ISLAMABAD.: In a major policy initiative, the government is all set to introduce a punitive legal regime to change the PML-N era’s concept of non-filers to active taxpayers in the upcoming budget.
The move is aimed at doubling the existing number of income tax filers to four million besides contributing to an overarching goal of slapping additional Rs688 billion taxes with effect from July 2019.
As against the current practice of only charging higher income tax rates from those who do not file their annual statements of income and assets, the government has proposed to immediately start legal proceedings against people who would do cash or banking transactions but are not on the Active Taxpayer List (ATL).
At present, less than two million people are on the ATL that essentially comprises of people who submit their annual income and wealth statement to the Federal Board of Revenue (FBR).
The FBR has proposed to insert a 10th Schedule in the Income Tax Ordinance of 2001 that will have two major legal components. The withholding tax related sections that will be in the 10th Schedule will attract 100% higher rates than the one paid by those who are income tax return filers.
For instance, the dividend income’s withholding tax rate is 15% for filers and 20% for non-filers, which will be doubled to 30% for those who will not be on the ATL.
The second component of the 10th Schedule will be that the withholding tax collecting agents would immediately pass on the traceable information of these people to the FBR and the board will then send provisional tax demand to the non-ATL people on the assumption of concealed income, the sources said.
The withholding tax agents would be bound to get the Computerised National Identity Card number and other related information.
The punitive legal regime is being introduced in a bid to double the existing number of income tax return filers to four million in next two years, according to sources in the tax machinery.
Except in cases where the income is fixed or the business transactions are known and cannot be outside the formal economy, all the other withholding tax sections will be included in the 10th Schedule.
The government also plans to abolish about 20 withholding tax sections that do not yield significant revenues.
The FBR faces a mammoth task of collecting Rs5.550 trillion in taxes during fiscal year 2019-20 and it is going to slap additional Rs688 billion worth of taxes.
The government is also in negotiations with the industrialists to introduce general sales tax (GST) rate at manufacturing stage. It wants to slap 7.5% GST on manufacturing of goods but the International Monetary Fund has asked to introduce the standard 17% rate.
There are currently about 47 types of withholding taxes and nearly 26 will remain after the cleansing exercise. Of these, about 20 sections would be in the 10th Schedule of the Income Tax Ordinance. The withholding tax sections related to salaries, imports, exports and professional services will not be included in the 10th Schedule.
The PML-N government had introduced the concept of the non-filers of the income tax returns in 2014. It helped to increase the share of withholding tax in total tax collection from 56% to 70% but did not increase the tax base of the country. People preferred to pay higher tax rates meant for non-filers but did not come into the tax net due to hostile attitude of the tax machinery, increasing burden of being a taxpayer and arm twisting measures.
The Section 181A of the Income Tax Ordinance says that there will be an ATL and the FBR can regulate it as may be prescribed.
The sources said that those who will not be on the ATL on July 1 and make a transaction will be sent a provisional tax assessment by the FBR commissioner.
The relevant section of the provisional assessment is 123 in the Income Tax Ordinance that says that where a concealed asset of any person is impounded by any department or agency of the federal government or a provincial government, the commissioner may, at any time before issuing any assessment order under Section 121 or any amended assessment order under Section 122, issue to the person a provisional assessment order or provisional amended assessment order, as the case may be, for the last completed tax year of the person taking into account the concealed asset.
The commissioner shall finalise a provisional assessment order or a provisional amended assessment order as soon as practicable.
The growing share of withholding tax in total collection on the back of higher tax rates has made authorities and the political leadership complacent, diverting attention away from core problems in the tax machinery.
The government had targeted credit card overseas transactions, hotels, clubs, marriage halls, restaurants, foreign-based films, dramas, dealers’ commission, educational institutions, wholesalers and retailers, realty sector and banking transactions to expand the tax base. It did not yield the desired results.
The FBR also collects withholding taxes on withdrawal of money from pension funds, from financial institutions on making demand draft, pay order, on domestic electricity consumption from steel melters and re-rollers, on the purchase of domestic and international air tickets, cable operators, dealers and commission.