FBR faces taxing problem as people reluctant to file returns

Despite low revenue collection, authorities lack muscle to go after big guns

ISLAMABAD: Faced with serious challenges including weak capacity and retaining one-time return filers who contact the tax machinery just to avoid high tax rates, the Federal Board of Revenue (FBR) is now pushed to undertake a tough task of expanding extremely narrow tax base.

After being elected as prime minister, Shahid Khaqan Abbasi announced tax reforms as his number one priority on the economic front. After assuming office, the premier had a meeting with the FBR and was not happy about the outcomes, said sources in the PM’s Office.

The prime minister was not impressed by FBR’s number crunching that featured a 72% increase in tax collection in the past four years that had jumped to Rs3.361 trillion. PM Abbasi was fully aware that the additional money was taken out from pockets of the existing taxpayers and did not come after much effort.

The PM asked the FBR to use the data of withholding taxes for broadening the base instead of just using it as easy source of collecting taxes, said the sources. The PM wanted the FBR to use data like international travellers, credit card holders and property buyers to collect tax as per their potential.

The FBR now plans to send centralised tax notices to those people who spend lavishly but do not pay enough taxes. Sending notices to wealthy people is not a new phenomenon, as Pakistan had undertaken a similar exercise under the $6.2 billion International Monetary Fund programme but it did not yield desired results.

But FBR Chairman Tariq Pasha believes that this time he would use tools like linking incentives of the government employees with filing of income tax returns. The critics say that targeting the salaried class will not yield the desired results, as major evasion was in the private sector.

The government has undertaken the broadening of the tax base campaign at a time when its political capital has already significantly eroded and it does not have the muscle to go after traders and property sectors.

Another opposition was from within the FBR, which is evident from non-implementation of Tax Reforms Commission report.

Old flawed policy

Four years ago, the FBR had introduced the policy of charging high tax rates from non-filers of the income tax returns in order to force them to come into the tax net, said the FBR chairman. Pasha said that it was a three-pronged strategy - first increasing the rates, then collecting data of non-filers and using it to broaden the base and finally, once the base is broadened, to lower overall rates across the board.

Despite the government’s good intentions, the FBR could not effectively utilise the withholding taxes data for broadening the base, Pasha added. The high withholding tax rates for non-filers led to the introduction of a record 72 types of withholding taxes. However, the major flaw of this policy is that it captures expenditures and businessmen passed on the cost of withholding taxes to consumers.

System dodgers

Those who are not ready to come into the tax net have their own ways to cheat the system, as they started filing the income tax returns only for one year and that too, when they were supposed to undertake any big business transactions.

There is a clause in the Income Tax Ordinance 2001 that states that a person shall be automatically selected for audit, if he does not file income tax return within the due date or if the tax is not paid. And the result was that the total audit cases alarmingly jumped to over 575,000 cases, which was beyond the capacity of the FBR’s audit wing. But the FBR chairman said that he has given new timelines to the audit wing to settle these cases.

High aim

Pasha said that his aim is now to bring new people in the tax net and for that purpose the FBR has launched a campaign with the help of Pakistan’s corporate sector.

“We are encouraging the employers to ask their employees to file the income tax returns,” said Pasha. He said that this exercise would immediately boost the number of return filers that currently stands at only 1.21 million people, which is just 0.6% of the total population. He admitted that this will not increase the tax amount, as these salaried people get salaries after deduction of withholding taxes.

In order to boost revenues, the FBR is also contacting businessmen to pay their due income tax and sales taxes, said the FBR chairman. He said that the FBR will also bring unregistered businesses into the tax net by using all possible means.

In tax year 2016, only 29% of the registered National Tax Number (NTN) holders or 1.21 million people filed income tax returns for the tax year 2016, according to the Tax Directory that Finance Minister Ishaq Dar unveiled in August this year.

Out of the 1.216 million who filed income tax returns, 366,000 or 30% of the filers did not pay any tax as their income was below the annual threshold of Rs400,000 in tax year 2016, said the finance minister. He said 850,614 people paid income tax in the tax year.

Published in The Express Tribune, September 23^rd, 2017.

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