The leaking taxation regime

A few small examples illustrate the extent of the brutal tax evasion taking place in Pakistan. These can be likened to vultures out to secure their interests at the cost of the rest. A national daily reports that the number of doctors across the country stands around 650,000. This includes 39,607 registered with the Federal Board of Revenue (FBR). Of them only 14,712 filed income tax returns worth Rs1.93 billion in 2015. This number in 2014 was 17,167 filers, who deposited some Rs2.73 billion in income tax. This marked a decline in filers and a staggering 24,886 doctors either did not bother to report their incomes to the FBR or found ways to avoid doing so.

Similarly, of the over 80,000 lawyers — the harbingers and the protectors of rule of law only 4,386 filed income tax returns in 2015, while 7,255 didn’t. This figure relates only to the category of major law practitioners, which is about 11,641. The filers paid income taxes worth Rs950 million.

What about rest of the doctors and lawyers? Why does the FBR not move against them? What about private clinics or consultants — whose daily income runs in millions? How do lawyers handle the hundreds of thousands, often millions that they charge for once case?

Keeping the aforementioned extremely small data in view, and considering the daily or per case high incomes of doctors and lawyers (some of whom charge tens of millions for a case) the FBR got only a fraction of tax from these professionals.

How ironic is it that most of these professionals pontificate the rest of the nation on the virtues of rule of law and duties towards the state but themselves are involved in massive tax evasion.

The dismal statistics accruing from the Voluntary Tax Compliance Scheme — introduced in February 2016 to lure more businessmen into the tax net — reflects an equally disturbing story; in the first 26 days of enforcement, only 128 businessmen filed income tax returns worth Rs20 million in taxes — unlike the government expectation of adding another million new traders into the tax net.

The amount the government earned off new tax filers — $200,000 — was far less than the tens of millions it spent on an aggressive media campaign. An amnesty scheme in November 2013 failed in expanding the tax baser fetching fresh investment.

Another major source of leakage are FBR officials themselves; in league with big businesses such as the marquees, wedding halls and restaurant chains, these officials deprive the national kitty of dozens of billions annually. All these businesses maintain double registers for “convenience”. Most of them charge the excise duty or general sales tax but only few pay this into the national exchequer. Indeed a massive fraud being committed.

While they fleece their clients, they themselves refuse — through trickery and figure jugglery — to make their contribution to the public kitty. That is why the Tax Reforms Commission (TRC) has also concluded that “In Pakistan, it seems the poor are subjected to heavy and harsh indirect taxation and the elite are enjoying free perquisites and benefits, including purchase of valuable state-owned plots at prime locations and at throwaway prices”.

This is also evident from the fact that almost half of national and provincial legislators do not pay taxes while 12 per cent are without National Tax Numbers (NTN). No surprise that some seven million Pakistanis are eligible to pay income tax but less than one per cent actually pay income tax.

Experts believe that adding more to the list of income tax filers — which is still pathetically below one per cent — is no rocket science. If the chamber of commerce and industries requires a taxation number for new members (mandatory registration with FBR for NTN ), why cant umbrella organisations for lawyers and doctors, restaurants, private hospitals do the same? Why can all private institutions — businesses, clinics, restaurants, hospitals, marquees — be data-linked with the FBR?

Astute businessmen like Ishaq Dar and the Sharifs and many of their cohorts know well, through their own practices from the past, where the system is leaking. They also know how best to co-opt FBR officials in the business of tax evasion, under-invoicing and shadow documentation. If they can’t fix the system then don’t be disappointed. In all likelihood, instead of meaningful radical measures, they will persist with the status quo that is tailored more to benefit the few.

Published in The Express Tribune, March 16^th, 2016.

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