact, tax noncompliance, in the form of tax avoidance and tax evasion, is currently a major taxation challenge faced by Pakistan. At present, there are only 1.4 million filers of income tax returns in a country with more than 200 million population. Regrettably, in the absence of any efficient tax regime and healthy tax culture in Pakistan, tax noncompliance has somehow become our national character. There is a large pool of wealthy Individuals, business and traders in the country who are legally liable to pay income tax, but who are easily managing to stay out of tax net.
A few months ago, I happened to visit a wholesale cloth market in Lahore, which is also claimed to be the Asia’s largest market. And I was just astonished to know that most the traders there are not simply complying with the country’s sales tax regulations. Nor did they bother to get registered under such regulations which require every manufacturer or trader to duly become a sales tax registered person whose annual business turnover exceeds 10 million rupees. I can presume that there were many traders in the market who were making taxable supplies to the tune of Rs10 million in just a month. Nevertheless, they were not paying a single penny as sales tax. Similarly, most of them were also either non-filers or simply paying only a meager amount as income tax. I wondered how they had easily managed to do away with legitimate taxes despite there existed a functional administrative hierarchy of the FBR starting from the field officers or inspectors to senior inland revenue officers.
There are a large number of manufacturers, wholesalers and retailers across the country who are readily evading income tax and sales tax with impunity. Unfortunately, no government has ever seriously tried to bring them into tax net. There has been a perception that the PML-N government didn’t take any strict action against the tax-evading business community owing to its political expediencies. The businessmen in general and traders in particular, have been an important part the PML-N’s vote-bank. Since the incumbent government apparently has no such political expediencies, one may hope that the tax authorities would now go after these tax evaders.
Under Section 116 of the Income Tax Ordinance-2001, every individual who files a return of income tax is also legally required to furnish a “wealth statement” specifying the detail of his/her assets and liabilities. Constitutionally, property tax is essentially a provincial subject. Nevertheless, the FBR requires every taxpayer to furnish the detail of his/her moveable and immovable property. The aforementioned ‘wealth statement’ is thoroughly examined by the FBR to ascertain the nature and source of Individuals’ income. At the same time, it also helps FBR to determine whether or not individuals have evaded income tax while acquiring such property. Moreover, the law also requires individuals to plausibly reconcile their accumulate wealth to their declared income. Thus a ‘wealth statement’ is an important tool for the FBR to detect and prevent any potential income tax evasion.
Since Pakistan’s economy is largely undocumented, it is a bit hard for the FBR to precisely ascertain individuals’ income. It is, however, relatively easy to detect or discover individuals’ assets, especially their immovable property. Therefore, the FBR should go after the income tax evaders on the basis of such “definite information”. Under Section 114 of the Income Tax Ordinance-2001, every person is required to furnish a tax return who, inter alia, owns a one-Kanal immovable property in a rating area, or a motor vehicle having engine capacity above 1000cc. In order to broaden the income tax base in the country, the FBR should narrow the scope of its ongoing process of data collection down to the parameters provided by the income tax law. It is also advisable that there should be introduced legislation to provide the general public an access to individuals’ wealth statement, or at least to the details of their immovable property, so that anyone could point out any misdeclaration of such assets.
The PTI government promulgated the Assets Declaration Ordinance-2019 last month whereby individuals can lawfully declare their (owned or Benami) domestic or foreign assets after paying tax at varying rates. There have been introduced a number of tax amnesty/assets declaration schemes in Pakistan at times. However, they have never been so successful in motivating people to declare their hidden assets. Therefore, instead of wasting time in similar schemes, the FBR should devise a proactive tax strategy to tighten noose around the willful tax evaders primarily on the basis such undeclared assets.
It is high time the government should abolish the notions like ‘filer’ and ‘non-filer’ in the country’s income tax regime forthwith. There should only be a taxpayer or a tax evader. There should also be evolved and promoted a healthy tax culture in the country. For this purpose, first of all, the ruling elite will have to become role model for the masses. Superior government functionaries, ministers and politicians should actively and honestly pay their taxes before asking people to do the same. The ‘representation without taxation’ should not be an option in Pakistan any more. Indeed, if the government’s own moral pedestal crumbles, it can hardly compel people to become tax compliant.
The writer is a lawyer and columnist based in Lahore.mohsinraza.malik@ymail.com
@MohsinRazaMalik
At present, there are only 1.4 million filers of income tax returns in a country with more than 200 million population.