A Collection of tax where it is not due is as detestable as its non-payment when it is due—Nasim Sikander J, CIT Companies, Lahore v State Cement of Corporation (Pvt) Ltd, Lahore 2002 PTD 1603
This deprivation [collecting taxes in advance] results in unjustly enriching and benefitting the department—Syed Mansoor Ali Shah J, Sui Northern Gas Pipelines v Deputy Commissioner of Inland Revenue etc. (2014) 110 TAX 221 (H.C. Lah.)
In all civilized societies, governments give recognition and express gratitude to citizens who pay their taxes, as well as to those who act as withholding tax agents on the state’s behalf and collect taxes for the well-being of their fellow citizens. The state not only acknowledges their services, but also authorizes them to hold back a certain percentage of collection as their charges to compensate expenses incurred by them in the performance of their official functions. In Pakistan, the inverse is the case. The law says that no one is entitled to compensation for collecting tax on behalf of the state. Not only are the withholding agents insulted and humiliated, but citizens are deprived of money by way of withholding tax provisions and on asking for refunds, are severely penalised by tax officials.
Millions in Pakistan, having no income or income below taxable limit, not liable to income tax under any provision of Income Tax Ordinance, 2001, suffer numerous withholding of taxes. They are required to file tax returns online to claim refunds. This is in utter violation of Article 4(c) of the Constitution of the Islamic Republic of Pakistan, which says: “No person shall be compelled to do which the law does not require him to do”.
According to the Pakistan Economic Survey (2021-22), the labor force increased from 65.5 million in FY 2017-18 to 71.76 million in FY 2020-21, and the number of employed persons increased from 61.71 million to 67.25 million during the same period. As per the latest information available on the website of the Pakistan Telecommunication Authority (PTA), total cellular subscribers as on February 28, 2023 were 194 million (86.53% mobile teledensity). Out of these, 124 million had mobile broadband utility (54.42% mobile broadband penetration), 3 million fixed telephone line users (1.16% fixed teledensity) and 127 million broadband subscribers (56.83% broadband penetration). It is thus clear that not less than 120 million mobile users, many of them with multiple SIMs, have been paying advance and adjustable income tax of 15% from July 1, 2022 (earlier it was 12.5%).
The above data proves beyond any doubt that presently, the entire taxable population, and even those having no income or income below the taxable limit are paying advance and adjustable income tax at source as mobile users, though the overwhelming majority does not file income tax returns. The issue is the determination of accurate tax base—the number of persons, as defined in the Ordinance, that includes individuals, firms, association of persons and companies, having taxable income and are liable to file income tax returns.
In case all individual mobile users paying advance tax file income tax returns, there would be refunds payable to at least 90 million having no income or income below the taxable limit. Indeed, the cost of claiming refunds would be much higher than the amount of tax withheld—sadly, the FBR does not acknowledge such persons as “taxpayers” and is not even ready to pay refunds to existing income tax filers.
The legitimate question that comes to the mind is: if a citizen has no or below taxable income, why does tax withholding apply? As mentioned above, at least 90 million individuals, subjected to advance tax collection as mobile users, have been unlawfully compelled to spend money for claiming refunds of meagre amounts paid by them along with bills or when topping up their subscriptions online!
With regards to withholding tax agents, treated as “slaves” and subjected to forced labor with no financial compensation, this is gross violation of Article 11 of the Constitution. No service fee is allowed to be paid to withholding agents for man-hours and other expenses they incur to collect taxes on behalf of the government [section 168(6) of the Ordinance]. Adding insult to injury, they are subjected to penal actions even when the person on whose behalf tax was collectable pays the same. This shows the disgusting and ugly face of our tax system and its machinery that collects hardly 5% of total revenues with its own efforts, and for the rest, not only uses Pakistani citizens as withholding agents, but also humiliates them.
We hardly need any other indicator to prove the level of high-handedness, arbitrariness, sadistic mindset and cruel attitude that prevails in all revenue authorities—both federal and provincial. Brown sahibs sitting in tax agencies get kudos from the gora sahibs of the International Monetary Fund and World Bank for these atrocities. Through these oppressive measures, tax authorities are destroying the socioeconomic fabric of our society, depriving people of their self-esteem and legal rights guaranteed under the Constitution.
There are more than 50 withholding tax provisions in the Ordinance, the latest added by the Finance (Supplementary) Act, 2023 with effect from February 23, 2023 by inserting subsection (6) in section 37 of the Ordinance. It requires all buyers of shares, other than those of listed companies through stock exchange, to withhold 10% tax on the fair market value of such scrips.
The withholding provisions provide deduction at source or payment of income tax in advance. It means that even before one can determine one’s taxable income and amount of income tax payable for a tax year, already a substantial amount of tax is paid in advance to the state and that too, without any compensation whatsoever.
Some of the advance payments and deductions constitute presumptive taxation (full and final discharge of tax liability), while some, as on dividend and profit on debt, are final tax liability, especially for individuals and association of persons. The vast majority of citizens are not even aware that advance payments of tax by them fall either in the final tax regime or in separate block of income category—not adjustable against admitted tax liability computed on total taxable income. In yet other instances, the payment or deduction of tax is minimum tax liability; in which case it becomes final tax if the actual tax liability is less. All these provisions are for “filers of returns”! But about the case of those who do not file their returns, commonly known as “non-filers.”
The Finance Act 2014, adopted under the PML-N government introduced a “unique” concept of non-filers. It provided varied rates for deduction (withholding) of tax in the case of “filers” and “non-filers”—a higher rate of withholding for “non-filers.” The purpose was to force non-compliant persons to file returns of income. However, rather than broadening the base, this has created apartheid, where those that are able to pay more tax and not file returns enjoy the privilege just like a white man discriminating against those with colored skin. It has immensely added to the burden of withholding tax agents who, to determine the applicable rate of tax, have to verify whether a person whose advance tax is to be deducted or collected is appearing in the Active Taxpayers’ List or not.
The prevailing myth that our tax base is narrow and only 1% of the population pays income tax is completely fallacious. The fact is that income taxpayers are no fewer than 120 million, but return filers are pathetically low. Total income tax filers, according to the FBR’s Active Taxpayers’ List, last updated on April 10, 2023, were 3.4 million. The FBR should register all taxable persons to bridge the huge tax gap and stop extorting 15% oppressive tax from the poorest of the poor mobile users.
According to the 2017 official census, our population was 207.7 million provisionally; as on 13, April 2023, it is estimated at 232.8 million. The dependent population of children under the age of 15 years is around 35% and 4% people are above 65 years. Out of the total population, 60 million are below the poverty line. Our employed labor force is around 67 million, the majority of which is in rural areas, 42%, that earns below taxable income or agricultural income falling outside the ambit of the Ordinance. Analyzing all these figures, individuals liable to pay income tax could not be more than 20 million in the 2022 tax year. The FBR collected advance and adjustable income tax from 120 unique million mobile users alone, since out of a total of 192 million subscribers as on June 30, 2022, many had multiple SIMs, during the fiscal year 2021-22.
Pakistan’s real dilemma is that the rich and mighty are not paying taxes according to their ability. From tax years 2012 to 2022, less than 40,000 persons paid taxes between Rs. 1,000,000 and Rs. 10 million, and less than 5,000 declared tax of over Rs. 10 million.
Millions having below taxable incomes are paying income tax at source, yet the FBR, lenders, donors and TV anchors are engaged in a vicious propaganda that the people of Pakistan are tax cheats! This is highly lamentable, especially when small traders and shopkeepers in villages using commercial electricity connections are paying advance income tax under section 235 of the Ordinance.
It is an undeniable fact that Federal Board of Revenue (FBR) has miserably failed to get due income tax from the rich—its main emphasis is on withholding taxes, many of which are in the nature of indirect tax. As per FBR’s Year Book 2021-22 net direct tax collection during 2021-22 was Rs. 2,285 billion — withholding taxes: 67.13%, advance tax: 25.68%, paid with returns 3.45% and FBR’s own efforts: 4.46%, out of arrears demands (1.53%) and current demand (2.88%).
The FBR has failed to tax those who have amassed mammoth wealth, some of whom have availed generous and unconstitutional amnesties provided in 2018 and 2019. Had they been taxed at normal tax rates, collection could have reached Rs. 12 trillion. This target is still achievable, provided collection is fully automated, the tax machinery is overhauled, leakages are plugged and all exemptions, waivers and concessions to the privileged classes are withdrawn. Banks, electricity and gas distribution entities and mobile companies that collect advance taxes on behalf of FBR are fully computerised. By using their database, the FBR can easily determine a fair tax base. Provisional assessments can be made in respect of all persons who have taxable income but are not filing tax returns. This will end the undesirable regime of ‘non-filers.’