Analysis: Why FBR’s taxpayer database is less useful than it looks
There is a difference between paying taxes and filing tax returns.
The list published by the FBR includes hundreds of thousands of names of people who have evaded their taxes and excludes the names of hundreds of thousands of hardworking Pakistanis who pay their taxes. ILLUSTRATION: JAMAL KHURSHID
SOUTH BEND, INDIANA:
774,706. That is the number of taxpaying entities that the Federal Board of Revenues (FBR) says existed in Pakistan in 2013. Except that the number is simply not true.
The list published by the FBR includes hundreds of thousands of names of people who have evaded their taxes and excludes the names of hundreds of thousands of hardworking Pakistanis who pay their taxes. Indeed, the list is more useful in what it does not reveal than what it does. It says more about the FBR’s limited capabilities than it does about who pays taxes in Pakistan and who does not.
[infogram url="https://infogr.am/squibby2_1397721253?src=web" height="255"]
Disclosure: I worked as a consultant for the FBR in December 2012. For a month, I lived and breathed a dataset quite similar to the one made public on Wednesday, as well as a far larger set of data that remains confidential. While I was not in favour of publishing this dataset, it is useful to have a conversation about just why there are so few taxpayers in Pakistan in the first place. The problem lies in our culture of tax evasion, yes, but also because the FBR needs to do a better job.
Let’s start at the very beginning: this database covers only federal income taxes for entities that filed an income tax return in 2013, or for whom their withholding agent filed income tax information. What it does not include are people whose income taxes were withheld by their employer, or other sources, and who did not file their tax returns. (It does include people whose employer filed their individual tax data.) And barring a few FBR and finance ministry officials who clearly had the sense to file their returns before the list was published, it does not include the over 700,000 government employees who all pay their taxes, but the vast majority of whom do not file their returns.
This is why you cannot find the names of any generals or judges: the Accountant General of Pakistan Revenue simply gives the government a lump sum for all federal employees, including the military, but provides no breakdown. (The FBR has no clue as to whether the income tax withholding process is even being done properly.)
This is an important distinction: there is a difference between paying your taxes and filing your tax returns. Both are legal requirements, but only failure to do the former gets you labelled a tax evader. In fact, it is possible to evade taxes and still be a tax-filer: by submitting falsified documents, something that the FBR’s electronic systems do not have the ability to catch. It is also possible to declare that you have paid one amount and actually pay a lower amount, and the FBR’s systems will not catch that either.
Hence, the database that has been released includes hundreds of thousands of entities against which you will note a “tax paid” amount of zero. Not all of these entities are, of course, evading their taxes. Some are companies that had net losses and do not owe taxes. Others are companies in sectors that are exempted from paying income taxes (such as exporters). And some individuals earn less than the amount that is taxable, or can claim enough deductions and exemptions to minimise their liabilities to zero.
The database also does not include any information about general sales taxes (GST), federal excise duties (FED), or customs duties paid by any company or individual business owner. Taken together, these taxes constitute 74% of all tax collection by the government, meaning that the database barely covers a quarter of all taxes. That difference is important. On the basis of income taxes, the state-owned Oil & Gas Development Company is the biggest taxpayer in Pakistan, paying nearly Rs37 billion in 2013. If GST and FED are included, the top spot goes to Pakistan Tobacco Company, which paid just under Rs61 billion last year, about the same as the income taxes of all salaried individuals in Pakistan combined.
And taxes paid are not a reflection of a person’s wealth, or assets. Mian Muhammad Mansha, for instance, is the richest man in Pakistan, but that is by assets. His income is high, but not the highest in the country, since most of his wealth is tied in the shares he owns in some of the largest companies in Pakistan, shares he is unlikely to sell any time soon. Hence Mansha is among the highest taxpayers in the country, but he is not the biggest taxpayer. Income taxes are levied on the actual cash flow one gets in a given year from non-exempt sources, not on the total asset base that delivers those cash flows.
So how many taxpayers should there be in Pakistan? The team I worked with at the FBR conducted that analysis and found that only about 4.5 million of the more than 180 million people in Pakistan make enough money to be above the minimum taxable income level.
[infogram url="https://infogr.am/proportion-of-people-above-minimum-tax-level?src=web" height="670"]
This number, by the way, is why the government relies so heavily on sales taxes rather than income taxes: about 93% of the people in Pakistan simply do not make enough money to pay income taxes.
But even if one were to take this greatly reduced number of eligible taxpayers, the FBR database is effectively an admission that the government is only collecting taxes from about 17% of the potential taxpayer population. How does it plan on solving that problem?
[infogram url="https://infogr.am/chart-55847191461?src=web" height="420"]
Under the Zardari Administration, former FBR Chairman Ali Arshad Hakeem (whom I worked under) was trying to compile a list of the 3 million or so Pakistanis who appear to have lifestyles that would justify them paying taxes, but for whom the government has no record of paying any taxes. The government knew where they lived, where and how often they travelled abroad, what cars they own, how many bank accounts they have (but not what is in those bank accounts), and even whether they had more than one wife.
The goal was to try to estimate how much tax they should be paying and try to force them into the documented tax fold using that information. It was an audacious plan: using the power of Big Data to crack down on tax evasion, with the FBR being aided by the database and mathematical wunderkinds at NADRA.
The Nawaz Administration, however, appears to feel that that information was somehow flawed and scuttled the project. Yet it appears oblivious to the fact that so is the database it just released.
Published in The Express Tribune, April 21st, 2014.
774,706. That is the number of taxpaying entities that the Federal Board of Revenues (FBR) says existed in Pakistan in 2013. Except that the number is simply not true.
The list published by the FBR includes hundreds of thousands of names of people who have evaded their taxes and excludes the names of hundreds of thousands of hardworking Pakistanis who pay their taxes. Indeed, the list is more useful in what it does not reveal than what it does. It says more about the FBR’s limited capabilities than it does about who pays taxes in Pakistan and who does not.
[infogram url="https://infogr.am/squibby2_1397721253?src=web" height="255"]
Disclosure: I worked as a consultant for the FBR in December 2012. For a month, I lived and breathed a dataset quite similar to the one made public on Wednesday, as well as a far larger set of data that remains confidential. While I was not in favour of publishing this dataset, it is useful to have a conversation about just why there are so few taxpayers in Pakistan in the first place. The problem lies in our culture of tax evasion, yes, but also because the FBR needs to do a better job.
Let’s start at the very beginning: this database covers only federal income taxes for entities that filed an income tax return in 2013, or for whom their withholding agent filed income tax information. What it does not include are people whose income taxes were withheld by their employer, or other sources, and who did not file their tax returns. (It does include people whose employer filed their individual tax data.) And barring a few FBR and finance ministry officials who clearly had the sense to file their returns before the list was published, it does not include the over 700,000 government employees who all pay their taxes, but the vast majority of whom do not file their returns.
This is why you cannot find the names of any generals or judges: the Accountant General of Pakistan Revenue simply gives the government a lump sum for all federal employees, including the military, but provides no breakdown. (The FBR has no clue as to whether the income tax withholding process is even being done properly.)
This is an important distinction: there is a difference between paying your taxes and filing your tax returns. Both are legal requirements, but only failure to do the former gets you labelled a tax evader. In fact, it is possible to evade taxes and still be a tax-filer: by submitting falsified documents, something that the FBR’s electronic systems do not have the ability to catch. It is also possible to declare that you have paid one amount and actually pay a lower amount, and the FBR’s systems will not catch that either.
Hence, the database that has been released includes hundreds of thousands of entities against which you will note a “tax paid” amount of zero. Not all of these entities are, of course, evading their taxes. Some are companies that had net losses and do not owe taxes. Others are companies in sectors that are exempted from paying income taxes (such as exporters). And some individuals earn less than the amount that is taxable, or can claim enough deductions and exemptions to minimise their liabilities to zero.
The database also does not include any information about general sales taxes (GST), federal excise duties (FED), or customs duties paid by any company or individual business owner. Taken together, these taxes constitute 74% of all tax collection by the government, meaning that the database barely covers a quarter of all taxes. That difference is important. On the basis of income taxes, the state-owned Oil & Gas Development Company is the biggest taxpayer in Pakistan, paying nearly Rs37 billion in 2013. If GST and FED are included, the top spot goes to Pakistan Tobacco Company, which paid just under Rs61 billion last year, about the same as the income taxes of all salaried individuals in Pakistan combined.
And taxes paid are not a reflection of a person’s wealth, or assets. Mian Muhammad Mansha, for instance, is the richest man in Pakistan, but that is by assets. His income is high, but not the highest in the country, since most of his wealth is tied in the shares he owns in some of the largest companies in Pakistan, shares he is unlikely to sell any time soon. Hence Mansha is among the highest taxpayers in the country, but he is not the biggest taxpayer. Income taxes are levied on the actual cash flow one gets in a given year from non-exempt sources, not on the total asset base that delivers those cash flows.
So how many taxpayers should there be in Pakistan? The team I worked with at the FBR conducted that analysis and found that only about 4.5 million of the more than 180 million people in Pakistan make enough money to be above the minimum taxable income level.
[infogram url="https://infogr.am/proportion-of-people-above-minimum-tax-level?src=web" height="670"]
This number, by the way, is why the government relies so heavily on sales taxes rather than income taxes: about 93% of the people in Pakistan simply do not make enough money to pay income taxes.
But even if one were to take this greatly reduced number of eligible taxpayers, the FBR database is effectively an admission that the government is only collecting taxes from about 17% of the potential taxpayer population. How does it plan on solving that problem?
[infogram url="https://infogr.am/chart-55847191461?src=web" height="420"]
Under the Zardari Administration, former FBR Chairman Ali Arshad Hakeem (whom I worked under) was trying to compile a list of the 3 million or so Pakistanis who appear to have lifestyles that would justify them paying taxes, but for whom the government has no record of paying any taxes. The government knew where they lived, where and how often they travelled abroad, what cars they own, how many bank accounts they have (but not what is in those bank accounts), and even whether they had more than one wife.
The goal was to try to estimate how much tax they should be paying and try to force them into the documented tax fold using that information. It was an audacious plan: using the power of Big Data to crack down on tax evasion, with the FBR being aided by the database and mathematical wunderkinds at NADRA.
The Nawaz Administration, however, appears to feel that that information was somehow flawed and scuttled the project. Yet it appears oblivious to the fact that so is the database it just released.
Published in The Express Tribune, April 21st, 2014.