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Widening tax net

August 26, 2013
- File Photo
- File Photo

The ministry of finance appears determined this time to go ahead with its initiative to broaden the tax base, even though its past record on this score has been disappointing.

The new move, also not without a tinge of controversy, was adopted on the eve of the budget by making an amendment in the Income Tax Ordinance, which aimed to lay hands on tax evaders by having online access to their bank accounts.

One reason for the regime showing firmness in implementing this scheme, which the business community calls ‘a harsh measure,’ is that the broadening the tax base is one of the conditions for the new $6.6 billion loan that the country is seeking from the International Monetary Fund. The loan will come up for approval before the IMF’s executive board early next month.

The business community is resisting the new law on grounds that it amounts to ‘invasion’ of privacy of the accounts that the banks have guaranteed and are supposed to protect. The banks have also opposed the measure, but not publicly. The businessmen, in a desperate bid to get this measure quashed, have even offered quid pro quo proposals to the Federal Board of Revenue (FBR) to make up for the shortfall. One such offer is to pay withholding tax also on crossed cheques that will, they say, raise revenues worth billions.

What worries them is that a blanket application of Section 165-A, inducted in the Income Tax Ordinance 2001 this June, regarding access to transactions will expose their accounts to misuse, and subject account holders to harassment and blackmail by FBR functionaries. The Senate’s standing committee on finance had in its meeting on June 17 rejected the government move. Some senators were of the opinion that this measure was likely to promote ‘corruption and open up new doors of blackmailing’ by the tax authorities.

The fear stemmed from the fact that the new amendment did not define the category of account holders who would come under its jurisdiction. Authorities removed this confusion by issuing a notification saying that not all account holders are subject to having their accounts accessed by the FBR.

There have been repeated clarifications, and a recent one made by Finance Minister Ishaq Dar at the meeting of the apex body of the business community on August 18 made it clear that bank accounts of only those ‘affluent’ persons who are out of the tax net or are deliberately not paying taxes will be looked into. The accounts of existing/compliant taxpayers would not be touched. But the fear still seems to persist.

During the meeting, the finance minister made it amply clear that the government was not considering ‘deferring the changes’ in the law, as has been sought by some business circles. Besides, he assured Federation of Pakistan Chamber of Commerce and Industry (FCCPI) members that only top officials of the FBR, such as its chairman and board members — not ordinary officials — will be authorised to have access to the bank accounts.

But many businessmen are still unsure about the safety of their bank accounts. Those who are involved in illegal transactions or money laundering have already spread panic that businessmen were withdrawing most of their deposits or simply closing their accounts, to put pressure on the government to withdraw the scheme.

What is strange to note is the lack of support shown by members of the FPCCI for the government’s efforts to expand the tax net and persuade the non-taxpayers to enter the net. Instead most of them have been so pre-occupied with rescuing their own bank accounts from the FBR ‘invasion’.

Currently, the total number of National Tax Number (NTN) holders in the country in a population of 180 million is just 3.3 million. Of these, around 800,000 persons are paying taxes. Pakistan’s tax-to-GDP ratio is one of the lowest in the world.

The most committed to tax compliance are the corporate sector and the salaried class. The latter are in fact forced to pay, as their taxes are deducted at source. A large number of self-employed persons prefer to pay FBR functionaries rather than the national exchequer.

In April, Sir Malcolm Bruce, chairman of Britain’s House of Commons’ international development committee, had warned in a report that the British public may rise against economic assistance to Pakistan if the elite there “don’t come to senses and continue to evade taxes and encourage corrupt practices”.

In its report, the powerful committee had recommended halting the planned rise in aid to Pakistan, after having seen ‘no evidence’ in the last few years that there was any movement towards ‘serious tax reforms’ and having not noticed the wealthy people ‘taking any responsibility by stopping to cheat.’

Britain had planned to increase its bilateral assistance to Pakistan from £267 million in 2012-13 to £446 million in 2014-15, making Pakistan the largest recipient of UK aid.

The people of Pakistan, the report says, should know that the “Pakistani rich class who don’t pay taxes at all are wealthier than British citizens, including British Pakistanis”. If the British public has a commitment towards Pakistan, then Pakistan’s rulers and other wealthy people should have a similar commitment too. “We have to work together to deliver results. If we are to increase our contribution then the tax base should increase at the same time…”

The committee chairman Sir Bruce added it’s not the wealthy in Pakistan alone who are cheaters. Britain’s elite, as well as rich people everywhere else in the world, try to hide their wealth and dodge paying taxes, but what’s happening in Pakistan is beyond any comparison. Pakistan’s wealthy class, he observed, don’t seem to have any respect for the concept of social contract and justice.