By Ikramul Haq & Huzaima Bukhari|
Published in The Express Tribune, May 16th, 2016|
By blocking refunds of nearly Rs250 billion, our worthy finance minister is confident to achieve this year’s tax target of Rs3104 billion, no matter if exports go down substantially and economy as a whole is retarded. Exporters have been continuously advertising in newspapers and virtually begging for what is due to them for the last many years. The amounts due to them are deliberately withheld to show higher collection figures to the International Monetary Fund (IMF).
This culture of cheat and deceit is prevalent in our entire socio-politico-economic life. Resultantly, nobody is ready to trust the rulers while disrespect and scorn for rule of law has become a sign of might and pride. People say that when the prime minister is not ready to come out with clean hands in his financial affairs then why should we adhere to ethical values and pay our taxes honestly.
On November 26, 2015, it was confessed by Federal Board of Revenue (FBR) that it had blocked refunds of nearly Rs200 billion to show higher collection aimed at hoodwinking the people and the IMF. This confession was made before the National Assembly’s Standing Committee on Finance, Revenue, Economic Affairs, Statistics and Privatization.
In 2014-15, as in the past, FBR failed to meet the third revised target. The original target of Rs2810 billion was first reduced to Rs2691 billion and then to Rs2605 billion. On shortfall of over Rs220 billion vis-à-vis original target, FBR stalwarts received kudos from the finance minister, besides bonuses! FBR in its Year Book 2014-15 claimed provisional collection at Rs2589.9 billion. Till to date it is “provisional” (sic) as no reconciliation is made with State Bank of Pakistan. This collection was made possible after imposing additional taxes of Rs360 billion, blocking refunds of Rs200 billion and taking advances, yet not due, of many billions.
Interestingly, the finance minister told the House Committee on November 26, 2015 that “an out-of-the-box solution is under consideration to clear all the pending refund of Rs200 billion”. Even after a lapse of nearly six months not only payment of earlier refunds is pending but new ones have also been added. Chairman of the Finance Committee and minister for commerce ensured the exporters that refunds would be soon issued, but nothing happened till to date. Due to pending refund there is a serious liquidity crunch for the exporters. Exports have shown 15 per cent decline during the current fiscal year but the finance minister is more concerned to please the IMF. Everybody is making a hue and cry over the pending refund claims but FBR says it is “helpless”!
In the past, FBR has been lying before the Standing Committees of Senate and National Assembly about quantum of refunds due. On May 13, 2014, the then chairman FBR claimed that “only Rs97 billion were payable as refunds”. On November 26, 2015, the finance minister and new chairman admitted that the figure was Rs200 billion. As expected, no action was taken by the finance minister against anybody as allegedly “everything was in his knowledge” and done with his “tacit approval”.
Till today, FBR has also not made public the details of outstanding refunds. For good governance and transparency, fiscal data of this nature should be available on the websites of Ministry of Finance and FBR. It should be updated every month so that public knows how much tax is collected under various heads and what is payable to the taxpayers.
Voluntary tax compliance cannot be achieved unless the tax system is transparent and effective. Even after wasting huge funds in the name of reforms, FBR lacks an effective, automated Tax Intelligence System that can check tax evasion and avoidance. People say that such a system does not suit vested interest. They want cumbersome procedures that facilitate corruption.
There is no will to change the working of FBR by making it a transparent, corruption-free, efficient and effective organisation, capable of performing the assigned duties diligently within four corners of law. It thrives on blocking bona fide refunds and creating fictitious demands to meet “targets”. At the same time tax cheats and evaders are protected and rewarded through amnesty schemes. The burden of taxes is mostly on the honest and helpless people.
Our self-assumed, so-called tax experts-cum-economists, sponsored and funded by foreign donors, keep on accusing Pakistanis of not paying taxes, whereas over 60 million mobile users are paying 14 per cent advance income tax whether they have taxable income (more than Rs400,000 annually) or not, in addition to 19.5 per cent sales tax. Their oft-repeated jargon is that only “1 per cent of the population pays income tax.” This is total fabrication.
Pakistanis are subjected to 58 kinds of withholding taxes under the Income Tax Ordinance, 2001 (both adjustable and non-adjustable) and they contributed 89.4 per cent of direct tax collection [Rs980 billion] in fiscal year 2014-15 voluntarily. Pakistanis are one of the most heavily-taxed nations, yet in foreign-funded initiatives like ‘raftaar’, they are dubbed as poor tax payers or even tax cheats. This is height of intellectual dishonestly.
Do these foreign-sponsored experts (sic) and policymakers have any concrete study about real tax potential of Pakistan? It is not less than Rs5.5 trillion. Pakistan has about three million individuals having taxable income of Rs1.5 million — total income tax collection from them, according to tax rates for tax year 2016, comes to nearly Rs300 billion. If super-rich about 0.2 per cent of population are taxed properly, tax collection from them would be around Rs100 billion. If we add income tax from corporate bodies, non-individual taxpayers (AOPs) and individuals having taxable income up to Rs1,500,000, the gross figure would be nearly Rs2500 billion.
FBR collected around Rs1033.7 billion as income tax in fiscal year 2014-15. Due to weak enforcement and rampant corruption, the collection of sales tax in 2014-15 was Rs1088 billion, customs duties Rs306 billion and federal excise was Rs162 billion. This was around 50 per cent of actual potential as per own admission of tax gap by FBR. It should have been at least Rs3000 billion under the existing system. This shows that FBR is under performing by at least 60 per cent.
In these columns, for the last many years, we have been suggesting measures for fundamental reforms in the tax system for accelerated growth of economy. We need at least 8 per cent growth rate to provide 1.5 to 2.5 million jobs every year. For achieving this target, we have written a policy paper, ‘Towards Flat, Low-rate, Broad & Predictable Taxes’, published by Prime Institute, a public policy think tank. This study, available on http://primeinstitute.org/, can be considered by policymakers and all stakeholders. The paper gives a roadmap for collecting revenues of Rs8 trillion at federal level alone. In the Finance Bill 2016, the government, instead of doing patchwork here and there and making the system more complex may opt for fundamental reforms.
An efficient model for growth requires removal of irritants prevailing in the tax codes, procedures and implementation processes. The paper, Towards Flat, Low-rate, Broad & Predictable Taxes, is an attempt in this direction. It emphasises that the real issue is lack of willingness to make the system simple making cost of voluntary tax compliance less than cost of evasion or avoidance. It is possible only through a revenue agency that can ensure: “We collect money to fund the public services as our duty fixed by Parliament. We give you a service that is even-handed, accurate and based on mutual trust and respect. We also want to make it as easy as we can for you to get things right”.
Only by winning the trust and support of the public, tax compliance is possible, coupled with efficient availability of public services in lieu of taxes. It would certainly persuade people to discharge their tax liabilities voluntarily and happily.