Tax base widens to record 10m
design: mohsin alam
The registered taxpayers in Pakistan reached the record at nearly 10 million but only 4.4 million of them filed annual tax returns and one-fourth actually paid any taxes in the last fiscal year, revealed a World Bank report.
The Implementation Status and Results report on the $400 million Pakistan Raises Revenue project once again exposes the weak tax enforcement system that is often offset by putting more tax burden on the already burdened individuals and companies.
“In June 2023, the total number of registered income taxpayers was 9.865 million and the active income taxpayers, referred to as compliant taxpayers, were 4.434 million,” said the report compiled last month.
This means there were 5.43 million other people and companies that got registered with the Federal Board of Revenue (FBR) but they did not file annual tax statements, showing that the FBR was not even able to catch the 55% registered taxpayers.
The report stated that out of those who submitted their returns, only 2.32 million paid any tax. The ratio of people and companies paying taxes was a mere 24% compared to the total registered taxpayers.
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In fiscal year 2022, about 8 million people were registered with the FBR and just 3 million filed returns till June 2022. The FBR extended the date for filing annual income tax returns till October 31 after less than 2 million submitted annual returns till the statutory deadline of September 30, 2023. This reflects very poor enforcement as only 18% of the now 10.5 million registered taxpayers had filed returns till the deadline.
Under the law, every person earning income above a certain threshold or having assets in his or her name is required to submit annual income and wealth statements.
The results of the four-year World Bank-funded programme once again underscore that Pakistan needs a strong political will, efficient taxmen and implementation of existing laws to get due taxes from people and companies.
An effort is being made by the interim government to promulgate a presidential ordinance for enhancing the tax base, an exercise that may prove futile, as the problem lies in enforcement, not data sharing.
Tax authorities will also miss some key targets under the $400 million project and will not be able to increase revenues to 17% of the size of economy.
The Washington-based lender has kept the poor rating of “moderately satisfactory” for the project in its latest report. The moderately satisfactory rating is assigned to the schemes that are facing implementation delays, although the World Bank has kept satisfactory rating for the overall project development objective.
The implementation status and results of the project showed that, by the end of fiscal year 2023, over $370 million should have been disbursed. The lender, however, released $278 million.
Poor tax-to-GDP ratio
The $400 million loan was aimed at increasing the country’s tax-to-GDP (gross domestic product) ratio to 17% by June 2024, a task that the FBR and provincial tax authorities cannot achieve. The four provinces hardly contribute 1% of GDP in taxes and the target has mainly been assigned to the FBR.
The report showed that total tax-to-GDP ratio was 9% as of June 2023, which deteriorated significantly compared to June 2018 when it was 13%. The ratio further fell when compared with the last fiscal year.
At the 17% tax-to-GDP ratio, Pakistan would have collected Rs15 trillion in taxes. This year’s tax target is Rs9.41 trillion, which is equal to just 9% of GDP. The low collection means higher borrowing by the federal government.
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While commenting on another indicator, the World Bank said that 84 entities were now sharing data with the FBR for tax broadening. These include 44 government departments, 11 electricity distribution companies and 29 commercial banks. The target was data sharing with only 20 entities by June 2024.
Some people in the federal cabinet are trying to give the role of data collecting agency to the Ministry of Information Technology through legal changes.
The FBR has already signed a data-sharing memorandum of understanding with all provincial tax authorities. It has signed an agreement with the four provinces on immoveable property valuation tables. It has also signed an agreement with provinces on methods for GST input adjustment.
Tax arrears
There is no progress on the monitoring and reporting of tax arrears. The June 2024 target is that the FBR will track “tax arrears through the Management Information System, analyse, and recover at least 60% of collectible arrears at the start of the fiscal year”.
But the report stated that the consolidated arrears data is not available. The arrears tracking system is piloted in the Large Taxpayers’ Office, Karachi.
The report said that the FBR had not yet developed the technical streams of its workforce. The goal was that at least 40% of grade-17 officers were assigned to a technical stream and received specialised training.
The FBR was also required to completely replace its obsolete ICT equipment, have its software updated, and active-active private cloud established. So far, however, this goal has not been achieved. The report stated that “procurement was underway”.
In order to meet an important programme condition, the FBR was required to abolish many withholding taxes. But so far it has abolished only 25 out of 58 types of withholding taxes.
While commenting on the overall progress, the World Bank stated that overall satisfactory progress was noted towards achievement of project development objectives and implementation of the results-based component of the project.
Published in The Express Tribune, October 15th, 2023.
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