Non-filers of tax returns could be burdened further

Dar critical of FBR’s proposals as he doesn’t want to increase taxes in election year

ISLAMABAD: Tax rates for the people who stay out of the net will go up phenomenally, including on dividend income that may be slapped with 25% levy, as the government finds solace in penalising the non-filers of income tax returns.

The Federal Board of Revenue (FBR) has proposed that almost all withholding taxes should be doubled, but only a certain percentage of the additional tax should be returned to those who subsequently file tax returns, according to sources in the Ministry of Finance.

Owing to elections next year, Finance Minister Ishaq Dar did not want to take tax measures that may antagonise different lobbies or annoy traders and businessmen, said sources. The upcoming budget will be the last for the current PML-N government.

According to sources, Dar and Finance Secretary Tariq Bajwa were very critical of FBR’s budgetary proposals. Dar did not accept the proposal to increase the 2% Further Tax to 3%, which is applicable on unregistered persons, which would have increased sales tax to 20%. Only 150,000 file sales tax returns.

However, the minister endorsed the proposal of increasing the minimum tax rate, applicable to all companies and individuals earning more than Rs10 million annually.

Most of the tax measures that had passed through the scrutiny process despite ministry’s reservations would add to the burden on existing taxpayers, said sources in the finance ministry.

The FBR argued that without these measures, it could not add Rs500 billion to tax receipts next year. It expressed reservations about rejection of many of its proposals.

Like previous years, the FBR failed to come up with proposals that could widen the tax base without further burdening the existing taxpayers, said sources.

However, since the government is targeting over Rs4 trillion in revenue collection in fiscal year 2017-18, the finance ministry is focusing more on increasing income tax for all non-filers of tax returns. This means increasing the tax rates for all income earners except for 1.1 million individuals and companies that file tax returns.

Sources said the government may increase the tax on dividend income for non-filers from 20% to 25% in the next budget. It will be the second consecutive year when this tax rate will go up, which will enhance the burden on non-filers by another 25%.

The government may also enhance the tax on dividend income for return filers from 12.5% to 15%. This will generate an additional Rs5 billion in revenues.

Dividend income includes distribution by a company of accumulated profits, debentures, debenture stock or deposit certificate in any form, with or without profit, to its shareholders.

There is also a proposal to enhance the tax on profit from debt, securities and investment in bonds made by the non-filers. The existing tax rate is 10% for return filers whereas for non-filers it is 17.5%.

According to the main proposal, the FBR will treat most of the tax paid by the non-filers as final liability and will not return it even if they file returns afterwards. Only a certain percentage will be given back.

The government had introduced the policy of creating a distinction between filers and non-filers of income tax returns in 2013 in the hope that this will broaden the tax base. However, the policy has failed to bear fruit as the tax base remains extremely narrow comprising 0.5% of the population.

The different tax rates for filers and non-filers have become an easy way of revenue generation for the FBR without making efforts. It collects 87% of total revenue through indirect taxes including withholding tax. If the government accepts the new tax rates, the FBR’s reliance on indirect means will cross 90% of revenue receipts.

The FBR has also proposed reduction in withholding tax on commercial importers from 5.5% to 4%.

However, it has suggested an increase to 2% in the tax on imports made by the industries. The rate difference is being proposed to stop the misuse of facility.

Published in The Express Tribune, May 21^st, 2017.

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