While ad-hoc measures to collect tax help the government enhance the quantum of its revenues, they are an impediment to increasing the number of taxpayers and the composition of taxes.
Are there flaws rooted in the tax policy or the administrative set-up?
For policymakers, increasing the quantum of revenue is a target in itself, but tax practitioners view the Federal Board of Revenue (FBR) as an organisation mostly surviving on tax deduction at source instead of income-based assessment.
Tax experts point out that the tax policy is one of the major irritants in broadening and deepening the tax base. “I think the grey area in tax policy is one of the hindrances,” Shabbar Zaidi, an expert, said.
The tax system in Pakistan, he said, was haunted by an ‘unholy trinity’: a presumptive tax regime, bogus gifts and exemption on remittances. Together they have spoilt the substance of the tax system in Pakistan, he said.
The concept of presumptive income was introduced in 1980 for the taxation of income of foreign shipping and air transport enterprises.
It was introduced as a remedial measure and to mitigate the adverse effect of tax foregone on account of the huge depreciation allowance claimed while computing income on a net basis.
In subsequent years, its scope was extended to several other instruments. The tax deducted considered as final discharge of tax liability.
Further, the concept of maintaining a full set of books of accounts also vanished from taxpayer’s minds due to taxation of its gross receipts on a presumptive basis.
Considering it an easier tool to collect revenue, the final taxation regime is fraught with the possibilities of ultimately complicating the system more than simplifying it.
Presumptive taxation, bogus gifts and exemption on remittances have together spoilt the system, an expert says
The FBR has recommended continuing with the final tax regime to primarily collect tax paid which is collected by other withholding agents, with little or no FBR input.
Tax withholding at present represents about 80pc of direct tax collection.
Mr Zaidi believes that presumptive tax is one of the unique taxation systems in Pakistan and “one of the most absurd concepts” introduced in the taxation law in any civilised society.
In short, under this regime, the direct taxation system is totally ignored because income is not taxed, but the value of import, value of supply, gross receipts, gross commission or sums received on export proceeds, etc. are taxed as income.
The second sin, according to Mr Zaidi, is the non-taxability of gifts. Recently, the Inland Revenue’s intelligence department unearthed 3,000 cases of gifts in which Rs102 billion untaxed amount was involved.
Ironically, there is no bar on the receipt of gifts, even from unrelated persons, in Pakistan.
There is a permanent window for whitening black money under section 111(4) of the Income Tax Ordinance. Under this scheme, money received from abroad through the banking channel is immune from tax.
“This is a wrong, absurd, illogical, discriminatory, ethically and morally incorrect and corrupt piece of legislation ever introduced in any country. This is an intellectual crime,” Mr Zaidi said.
Why would someone pay tax at the rate of 30pc to 35pc when this permanent route of amnesty is available at a nominal cost of around 2pc simply by managing foreign remittances?
This legislation is essentially a continuation of the Foreign Exchange Bearer Certificate (FEBC) scheme that was in vogue before the provisions of section 111(4) of the ordinance or other provisions of similar character.
He suggests abolishing all presumptive taxes, amending gift schemes, linking foreign currency accounts with national tax numbers and limiting immunity from tax on personal foreign remittances to $5,000.
The disclosure of source should also be mandatory, he added.
The tax reform commission has also suggested limits for foreign remittances seeking tax exemptions.
A bigger and more serious issue is the outflow of untaxed income, which the FBR should arrest through right measures.
Are there flaws in the country’s tax policy or the administrative set-up that put blockages in widening the tax base?
This might entail close coordination with the State Bank of Pakistan and monitoring outward remittances, but will ensure the documentation of the economy in an effective and efficient manner.
The fear of a complicated tax process is one of the major hurdles in broadening the tax base and corruption is a by-product of this process.
Another tax practitioner, Mansoor Ali Khan, said people have legitimate reasons for keeping money outside Pakistan. He listed several clauses in the income ordinance which are being misused by tax officials.
But policy is not the only hurdle. On the administrative end, there are some issues which need attention as well.
In 2011, an amendment was made to the Federal Board of Revenue Act of 2007 for creating a tax policy board (TPB) headed by the Ministry of Finance to provide guidance on fiscal policy matters to the FBR.
The task of the board was to debate and formulate national tax policy in consultation with stakeholders on a continuing basis.
But until the government separates policy from administration, broadening the tax base will remain a challenge.
A reason given for the FBR’s administrative difficulties is its outdated infrastructure which has greatly affected productivity.
“The existing IT infrastructure did not easily allow uploading taxpayer returns,” former FBR chairman Dr Irshad said, adding that the IT equipment became outdated four years ago.
While taxation policies have advanced, the existing IT infrastructure doesn’t support them.
He said a huge investment is required in the IT infrastructure and agreed that non-compliance will reduce only by simplifying the tax process.
Ejaz Hussain Rathore, a tax expert, said the tax system can be improved by addressing competence deficit in the tax department.
Published in Dawn, The Business and Finance Weekly, August 14th, 2017