FBR performance and erratic taxation | Political economics


or the Federal Board of Revenue (FBR), the 2021-22 fiscal year ended on a high note. It admirably exceeded the revised target of Rs 6.1 trillion from Rs 25 billion. The provisional figures depict an impressive growth of 29% over the previous financial year, when net inflow was Rs 4.7 trillion.

The data shows a significant increase of 32% in direct taxes compared to last year. In the fiscal year (FY) 2021-22, the net collection of income tax amounted to Rs 2,278 billion against Rs 1,731 billion the previous year.

Similarly, sales tax collection reached 2,525 billion rupees from 1,983 billion rupees in the last fiscal year. For the first time, net tariff collection hit the Rs 1 trillion mark, up from Rs 747 billion in 2020-21. The collection of federal excise duties amounted to Rs 322 billion against Rs 284 billion during the previous year.

Despite the political turmoil, the RBF performed extremely well in the last quarter of FY2022, recording net inflow of Rs 1.741 trillion, 32% higher than the Rs. 1.351 trillion raised last year. quarter of 2021. In 2022, the FBR also processed refunds of 335 billion rupees, which is 33% more than the 251 billion rupees paid in the previous year.

Of the 335 billion rupees repaid, 105 billion rupees were issued in the last quarter of the 2021-2022 financial year, which is 55% more than the 68 billion rupees issued in the same quarter of the previous financial year . This has helped taxpayers manage liquidity problems without seeking expensive loans from banks and other financial institutions.

However, these figures cannot be considered in isolation. One of the most important performance criteria is the tax-to-GDP ratio. This provides an index to quantify the capacity and performance of the tax system. With a better tax-to-GDP ratio, the government can rely on internal resources rather than having to borrow at exorbitant costs. Historically, the tax-to-GDP ratio in Pakistan has remained low. Many factors cause failure.

The key elements of weakness are an extremely narrow tax base, negligible contribution from the agricultural sector, rampant tax evasion, lack of documentation, monstrous size of the informal economy, numerous tax exemptions, concessions, waivers and amnesties, limited use of technology and artificial intelligence, pervasive corruption and endless litigation.

During the five-year rule (2013-18) of the Pakistan Muslim League (Nawaz), the FBR had significantly improved the tax-to-GDP ratio which reached 11.2% in 2017-18 (before rebasing). The World Bank also appreciated this achievement. He documented this significant improvement in the overall tax-to-GDP ratio from 9.5% in FY 2012-13 to 13% in FY 2017-18, attributing the increase in tax revenue to policy measures, reducing tax exemptions for specific industries and improving tax administration at the federal and provincial levels.

However, even this improvement fell short of the 15% benchmark considered the minimum allowed for developing countries to finance basic government functions. The four-year rule of the Pakistan-led coalition government Tehreek-i-Insaf (PTI) has seen a significant drop in the tax-to-GDP ratio. It fell to around 8.6% for FY2021 and will likely rise back to around 9.5% in FY2022 (once the numbers are finalized).

The FBR relies heavily on prescribed withholding agents to collect taxes on its behalf. Total recovery through FBR’s own efforts does not exceed 5% of total net revenues. It has failed miserably to modernize.

An increase in the tax-to-GDP ratio is seen as mandatory by international lenders and donors to close the gaps and generate fiscal space for spending on infrastructure, education and health and other projects for the benefit of the general public. The World Bank believes that Pakistan has substantial potential to increase tax revenue without imposing new taxes or raising tax rates and using a broad-based, low-rate approach. He refers to the tax gap analysis indicating that Pakistan’s tax revenue can be increased significantly to 26% of GDP, if tax compliance alone is increased to 75%.

To broaden the tax base and encourage fair and equitable tax treatment, the government must review its massive tax expenditures. Tax laws currently offer numerous exemptions and reduced rates for certain industries and economic activities. These exemptions distort the competitive environment.

According to the Tax Expenditure Report for FY 2022, tax revenue foregone due to exemptions and concessional rates is estimated at Rs 1.482 trillion or 2.67% of GDP. Tax expenditures represent approximately 25% of total collection in fiscal year 2021-22. The largest portion of tax expenditure is related to sales tax exemptions and concessions, which are estimated at Rs 740 billion, followed by Rs 400 billion in income tax and Rs 342 billion in customs duties.

In recent years, the FBR has made efforts to increase the share of direct taxes in its collection, but its overwhelming reliance remains on indirect taxes and collection through withholding agents. This indicates that the tax collection authority has limited ability to identify unregistered taxpayers and bring them into the tax net.

The FBR relies heavily on prescribed withholding agents to collect taxes on its behalf. Collection by FBR’s own efforts does not exceed 5% of net income. Unfortunately, the FBR has failed miserably to modernize and use the latest data analysis techniques to corroborate information received through withholding agents and third party sources to verify taxpayer returns.

If this is not done, the FBR will never be able to verify the information provided by taxpayers and identify potential taxpayers who remain outside the tax net by not producing tax declarations/returns.

All federal and provincial tax authorities are given responsibility for collecting taxes, duties and charges by integrating and sharing information. There must be coordinated efforts between federal and provincial governments to improve overall tax revenues.

Currently, different laws/rules/regulations of indirect and direct taxation are applied by the federation and the provinces. This leads to conflicts and disputes.

Recent tax measures announced in the federal budget for fiscal year 2022-23 have been strongly criticized by many tax practitioners, stakeholders and the general public. For example, the deemed tax on immovable property is nothing but a diversion from the wealth tax.

After the Eighteenth Constitutional Amendment, the federal government can no longer levy wealth tax, gift tax, inheritance tax, capital gains tax, or inheritance tax on real estate.

Measures to this effect clearly signal that the government is not respecting the supreme law of the land, the Constitution, which provides that all kinds of property taxes are the exclusive domain of the provinces.

Item No. 50 of the Federal Legislative List through the 18th Constitutional Amendment actually prohibits the Federation from levying any type of real estate tax. Therefore, the capital value tax (CVT) on real estate is transferred to the provinces. If the Federation cannot levy any tax on real estate, how can it tax the “capital gain” from real estate?

The phrase “not including taxes on immovable property” in item 50 cannot be read as “includes taxes on capital gains on real estate”. Of course, taxes include taxes on income and capital gains.

The National Assembly intentionally or ignorantly transgressed the constitutional commandment by taxing real estate under the guise of income and capital gains tax. This shows that the provinces have no political will to tax the wealthy and powerful owners of major real estate following the 18e Modification by the imposition of progressive taxes, namely wealth tax, inheritance tax, gift tax, inheritance tax, etc, once popular in Pakistan. While the poor and small farmers are burdened with heavy sales taxes on many goods (inputs) directly used for agricultural production, the wealthy absentee landowners pay negligible tax on their colossal farm income.

Abdul Rauf Shakoori is a US-based corporate lawyer

Supreme Court Advocate and Writer Dr. Ikramul Haq is Adjunct Professor at Lahore University of Management Sciences

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