October Issue 2015
Spreading the Net
The government’s attempt to widen the tax base and boost revenues, by raising the withholding tax ceiling on bank transactions from 0.5 per cent to 0.6 per cent in the budget, ran into spirited resistance from the business community. Over the last three months, financial managers have held a series of meetings with the business community in an attempt to resolve the issue, but have yet to reach a consensus.
In the past, withholding tax on bank transactions was applicable to just cash transactions, but under the new measures it is applicable to all transactions, including pay orders and demand drafts. The new rule assumes that any individual or company with transactions of a certain value should have income at taxable levels. While listed companies, multinationals and other registered companies already paying taxes are not threatened by the measure, it may net smaller traders and shopkeepers who have successfully evaded payment so far.
It is no secret that tax evasion is rampant across the length and breadth of the country. Of 3.5 million national tax number (NTN) holders in the country, only 0.9 million file tax returns. Moreover, out of 0.9 million tax filers only 33,000 (including individuals and companies) filed tax returns showing income tax of one million rupees and above in the fiscal year 2014-15.
A former chairman of the Federal Board of Revenue deplores the fact that the government has itself provided benefits and shelters to businessmen through Statutory Regulatory Orders, known as SROs. These SROs, in an apparent attempt to boost industrial activity, allowed industrialists to import certain machinery, for example, or raw materials, tax free. However, when the International Monetary Fund (IMF) asked the government to reduce the quantum of benefits delivered through SROs, it began to gradually rescind these benefits. Thus, while the facility amounted to around Rs 550 billion in 2012-13 and was assessed at around Rs 150 billion in 2015-2016, it will be below the Rs 100 billion mark in the new fiscal year (2016-17).
Under pressure to increase tax revenues and balance the budget, the government has also attempted to use the withholding tax as a tool to widen the tax net. The business community — in particular retailers and wholesalers — vociferously oppose the measure, suggesting alternative means. Recently representatives of the All Karachi Tajir Ittehad gave a proposal to the government to impose a fixed tax per shop. The tax, depending on size and location, would range from Rs 1,500 to Rs 10,000 per shop. They further asked the government for a three-year moratorium, following which the retailers and wholesalers would start filing tax returns.
Similarly, to resolve the issue of withholding tax on bank transactions, the President of the Karachi Chamber of Commerce and Industry (KCCI), Iftikhar Ahmed Vohra, proposed that the National Tax Number (NTN) be made compulsory for all Current Accounts/ Business Accounts opened by banks. “No Current Account should be opened without an NTN certificate and all existing account holders may be required to submit an NTN certificate issued by the Federal Board of Revenue (FBR), otherwise the account should be closed. A threshold may be fixed for turnover in Savings Accounts, and an NTN certificate made compulsory for turnover exceeding the threshold,” Vohra added, in a letter issued to Federal Minister for Finance, Muhammad Ishaq Dar.
He was of the view that once the particulars of account holders are accessible to FBR through the NTN, it has the required powers under the Income Tax Ordinance, as well as other prevailing laws, to pursue registered persons to file Tax Returns. “It is important to distinguish between non-filers and unregistered persons. The term non-filer is based on the assumption that the person is registered but not filing returns. Therefore, the concept of registered and unregistered persons should be applied instead of filer and non-filer,” he advised.
Several financial institutions both domestic and international, argue that revenue losses amount to billions of rupees. The business community, for its part, is adamant that they will not pay taxes through the withholding tax system and the government should devise other ways to broaden the tax net. They lodged protests and closed shops countrywide and even attempted to pressurise the government by asking members to curtail or halt banking transactions. While there was no way to halt transactions, a dip is evident in deposit numbers of around Rs 206 billion with deposits at a total of Rs 8.947 trillion at August 31, 2015, according to State Bank of Pakistan data. Some analysts were of the view that the drop was merely seasonal, while others attributed it to the withholding tax on banking transactions. Whatever the truth of the matter, the government should not give a clean chit to retailers and wholesalers, as billions of rupees change hands every day without any documentation.
According to an analyst, millions of middle-class salaried persons pay income tax at source, but the high and mighty evade taxes on their actual incomes. Unfortunately, the FBR does not own up to the situation–it has failed to acknowledge where the actual problem lies. No serious study is available to quantify the loss of revenue, as due amnesty is given to influential non-compliant taxpayers, rather than taking them to task. The problem is not so much of the tax base as the fact that the tax regime protects the interests of the wealthy.
“No one has calculated the massive tax loss Pakistan has suffered on account of non-taxation of agricultural income alone as suggested under the Finance Act, 1977,” a Tax Reform Commission report said. If we add total loss of revenue through various exemptions, non-taxation of benefits given to the state oligarchy and Statutory Regulatory Orders (SROs) issued during the last four decades, the number amounts to over Rs 100 trillion. In this way, unprecedented concessions to the rich have made the state poorer, rendering every citizen of the country enormously indebted. The report concludes that we would not have required any borrowing at all, if such tax losses had not been incurred.
In a nutshell, the main goal of tax reforms should be aligned to economic policy, seeking ways to unshackle the constituent elements of economic growth by letting market forces play their respective roles. The Tax Reforms Commission stresses upon the government to transfer the benefits of economic growth to enhance social wellbeing and cohesion, through transparent and well-designed taxation. If this paradigm could be made to work in Pakistan, then the people would reap the real advantages of paying taxes.
This article was originally published in Newsline’s October 2015 issue.