Tax challenge

Published December 2, 2020

THE FBR has released tax collection figures for the first five months of the present fiscal year. But they are not looking pretty even though tax collection has crept up since the removal of the coronavirus restrictions. The FBR has marginally surpassed its target of Rs1.67tr, which is seen to be on the lower side, for the period between July and November, but tax collection is still forecast to lag far behind the budgeted target of Rs4.96tr for the entire financial year to the disappointment of the cash-strapped government.

The IMF is reported to already have projected a gap of around Rs300bn between the budgeted target and the expected collection for the entire fiscal year. And if the government is forced to once again lock down the economy, fully or partially, to check Covid-19 infections, the tax shortfall at the end of the current year would be even worse.

Read: Virus surge, restrictions threaten economic recovery

Equally worrying are the very low numbers of income tax filers, which indicates the failure of successive governments to broaden the extremely narrow tax base and jack up the share of direct (income) tax in overall tax revenues. Last year, the FBR reported that nearly 3m people had filed income tax returns although a large number of them had declared their income to be below the tax threshold. This year only a third of them have filed returns thus far despite the fast-approaching extended deadline of Dec 8.

This is in spite of the claims by senior government officials that the board has credible data of 7.4m people whose withholding taxes are deducted, but who do not file their returns. Apparently, this number also includes over 3m people who, according to the FBR, frequently travel abroad, live in large homes in posh localities and drive luxury cars but don’t pay any income tax.

The shrinking share of income tax in tax revenues should be a cause of concern for policymakers because of the established linkages between increasing poverty and the government’s growing reliance on indirect taxes. The share of direct and indirect tax during the last 10 years has been 35pc and 65pc, according to the FBR. In income tax collection, the element of ‘indirect income’ taxes was 20pc, which underscores the fact that the actual share of direct taxes has not been more than 15pc.

The growing share of indirect taxes and presumptive levies in tax revenues means that the burden of the wealthy is being shifted onto the low-middle-income people. The rich, on the other hand, are not only spared the payment of their share of taxes but also given periodic amnesties to legalise tax-evaded holdings accumulated over the years. No effort to increase tax collection can succeed without broadening the base and reforming the income tax regime with a view to eliminating presumptive and withholding taxes.

Published in Dawn, December 2nd, 2020

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