Not bearing fruit: Measures to broaden tax base remain ineffective
Rs2.8 trillion collection target far-fetched; system experiences lack of effectiveness.
ISLAMABAD:
The government’s strategy to broaden the income tax base by increasing the cost for non-compliance has not yet yielded the desired results as collection remains short of the target, highlighting the need to review the approach.
The PML-N government set higher tax rates for those who do not file income tax on purchases of property, vehicles, cash withdrawal from banks, electricity consumption, dividend income, profits on debt and air travel. The measures were approved by the National Assembly in June this year in a bid to expand the income tax base, which currently stands at only 800,000 people.
The government has taken Rs146 billion additional income tax measures for the current fiscal year. In the first quarter of fiscal year 2014-15, it could generate an additional Rs16.5 billion as Rs75 billion measures remained ineffective due to a court stay order, while some measures will start yielding results from December.
Falling behind in target collection against these measures may have adverse implications for this fiscal year’s Rs2.8 trillion revenue collection target set by the government.
The Federal Board of Revenue (FBR) collected Rs105 million on account of advance tax on purchase of international air travel tickets from July through September of fiscal year 2014-15. The money was collected at a rate of 4% but the FBR had proposed to charge 3% from income tax return filers and 6% from non-compliant persons to raise Rs2 billion annually.
The government has also levied 0.5% and 1% withholding tax on sale of immovable property for income tax return filers and non-filers respectively. The cabinet not only halved the rates in addition to increasing minimum threshold from Rs2 million to Rs3 million.
In the first quarter of the current fiscal year, the FBR collected only Rs466 million on transfer of immovable property by non-filers against annual estimate of Rs10 billion. Similarly, from income tax return filers, the FBR collected just Rs140 million in the first three months against the annual target of Rs2 billion.
Taxing the monthly electricity consumption of high-income taxpayers was another measure to broaden the base. The FBR wanted anyone whose monthly bill is Rs35,000 to be taxed at a rate of 7.5%. The target was also to generate minimum Rs3 billion. The first quarter collection remained at Rs140 million after the cabinet increased the threshold to Rs100,000 per month bill.
Similarly, the government increased withholding tax rate on cash withdrawals to 0.5% from 0.3% for non-compliant persons. The incremental collection on this account in the first quarter remained at Rs892 million, while the annual additional impact has been assessed at Rs5 billion.
The government also set two rates for dividend income – 10% for filers and 15% for non-filers and assessed to collect additional Rs4 billion. Instead of showing any increase, the collection fell from last year’s level.
“People do not want to come in the tax net and have started using fake income tax returns at counters, which has rendered FBR’s measures ineffective,” said Dr Ikramul Haq, an expert in tax policies and a Supreme Court lawyer. He said FBR needs to improve its enforcement measures.
One of the reasons behind less collection was that the Sindh High Court also granted a stay order against one of the biggest revenue spinners – the 5% tax on bonus share, due to a lacuna in tax laws.
The FBR also set higher rates on registration and transfer of vehicles. But the collection fell short of the quarterly goals after people were able to cheat the system.
However, there was an incremental increase of Rs6.2 billion in withholding tax collection at the import stage due to higher than anticipated imports. This helped the FBR cover the shortfall on account of other measures. The FBR also set two rates of 10% and 15% for filers and non-filers respectively for profit on debt. It collected Rs1.9 billion in first three months, which was more than double the quarterly target.
Published in The Express Tribune, November 18th, 2014.
The government’s strategy to broaden the income tax base by increasing the cost for non-compliance has not yet yielded the desired results as collection remains short of the target, highlighting the need to review the approach.
The PML-N government set higher tax rates for those who do not file income tax on purchases of property, vehicles, cash withdrawal from banks, electricity consumption, dividend income, profits on debt and air travel. The measures were approved by the National Assembly in June this year in a bid to expand the income tax base, which currently stands at only 800,000 people.
The government has taken Rs146 billion additional income tax measures for the current fiscal year. In the first quarter of fiscal year 2014-15, it could generate an additional Rs16.5 billion as Rs75 billion measures remained ineffective due to a court stay order, while some measures will start yielding results from December.
Falling behind in target collection against these measures may have adverse implications for this fiscal year’s Rs2.8 trillion revenue collection target set by the government.
The Federal Board of Revenue (FBR) collected Rs105 million on account of advance tax on purchase of international air travel tickets from July through September of fiscal year 2014-15. The money was collected at a rate of 4% but the FBR had proposed to charge 3% from income tax return filers and 6% from non-compliant persons to raise Rs2 billion annually.
The government has also levied 0.5% and 1% withholding tax on sale of immovable property for income tax return filers and non-filers respectively. The cabinet not only halved the rates in addition to increasing minimum threshold from Rs2 million to Rs3 million.
In the first quarter of the current fiscal year, the FBR collected only Rs466 million on transfer of immovable property by non-filers against annual estimate of Rs10 billion. Similarly, from income tax return filers, the FBR collected just Rs140 million in the first three months against the annual target of Rs2 billion.
Taxing the monthly electricity consumption of high-income taxpayers was another measure to broaden the base. The FBR wanted anyone whose monthly bill is Rs35,000 to be taxed at a rate of 7.5%. The target was also to generate minimum Rs3 billion. The first quarter collection remained at Rs140 million after the cabinet increased the threshold to Rs100,000 per month bill.
Similarly, the government increased withholding tax rate on cash withdrawals to 0.5% from 0.3% for non-compliant persons. The incremental collection on this account in the first quarter remained at Rs892 million, while the annual additional impact has been assessed at Rs5 billion.
The government also set two rates for dividend income – 10% for filers and 15% for non-filers and assessed to collect additional Rs4 billion. Instead of showing any increase, the collection fell from last year’s level.
“People do not want to come in the tax net and have started using fake income tax returns at counters, which has rendered FBR’s measures ineffective,” said Dr Ikramul Haq, an expert in tax policies and a Supreme Court lawyer. He said FBR needs to improve its enforcement measures.
One of the reasons behind less collection was that the Sindh High Court also granted a stay order against one of the biggest revenue spinners – the 5% tax on bonus share, due to a lacuna in tax laws.
The FBR also set higher rates on registration and transfer of vehicles. But the collection fell short of the quarterly goals after people were able to cheat the system.
However, there was an incremental increase of Rs6.2 billion in withholding tax collection at the import stage due to higher than anticipated imports. This helped the FBR cover the shortfall on account of other measures. The FBR also set two rates of 10% and 15% for filers and non-filers respectively for profit on debt. It collected Rs1.9 billion in first three months, which was more than double the quarterly target.
Published in The Express Tribune, November 18th, 2014.