The main fault of budget 2017-18 is its failure to provide Pakistan a roadmap to become self-reliant, which would mean collecting taxes according to the country’s real tax potential and achieving an economic growth rate of over 7% for a decade.
Instead, we found it strange that the government did not include a single measure in Finance Bill 2017 to counter the illegal flight of capital and to bring back untaxed money stashed abroad. After the Panama Papers, the finance minister should have cracked the whip on the informal economy to show that he meant business.
If he dreams of us becoming a member of G20 by 2030, as he said, he will have to wake up to the reality that this isn’t going to happen as long as we don’t have the resources and are staggering under ballooning debt.
Everybody pleads for rationalization of taxation—taxing the rich and bringing the sales tax down to 10% after getting rid of all exemptions. Instead, the taxation proposals talk about a further increase in indirect taxes (through regulatory duty on hundreds of items) but are silent on practical ways to tap the real tax. And so, Finance Bill 2017 confirms that the rich and mighty will continue to swim in their colossal incomes and wealth—in fact they will get richer without paying taxes. They are more than content to remain non-filers by paying the meagre withholding tax and happily avoiding the tax that is due on their real incomes.
Sadly, the corporate sector is being further penalised through a 10% taxation on undistributed profits and a rise in the rate of turnover tax from 1% to 1.25%. These steps, along with higher taxes on dividend and capital gains on shares, would lead to more investments in unproductive vacant plots in lucrative societies. There will be a negative impact on corporatization and documentation of the economy. Less investment in industry means less job opportunities.
The gigantic government apparatus—the epitome of bad governance—has received raises in pay and pension. Not a single step has been taken to rein in the enormous perks and benefits of public office holders, judges, high-ranking civil-military officials, which could have been monetized to save us billions.
All independent economists are unanimous in the agreement that in his fifth budget, Finance Minister Ishaq Dar has not tackled the country’s main economic challenges: fiscal, trade, current account deficits, stagnation in industrial growth and a decline in exports. And so, our 70th bureaucrat-designed budget only contains the same clichés about economic revival! In the last four years, the government has not been able to kickstart long-overdue fundamental reforms to overcome issues like poverty, resource mobilisation, shortage of skilled manpower, a lack of affordable, uninterrupted power and rapid infrastructure development.
The real potential
The budget has failed to outline steps to bridge the huge tax gap. Pakistan has a tax potential of no less than Rs8 trillion. According to the Household Integrated Economic Survey 2011-12 conducted by the Pakistan Bureau of Statistics, 10 million individuals have an annual taxable income of Rs1.5 million. If all of them filed tax returns, income tax collection will be around Rs3,000 billion (3tr). If income tax from corporate bodies, other than non-individual taxpayers and individuals having income between Rs400,000 and Rs1,000,000, is added, the gross figure would not be less than Rs5,000 billion (5tr). The FBR collected only Rs1,220 billion during Fiscal Year 2015-2016 and in the current year figure will be not more than Rs1,350 billion.
Similarly, due to leakages in sales tax, federal excise and custom duties, only half of actual potential is collected. In 2015-16, the FBR collected Rs1,088 billion in sales tax, Rs162 billion as federal excise and Rs404 billion in customs duties. Collection under these heads in the current year will marginally improve, but, the actual positional is Rs3,000 billion. This year expected growth in the FBR’s collection is around 8%. This will be reached by blocking refunds and taking an advance of billions from taxpayers. The goal of collecting Rs8 trillion, which is the real potential, is not even the part of vision of budget-makers! This testifies to the fact that there is no will to tax the high and mighty.
Getting away with it
The high and mighty sections of society do not pay due taxes, enjoy tax-free benefits and also get State lands at throwaway prices or as free awards. The government is least bothered about taxing the undocumented economy and benami transactions. Since, the high and mighty are engaged in these transactions, the FBR is helpless.
For proof take a look at Tax Directory 2015 that shows that out of 1,001,722 returns filed by individuals, 31% paid no tax. Then 63% were among those paying up to Rs20,000. And 83% paid up to Rs100,000. Only 43 individuals paid tax over Rs10,000,000!
Total filers (other than individuals) were 72,699. Out of these, 39% paid no tax at all. Just 1,395 entities paid Rs25 million or more. Only 60 entities paid Rs1 billion or more. And 100 top companies contributed about 56% of total tax paid by all companies and other Association of Persons.
According to the FBR’s own admission, total return filers till May 26, 2016 were about 1.2 million, whereas 90 million mobile users paid advance income tax of 14% during the period relevant for tax year 2016. There are nearly 1.8 million Pakistanis, who frequently embark on international tours but do not file tax returns. There are around 3 million who have obtained NTNs for businesses but 60% are non-filers!
These facts and figures confirm that the FBR has failed to enforce tax laws. In the last two years, over 4 billion dollars alone was invested by Pakistanis in the UAE. On the floor of the House, the Finance Minister resolved to bring US$200 billion stashed abroad by tax evaders, but not a single penny has been retrieved till today.
The state of the economy is not at all satisfactory. Imports are increasing, exports are declining, the energy crisis persists, debts and fiscal deficit are worrisome, poverty is a reality for millions, tax compliance is extremely poor and unemployment is a source of disillusionment for the overwhelming young population. We need a sustainable growth of 6% to 8% for a decade to provide two million jobs every year to our youth alone.
There is a national consensus that existing tax policies have been stifling economic growth and widening the rich-poor divide. They need to be reformulated to provide an equitable, pragmatic and investment-oriented environment, integrate efficient tax administration with simplified tax laws that are easily comprehensible and hassle-free from implementation perspectives. This perspective is completely missing in the budget 2017-18.
The writers are lawyers and Adjunct Faculty at the Lahore University of Management Sciences.
Instead, we found it strange that the government did not include a single measure in Finance Bill 2017 to counter the illegal flight of capital and to bring back untaxed money stashed abroad. After the Panama Papers, the finance minister should have cracked the whip on the informal economy to show that he meant business.
If he dreams of us becoming a member of G20 by 2030, as he said, he will have to wake up to the reality that this isn’t going to happen as long as we don’t have the resources and are staggering under ballooning debt.
Everybody pleads for rationalization of taxation—taxing the rich and bringing the sales tax down to 10% after getting rid of all exemptions. Instead, the taxation proposals talk about a further increase in indirect taxes (through regulatory duty on hundreds of items) but are silent on practical ways to tap the real tax. And so, Finance Bill 2017 confirms that the rich and mighty will continue to swim in their colossal incomes and wealth—in fact they will get richer without paying taxes. They are more than content to remain non-filers by paying the meagre withholding tax and happily avoiding the tax that is due on their real incomes.
Sadly, the corporate sector is being further penalised through a 10% taxation on undistributed profits and a rise in the rate of turnover tax from 1% to 1.25%. These steps, along with higher taxes on dividend and capital gains on shares, would lead to more investments in unproductive vacant plots in lucrative societies. There will be a negative impact on corporatization and documentation of the economy. Less investment in industry means less job opportunities.
The rich are more than content to not file their income tax returns and pay the meagre withholding tax that then applies so they can avoid the tax that is due on their real incomes
The gigantic government apparatus—the epitome of bad governance—has received raises in pay and pension. Not a single step has been taken to rein in the enormous perks and benefits of public office holders, judges, high-ranking civil-military officials, which could have been monetized to save us billions.
All independent economists are unanimous in the agreement that in his fifth budget, Finance Minister Ishaq Dar has not tackled the country’s main economic challenges: fiscal, trade, current account deficits, stagnation in industrial growth and a decline in exports. And so, our 70th bureaucrat-designed budget only contains the same clichés about economic revival! In the last four years, the government has not been able to kickstart long-overdue fundamental reforms to overcome issues like poverty, resource mobilisation, shortage of skilled manpower, a lack of affordable, uninterrupted power and rapid infrastructure development.
What should happen
Pakistan's tax potential = Rs8tr
People + corps can give = Rs5tr
But the FBR collected = Rs1.2tr
The real potential
The budget has failed to outline steps to bridge the huge tax gap. Pakistan has a tax potential of no less than Rs8 trillion. According to the Household Integrated Economic Survey 2011-12 conducted by the Pakistan Bureau of Statistics, 10 million individuals have an annual taxable income of Rs1.5 million. If all of them filed tax returns, income tax collection will be around Rs3,000 billion (3tr). If income tax from corporate bodies, other than non-individual taxpayers and individuals having income between Rs400,000 and Rs1,000,000, is added, the gross figure would not be less than Rs5,000 billion (5tr). The FBR collected only Rs1,220 billion during Fiscal Year 2015-2016 and in the current year figure will be not more than Rs1,350 billion.
Similarly, due to leakages in sales tax, federal excise and custom duties, only half of actual potential is collected. In 2015-16, the FBR collected Rs1,088 billion in sales tax, Rs162 billion as federal excise and Rs404 billion in customs duties. Collection under these heads in the current year will marginally improve, but, the actual positional is Rs3,000 billion. This year expected growth in the FBR’s collection is around 8%. This will be reached by blocking refunds and taking an advance of billions from taxpayers. The goal of collecting Rs8 trillion, which is the real potential, is not even the part of vision of budget-makers! This testifies to the fact that there is no will to tax the high and mighty.
For proof take a look at Tax Directory 2015 that shows that out of 1,001,722 returns filed by individuals, 31% paid no tax. Then 63% were among those paying up to Rs20,000. And 83% paid up to Rs100,000. Only 43 individuals paid tax over Rs10,000,000!
Getting away with it
The high and mighty sections of society do not pay due taxes, enjoy tax-free benefits and also get State lands at throwaway prices or as free awards. The government is least bothered about taxing the undocumented economy and benami transactions. Since, the high and mighty are engaged in these transactions, the FBR is helpless.
For proof take a look at Tax Directory 2015 that shows that out of 1,001,722 returns filed by individuals, 31% paid no tax. Then 63% were among those paying up to Rs20,000. And 83% paid up to Rs100,000. Only 43 individuals paid tax over Rs10,000,000!
Total filers (other than individuals) were 72,699. Out of these, 39% paid no tax at all. Just 1,395 entities paid Rs25 million or more. Only 60 entities paid Rs1 billion or more. And 100 top companies contributed about 56% of total tax paid by all companies and other Association of Persons.
According to the FBR’s own admission, total return filers till May 26, 2016 were about 1.2 million, whereas 90 million mobile users paid advance income tax of 14% during the period relevant for tax year 2016. There are nearly 1.8 million Pakistanis, who frequently embark on international tours but do not file tax returns. There are around 3 million who have obtained NTNs for businesses but 60% are non-filers!
These facts and figures confirm that the FBR has failed to enforce tax laws. In the last two years, over 4 billion dollars alone was invested by Pakistanis in the UAE. On the floor of the House, the Finance Minister resolved to bring US$200 billion stashed abroad by tax evaders, but not a single penny has been retrieved till today.
The state of the economy is not at all satisfactory. Imports are increasing, exports are declining, the energy crisis persists, debts and fiscal deficit are worrisome, poverty is a reality for millions, tax compliance is extremely poor and unemployment is a source of disillusionment for the overwhelming young population. We need a sustainable growth of 6% to 8% for a decade to provide two million jobs every year to our youth alone.
There is a national consensus that existing tax policies have been stifling economic growth and widening the rich-poor divide. They need to be reformulated to provide an equitable, pragmatic and investment-oriented environment, integrate efficient tax administration with simplified tax laws that are easily comprehensible and hassle-free from implementation perspectives. This perspective is completely missing in the budget 2017-18.
The writers are lawyers and Adjunct Faculty at the Lahore University of Management Sciences.