Comparing apples and oranges
This impression is being created because the government has not distinguished between people who pay tax and people who file their tax returns. The two numbers are poles apart. There are no less than 60 million people in Pakistan who pay income tax (as we will prove below using data from the Pakistan Telecommunication Authority that charges it in cell phone bills). But only a miniscule 1.1m people filed their tax returns by September 2016, according to the FBR’s latest disclosure.
These 60m Pakistanis are paying what is called an advance income tax (in the shape of over 70 types of withholding taxes) as they go about their daily lives. And as you can imagine, these millions of people include a large number of those who do not need to be paying income tax in the first place because they don’t make enough (under Rs400,000 in income a year) or actually have no income (students). The paradox is that because they don’t fall in the group of people who should be paying income tax they don’t end up filing income tax returns—leading to the impression that we are a nation of cheats. The irony is that the system is such that they are still forking over advance income tax.
Non-collection of tax where due is as detestable as its collection where it is not due -CIT Companies, Lahore v State Cement of Corporation (Pvt) Ltd, Lahore 2002 PTD 1603
The cell phone litmus test
So, you ask, how come these people are paying “advance income tax” as they go about their daily lives? Let us give you the example of a student who has a mobile phone. When she goes to a company and gets a SIM and calling package, she subscribes to a service. She is then paying 14% income tax and 19.5% service sales tax each month. All you need to do to check this is take your last cell phone bill. You will see that you are being charged these taxes.
Ah, now you say, but there are millions of mobile phone users in Pakistan. Are they all paying this “advance income tax”? Yes, this can be assumed. Let’s connect two sets of overlapping data: income tax payers and mobile phone service users. People who have a cell phone pay taxes each month.
Look at the numbers: In August 2016, there were 133m mobile phone subscribers in Pakistan, according to the Pakistan Telecommunication Authority. But let’s factor in that the number we can use to tell how many people pay tax is lower because some people are multiple subscribers and some are inactive. Let’s go by the more conservative 60m (out of 133m) total of cell phone subscriber/income tax payers. We can safely say that at least 60m people are paying the 14% income tax and 19.5% service sales tax because they have cell phone service. The problem is that the FBR says only 1.1m people file returns—1.1m of 60m is 1.7%. The impression is that only this tiny percentage of people pay taxes because paying taxes is being used interchangably with filing returns. But the truth is that by virtue of having cell phones, we can prove that 60m people are paying at least advance income and a sales tax.
Let us telescope out to try to figure out how many people should be paying income tax. We can do some rough math. Our population was 195m by the end of last year, according to the Economic Survey of Pakistan. (Minus children and the elderly from this figure). Out of this 195m, 30m earn less than $2 a day, so it would be unfair and illegal to expect them to pay income tax. Then take our labour force, among the tenth largest in the world, which is around 61m people, out of which 57m were employed. Nearly half (42%) of the labour force earns below the taxable limit. When we factor all this in, we reach the conclusion that according to conservative estimates the total number of Pakistanis who should be earning enough to have to pay income tax is more than 10m. But, as we proved above, the government is making at least 60m people pay income tax in the form of withholding tax as active mobile phone users alone.
So it is hard to argue that Pakistanis don’t pay their taxes. They do. They just aren’t filing tax returns. And so we turn to this aspect of the debate.
Filing tax returns
The FBR says 1.1m Pakistanis filed their income tax returns by Sept 2016. This is a low number. It actually used to be higher. Five years ago it was 1.4m. And in 2006 it was 2.1m, according to Jorge Martinez-Vazquez and Musharraf Rasool Cyan in The Role of Taxation in Pakistan’s Revival report. Why has the number of people who filed their tax returns dropped over the years? Where have these people vanished? Obviously, this is the worst thing that can happen to any tax machinery, but the FBR has still been receiving kudos and bonuses from the finance minister. What also doesn’t make sense is that the FBR has not bothered to use data from telecommunication companies to ferret out people with taxable income and force them to file tax returns.
Why do people not file their tax returns? Firstly, if they claim a refund, they fear being exploited by tax officials and unscrupulous tax advisers, who sometimes work in cahoots. In any case, it costs people more to reclaim the withheld amount compared to the actual refund.
Why do the ultra-rich not file their tax returns? It is an established fact that they are happy to pay the far lesser withholding tax as it takes away only a fraction of their mammoth incomes. Pakistan’s real dilemma is that the rich and mighty are not paying taxes according to their ability. In 2014 and 2015, less than 4,000 people paid tax between one and ten million rupees. In 2014 just 3,663 people declared tax of over Rs10m and this position worsened in 2015, according to the Tax Directory 2015 recently released by the FBR.
Why should people who don’t earn enough engage a tax adviser to file their returns and pay money to get a refund? The extreme injustice in the present tax system demands a widow pay 10% non-adjustable withholding tax on her income of Rs300,000 (taxable limit Rs400,000) from an investment made with the national savings centre, from the funds she had received from the pension or gratuity on the death of her husband.
From the same source, a rich person also pays only 10% tax on an income of Rs2m, whereas she should be taxed in the highest slab of 35%.
What could be the case
The FBR has failed to tax the rich and thus its main emphasis has been on withholding taxes. FBR Yearbook 2014-15 concedes that in fiscal year 2014-15 withholding taxes made up 63.2% of total income tax collection of Rs1,094 billion. About 26.3% of this came from voluntary payments, advance tax and tax with returns. FBR’s own efforts (collection on demand) yielded only 10.6%.
Pakistan’s tax potential at the federal level alone is Rs 8 trillion, says the IMF. According to the household survey (2011-12) conducted by the Pakistan Bureau of Statistics, five million Pakistanis have an annual taxable income of Rs1.5m. If all of them filed their tax returns, income tax collection from them could be Rs1,650 billion. If you added income tax from corporate bodies, the total could be no less than Rs4,500 billion.
It is the FBR’s duty to enforce the law that says people should file their tax returns. Had it done this in the past by just obtaining the names and particulars of PLS account holders of banks, commercial and industrial electricity consumers, mobile and landline users (paying tax with bills) and vehicle owners, Pakistan would have over 60m income tax return filers by now.
Of course the people of Pakistan are not responsible for the performance of the FBR. It is high time that the board put its own house in order and enforced tax laws across the board rather than blame already overtaxed people. Parliamentarians must remember as lawmakers, and tax collectors must remember as functionaries of the State, that not collecting tax where they must is as bad as collecting it where it is not due.
The writers are lawyers and partners in Huzaima, Ikram & Ijaz and are adjunct faculty at the Lahore University of Management Sciences