FBR’s Lack Of Agility

Pakistan's tax system is marred by corruption and inefficiency, with only 4 million taxpayers among 43 million households, unfairly burdening the poor while the rich evade taxes.

FBR’s Lack Of Agility

90% of Pakistan’s population does not pay taxes. Out of 43 million households in the country, only 4 million are registered taxpayers……. retired officers have admitted to taking bribes for processing tax refunds. In legitimate cases, smaller bribes are accepted, while larger sums are demanded for fraudulent refunds…. “There are traders and industrialists who do not evade even a single rupee of tax…..Those who commit fraud and evade sales tax must be held accountable—Rashid Mahmood Langrial, Chairman FBR, in an address to the apex trade and commerce body in Karachi on October 16, 2024

The problem with incompetence is its inability to recognise itself— 
 Orrin Woodward, L.I.F.E. Living Intentionally For Excellence

The random thoughts of the incumbent Chairman of the Federal Board of Revenue (FBR), while addressing the leading businessmen of Pakistan the other day confirmed that he has little idea about the tax base and incidence of taxes in Pakistan. However, he rightly observed that over the decades, FBR had proved to be an epitome of inefficiency, corruption, indiscipline, and high-handedness. The apex revenue authority at the federal level has failed on all fronts: collection targets, widening of the tax base, countering tax evasion and avoidance, recovery of arrears, voluntary compliance, reform process, and whatnot. 

It is an incontrovertible fact that FBR ruthlessly wasted borrowed funds of millions of dollars under Tax Administrative Reforms Programme (TARP) but could not induce or compel at least 20 million potential taxpayers to file tax declarations voluntarily. According to Rashid Mahmood Langrial, the total number of registered taxpayers in Pakistan is only four million. In his address, he alleged that “90% of Pakistan’s population does not pay taxes”. This statement is contrary to facts highlighted in these columns frequently. 

It was highlighted in a recent article:

Admittedly, out of 120 million unique mobile users who paid advance/adjustable income tax during the FY 2022-23, 100 million had no income or income below the taxable limit! FBR failed to register all taxable individual—their number cannot be less than 20 million based on available data for FY 2022-23 with telecoms about their handsets, traveling history quantum of bills, etc. Had FBR done this, the monstrous tax gap in income tax filers could have been bridged, eliminating the self-created category of “non-filers”! Thus, registering the entire taxable population and making them return filers was, in fact, deliberately avoided by the FBR to retain a justification for extorting 75% oppressive advance income tax from the poorest of the poor mobile users having no taxable income.

The FBR cannot repudiate the fact that with effect from July 1, 2024, the entire taxable population and even those having no income or income below the taxable limit are paying advance and adjustable 15% income tax as filers and 75% as non-filers, being prepaid or postpaid mobile/broadband users. In the face of this undeniable factual position, under what logic, the FBR and others part of their bandwagon are labeling Pakistanis as tax cheats?

The persistent negative and malicious propaganda by the FBR of a “low tax base”, and media campaigns by certain entities, funded by foreign governments and non-governmental organisations (NGOs) that only 1% of the Pakistani population pays income tax are highly deplorable. They knowingly ignore the distinction between ‘payers’ and ‘filers’.

The Chairman FBR failed to highlight that the majority of non-filers are rich and mighty, including 50% of government employees having taxable income and hundreds of elected members of parliaments. FBR has not only failed to tap the actual tax potential of Rs34 trillion (17% of GDP, if the informal economy is also included) but is also guilty of shifting the tax burden from the rich to the poorer segments of society. It is serving and protecting the interests of the ruling elite—indomitable military-judicial-civil complex, corrupt politicians, and greedy businessmen.  

The present tax scenario shows that an overwhelming majority of Pakistanis are paying income tax at source and in some cases the tax withheld is full and final discharge of liability (for example 15% tax withheld on interest income from banks) The rate is 30% in the case of persons not appearing of Active Taxpayers’ List (ATL). However, if anyone has only this source of income, a refund of 15% can be claimed by just filing the regular return. The worthy Federal Finance Minister, Muhammad Aurangzeb, and Chairman FBR have yet not comprehended why people hesitate to file income tax returns in such cases when they can easily claim 50% of excess tax withheld! It has been explained in detail in an article, published recently. Hopefully, they will read it and change their stance about “poor” tax compliance in Pakistan. 

The majority of the rich and mighty just pay a fraction of income tax by way of withholding tax on their colossal incomes. They never bother to file returns and wealth statements—for tax years 2022 and 2023 even many FBR officers and parliamentarians failed to file tax returns and wealth statements!

Since only a fraction of the income taxpayers’ population file returns, a general misconception prevails that our income tax base is narrow. The fact is that millions pay income tax under various withholding provisions (more than 65 are in operation), but do not file returns and if they do so the FBR would have to refund billions to those who earn income which is below the taxable limit. This narrative is not available in any official and independent discourse—maligning the Pakistanis as a nation of tax cheats. The reality is that the rich and mighty are tax evaders and get state patronage for that.

The majority of mobile users have income below taxable limit. They would not bother to claim the refund of tax withheld by filing tax returns—primarily because filing a return would cost more than the amount withheld and secondly, for a refund claim one has to file an application electronically—for many illiterate Pakistanis, imposing such conditions by FBR shows its mind-set of highhandedness which is highly deplorable. On the contrary, the majority of the rich and mighty just pay a fraction of income tax by way of withholding tax on their colossal incomes. They never bother to file returns and wealth statements—for tax years 2022 and 2023 even many FBR officers and parliamentarians failed to file tax returns and wealth statements.

Can the Chairman FBR tell the nation how many judges, generals, and high-ranking civil servants filed tax returns in the last ten years showing the value of taxable perquisites or claiming their exemptions under any specific provision of law? It is time that FBR tells the nation how much tax was paid by the rich 1% of Pakistanis—judges, generals, bureaucrats, parliamentarians, politicians, professionals, industrialists, and traders, during the last 15 years. 

They intentionally hide the fact that where our actual problem lies. They have been more preoccupied with giving amnesty to their rich political masters, rather than taking them to task.

The new Chairman must probe and tell the nation how the wealthy classes have accumulated colossal assets without paying due taxes. Can FBR explain to the citizens what prevented it from issuing notices to the rich and mighty who received plots at no or concessional cost, and paid no tax under section 13(11) or section 39(1)(j) of the Income Tax Ordinance, 2001? People have the right to ask why FBR is reluctant to tap tax delinquents sitting in the parliaments having taxable income but failing to file tax returns and wealth statements under the law or just showing emoluments from the State as their only source of income. In fact, FBR should enforce provisions of the Income Tax Ordinance, 2001 across the board, without any hesitation forcing those who qualify under the law to file tax returns or be prepared for suffering penal actions. 

The data cited above and in many other articles confirm beyond any doubt the ineffectiveness and incompetence of FBR. Our tax base is not narrow as nearly 120 million persons are paying income tax at source, but the rich and mighty are not paying taxes on their enormous incomes and assets. Unfortunately, the high-ranking officials of FBR have not been speaking truthfully. They intentionally hide the fact that where our actual problem lies. They have been more preoccupied with giving amnesty to their rich political masters, rather than taking them to task. Our tax base is distorted—the system protects tax avoiders and plunderers of national wealth as well as forgoes revenues of billions of rupees through exemptions, amnesties, concessions, and immunities—most of the time using the wicked device of SROs (statutory regulatory orders). 

It is well-established that many withholding provisions in Income Tax Ordinance, 2001 bear the nature of indirect taxes that not only adversely affect the salaried class and the poor but are also among the factors triggering high inflation that reached 31.5%) in February 2023. The dozens of high-rate taxes and non-tax levies, both at the federal and provincial levels, yielded low revenues at the national level of Rs13.27 trillion against total expenditure reaching Rs20.48 trillion. This is our real malady and dilemma

According to the Summary of Consolidated Federal and Provincial Fiscal Operations, 2023-24, FBR collected Rs. 4.53 trillion as direct taxes, Rs. 3.99 trillion as sales tax, Rs1.10 trillion as custom duties and Rs 577.4 billion as federal excise duty.  The actual income tax potential even under the documented economy is not less than Rs12 trillion and that of sales tax at Rs8 trillion. Similarly, the potential of Customs Duty (using a 5% rate on $100 billion base could fetch Rs1,300 billion). Federal Excise Duty (FED) even if kept at its current position can fetch Rs700 billion.

Given the above, total tax potential at the FBR level alone comes to Rs22 trillion:

  • Income Tax: Rs12 trillion;

  • Sales Tax: Rs8 trillion;

  • Customs Duty: Rs1.3 trillion, and

  • FED: Rs700 billion

 Had this huge tax gap been bridged, the total revenue collection by FBR including petroleum levy would have been double the target of Rs12,97 trillion, assigned for the current fiscal year in Budget 2024-25, without imposing any new taxes or raising existing tax rates as was done in the Finance Act, 2024.

The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)