Pakistan’s tax chief has shown his inability to bring over 4 million willful law violators to the tax net due to the revenue authority’s lack of capacity and has also said that the Federal Board of Revenue (FBR) is “better off” without a $400 million World Bank loan.
Dr Mohammad Ashfaq, who took reins of the FBR over three months ago, was candid in a public interaction, where he also talked about the International Monetary Fund’s (IMF) demands to withdraw sales tax exemptions and increase personal income tax rates for individuals.
“I cannot do anything about those 4 million people who are outside the tax net because the FBR does not have the capacity and there are legal issues as well,” the FBR chairman said on Wednesday while responding to a question at a session arranged by the Policy Research Institute of Market Economy (PRIME).
In his presentation, Ashfaq showed that against the 7.1 million taxpayers registered with the FBR, only 3.1 million filed annual income tax returns.
He said that against the 305,000 registered sales tax persons, only 191,000 filed annual returns.
“Bringing people to the tax net is a long-drawn-out process and to accomplish the task, the state has to invest in tax administration,” said Ashfaq.
“We had been promised an amount through the supplementary grant against the $400 million World Bank loan but the Ministry of Finance either gave very little last year or turned down our requests for funds this year.”
The cost of tax collection was only 0.6% of the revenue and the FBR was the most under-financed organisation in the world, the chairman remarked.
Responding to another question about whether the FBR needed the $400 million loan to introduce reforms, Ashfaq said, “I am not a great fan of Pakistan Raises Revenue project and the FBR will be better off without it.”
The loan had been negotiated by the Economic Affairs Division and the Finance Division for their needs but “the FBR has been asked to implement the project and we do not have any role in its design”, he added.
Through various reports, The Express Tribune had also highlighted that entering into the $400 million loan deal with the World Bank in the name of tax reforms would not solve the FBR’s structural problems.
The World Bank had approved $400 million, including $80 million for database and system upgrade.
Responding to a question about the worst-ever data hacking in August this year, the FBR chairman candidly said that he prepared his presentation on a “pirated software”.
The then finance minister Shaukat Tarin, who is now PM’s aide on finance, had promised to hold the people accountable but the action was limited only to the extent of removing the then FBR chairman while people working in the Pakistan Revenue Automation Limited – FBR’s data arm – were promoted to next grades and paid bonuses.
He said that besides the challenge of over 4 million people remaining outside the tax net, there was also the issue of reduction in the average tax paid by a return filer.
In 2015, the average tax paid by the return filer stood at Rs23,640, which fell to just Rs10,914 in 2019, said the chairman. However, the trend has started reversing and the figure crossed Rs17,000 by tax year 2020.
The FBR chairman also briefly talked about IMF conditions.
“The IMF has demanded a reduction in the corporate income tax rate and an increase in the personal income tax rates,” he said.
However, the increase in personal income tax is not being made this month as the chairman said that “during the second half of this fiscal year, we will discuss this issue with the IMF.”
He said that general sales tax reforms were close to the IMF’s heart. “Most of the tax exemptions are creating distortions and we will eliminate a majority of them very soon.”
Just a day ago, Tarin said that bringing the Finance Bill to parliament was a prerequisite for approval of the next IMF loan tranche.
“The IMF only asks to tax people more, either through petroleum products or other means, which in turn hurts the local industry,” said Pakistan Institute of Development Economics Vice Chancellor Dr Nadeemul Haq.
The FBR chairman said that the tax-to-GDP ratio would improve to 10.8% in the current fiscal year but it would still be lower than the 11.1% recorded at the end of fiscal year 2017-18 – the last year of PML-N government.
He also spoke about stagnation in tax collection from 2018 to 2020 – a trend that, he said, the FBR reversed in the last fiscal year.
From 2017-18 to 2019-20, additional taxes worth Rs1.5 trillion were levied but the collection remained stagnant at around Rs3.8 trillion, said Ashfaq.
The chairman admitted that over 52% of tax collection in the first four months of current fiscal year was at the import stage and one of the reasons behind it was shifting crude oil sales tax collection from the domestic to import stage.
“We are on our way to achieve Rs5.829 trillion annual tax target even after some kind of import compression,” said Ashfaq.
The FBR has discontinued the practice of taking advances and blocking refunds to inflate revenues, he said.
“The Rs1.4 trillion annual tax exemptions exist not because of the FBR but because of parliament. You elect better people and in return you will have better laws,” said the chairman.
“Rather than bringing a paradigm shift, the Pakistan Tehreek-e-Insaf (PTI) government has been tinkering with the tax system for the past three years,” said tax expert Dr Ikramul Haq while speaking on the occasion.
“It is high time that the individual income tax rate is reduced to 10% and the corporate income tax rate to 20%,” he said. The ratio of direct taxes should go up to 66% from below 34% of the total tax collection, he suggested.
Published in The Express Tribune, November 18th, 2021.
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