Why FBR has failed to raise the tax to GDP ratio

Tax collection needs to be revamped as the economic scenario changes.

Flawed legislation and and an economic culture based on tax concessions and subsidies are two key reasons for the lack of revenue generation.

After the operation of Income Tax Ordinance, 2001 repeated concessions have been allowed to taxpayers. Our system of income tax today is one of the most concession-orientated systems in the world. But compliance of tax laws has shown no improvement.

Major attention was focused on withholding tax which has been imposed on nearly every consumable item or receipt, and Income Tax got converted into an indirect tax which is suicidal for the very spirit of direct tax system.

Revenue targets are fixed, and then revised. This has become the norm. Basically, the revenue system is a mess.

As pointed out earlier, our income tax system today is one of the most concession oriented systems in the world but despite that tax base has not expanded adequately and black economy still dominates the economic activity, with no improvement in the tax-GDP ratio in real terms. In my Tax Reforms Package presented in 1998, I had argued that taxpayers must have a guarantee of stability of tax rates and of the procedure as well. It is not clear how far the present measures will go, but in the latest budget, the government has hinted at measures to try and simplify the country’s taxation system.

It is about time that the FBR appreciates the role of continuity and credibility of tax laws. Instead, the government on the advice of non-technical consultants and advisers has constantly been introducing whitening schemes, despite the fact that foreign remittances through banking channels were a constant source of whitening untaxed money. The latest adventure by the government was that only two percent tax was to be paid through a whitening scheme  but the response was a paltry payment of Rs3.2 billion Income Tax.

The government has similarly failed to increase the number of tax payers.

The documented sector (or corporate sector) is very small which mainly bears the brunt of tax collection. The top one hundred tax payers paid Rs174 billion in tax year 2010 apart from deduction at source and advance tax (mostly paid by petroleum, banking and manufacturing sectors). Other than the active registered companies and salaried class, the number of business tax payers is quite low. Their share in the income tax collection is less than 10% of the gross collection whereas share of salaried person is 7%. After deducting the collection of tax paid by the corporate sector at Rs176 billion plus gross withholding tax (with Capital Value Tax collection), balance amount works out at Rs15 billion only which is around 3% of total tax collection. It is argued that business community pays withholding tax on almost each item, but the same is true of the whole population including a large majority of poor people (including 10 million mobile phone customers). The common man pays withholding tax on mobile phones and other items which was almost 54% of the gross income tax collection in tax year 2009. It may also be added that besides major collected through withholding tax, corporate sector, government corporations, banks and some multinational companies including oil companies, have been paying the bulk of tax revenue. Almost the same number of companies (one hundred) paid over 80% of indirect taxes like Sales Tax, Federal Excise and Customs duty. The number of regular business taxpayers who filed returns has not increased, and this is a problem.

The writer is former director general (Tax Audit) FBR and former adviser Federal Tax Ombudsman

Published in The Express Tribune, June 6^th, 2011.