Despite a lower than stipulated economic growth in the outgoing fiscal year, the Federal Board of Revenue (FBR) has collected Rs3,374 billion.
A few more billions may be added to the revenue after reconciliation of accounts in the next couple of weeks.
The volume of revenue has increased in absolute terms due to the imposition of more than Rs1 trillion of new taxes in the past five years. Yet, the tax-to-GDP ratio has stagnated at around 10pc over the last few years.
In terms of tax-to-GDP ratio, Pakistan is behind some of the poorest countries like Haiti, Gabon, Sierra Leone, Panama and Madagascar.
The question then arises: how did the FBR manage to cross the Rs3tr mark?
The contributing factors for the increase are the withdrawal of tax exemptions, new withholding taxes, imposition of regulatory duties and collection of past arears.
The current government has imposed 20 new withholding taxes since June 2013, while increasing the existing withholding tax rates for non-filers in order to ‘improve tax compliance’. Since then the number of withholding tax (WHT) categories have risen to 56 from 36.
Tax analysts believe the FBR has managed to achieve the revenue target through unsustainable and one-time, artificial measures
Even FBR Official Spokesperson, Dr Muhammad Iqbal, admitted that there is no more space for fresh taxation measures. “We have exhausted the available space in the past five years,” he said, adding that now the FBR will have to improve its enforcement.
Dr Iqbal said the field formation will have to identify tax evaders so as to bring them under the tax net. He said there is a huge potential for revenue collection in almost all sectors which are not fully contributing in the tax net.
Foreign donors lent Pakistan more than Rs14bn over the last 10 years for the reformation of the tax system/ administration but with no noticeable positive outcome.
Corruption, inefficiency and poor governance are still the hallmark of the country’s top taxation machinery.
Surprisingly, the net result of the FBR’s reforms is low filing of tax returns, a dip in the tax compliance level and a tax gap — the difference between potential and actual collection. The number of income tax returns filers stood at 1.2 million for the tax year 2016.
Tax compliance in Pakistan is in a constant decline. Compliance level fell to 21.32pc in the tax year 2016 from 26.17pc in tax year 2012, reflecting the country’s poor tax culture. Tax-compliance in tax year 2010 was 65pc.
The number of people having a national tax number (NTN) stood at 3.3m in 2012 as against 3.7m in tax year 2016. The NTNs also include dormant and dead cases. Pakistan’s ratio of taxpayers to population is at a low 0.5pc compared with India’s 2.7pc.
This poor tax compliance level can be attributed to the audit suspension and a lack of enforcement because of tax base integration — sales and income taxes. The compliance level in performing developing countries ranges between 70-80pc.
Similarly, taxpayers registered with the sales tax department are slightly over 150,000 but more than 80pc revenue is generated from 10 revenue spinners. Of these the active taxpayers are 127,000 from which only 114,000 taxpayers have filed returns in the tax year 2016.
So like income tax, the filing of tax returns in sales tax and federal excise is also negligible as compared to the potential.
A recent study by a Washington-based university has put Pakistan’s tax-gap at 58.3pc.
It further reveals that the evasion in income tax is more than 100pc as compared to indirect taxes (consumption taxes), which is less than 30pc, showing that a large number of people are not paying income tax in Pakistan.
The huge tax evasion also indicates a bigger informal economy and evasion of taxes by the rich. Agriculture income is always considered to be a major area where tax dodgers face no difficulty in evading taxes.
Real estate is another area, where the FBR has failed, allowing dealers and investors to enjoy duty evasions. They are influential people having access to the power corridors.
While the FBR is the only department where salaries have been doubled across the board to improve efficiency of its officials, its performance is quite off the mark.
The tax revenue of 19 regional tax offices (RTOs) is raised through at source deduction, which accounts for 95-97pc of the total tax return. Currently, the cost of RTOs running these offices is more than the revenue generated by them.
Around 70pc of the income tax is contributed by withholding tax. Some withholding tax measures, like the banking transaction tax of 0.3pc, generated around Rs22bn. The rate has now been increased to 0.4pc which will increase further revenue in the current fiscal year.
The super tax imposed last year on big corporate taxpayers generated over Rs24bn. This levy has been extended for the current fiscal year as well.
The government has not succeeded in curbing tax evasion or distributing the burden of taxes fairly and equitably. Nor have tax exemptions been done away effectively.
A study shows that tax evasion results in a loss of 5pc tax to GDP ratio. Revenue from the existing sources is reaching a saturation point. Over-taxing the same sectors has led to economic slowdown while potential taxpayers have yet to be brought in the tax net.
Published in Dawn, The Business and Finance Weekly, July 24th, 2017