Taxpayers still shying away from audit, monitoring

KARACHI: Imposition of a 35 per cent tax rate on an individual’s income to broaden the tax base will remain a distant dream. The high tax rate is a major impediment in keeping away persons having taxable income from fulfilling their obligations, said Muhammad Zeeshan Merchant, president of the Karachi Tax Bar Association.

Pakistan has 220 million population but only 3.2 million are declaring their annual income.

“The tax authorities are also not very serious in broadening the tax base, as the revenue collection is growing at a faster pace due to exorbitant rates of withholding tax,” he said.

The taxmen are happy over significant revenue growth, as withholding agents are collecting tax on their behalf. The tax officials are less bothered to go in the field leaving their AC rooms to identify potential taxpayers, he said, adding that the people are also shying away from becoming part of the tax net due to cumbersome procedures.

The people fear that once they become part of the tax system, they will be subject to audit and monitoring. Further, penalty, prosecution and default surcharge are common actions against the existing taxpayers.

The Federal Board of Revenue (FBR) may improve its image in paying timely refunds to the taxpayers but a recent incident related to maltreatment of tax authorities with an 82-year-old taxpayer in a refund case exposed the tax authorities.

President Dr Arif Alvi personally apologised to the taxpayer and ordered strict action against all the FBR officers involved in this case. But the senior citizen is not the sole victim of the tax authorities, there are a number of such taxpayers who have been waiting for their refund payments since 2009 and a huge amount is still stuck up.

To get an insight on the taxation system of Pakistan, BOL News talked to Muhammad Zeeshan Merchant:

What are the reasons behind less number of return filers?

It is a common perception that if the people become part of the tax system they will face audit and penalty. The government should revisit the tax rates and the higher rate should be reduced to 10 per cent. The FBR should also announce that it will not conduct audit of those persons who are already in the tax net.

Unfortunately, at present, only three million are return filers from across Pakistan. This is also a sorry state that poor segments of the society is the most affected due to this regressive taxation system.

What measures do you suggest for broadening the tax base?

As far as broadening the tax base is concerned, I recommend reducing the tax rates because nobody wants to pay taxes. There should be a fixed tax regime for all and it will increase the revenue. Further, higher rates of sales tax and Customs duty are resulting in smuggling. By reducing these rates, the government will curb smuggling, resulting in a significant increase in the size of the economy.

For broadening the tax base, the FBR needs profiling of transactions. All the data of mobile phone service providers, electricity and gas consumers, bank account holders, withholding tax deduction should be obtained by the FBR. The tax authorities should identify the tax dodgers.

What is your opinion about president’s apology to the 82-year-old taxpayer?

The maltreatment of an 82-year-old taxpayer at the hands of FBR officials is very unfortunate. Though, the president himself apologised to the senior citizen but it is a common practice by the FBR officials. The tax authorities stopped refunds in many cases since 2009 and millions of rupees of taxpayers are stuck up.

On the one hand, the FBR says it will follow the law in releasing refunds but, on the other, it refuses to do so. It is also common when we ask the FBR to pay refund amount and the field offices replied they were not allowed by the higher authorities.

I suggest the FBR to release refunds immediately to those who filed applications or claimed refunds through their return forms. If the tax offices are not issuing the refunds then they have no ground to issue notices of late or default surcharges.

It is the FBR’s obligation that it should issue refund within five days from filing the tax returns.

How do you see the FBR’s advance tax collection?

Withholding taxes are counterproductive to broadening the tax base. The withholding tax rates have been applicable irrespective of the income sizes. Therefore, higher income and lower income groups are paying equal amount of withholding tax. Withholding tax is a major component in the tax collection and it accounts for 80 per cent of the direct taxes. It is the failure of the FBR, as this collection was made by the withholding agents on behalf of the tax agency.

These withholding agents are collecting billions of rupees and also facing audit, monitoring and penalties. These are the reasons that they do not pay full amount to the national exchequer.

The withholding tax should be abolished in a phased manner and the tax should only be on the real income. As I said earlier, the people will only pay tax on their real income when tax rates are lower. To assess the ground realities, the tax officers need to come out from their AC rooms. The people are making transactions without documentations. Broadening the tax base is not possible without documentation of the economy.

The tax officers are unaware about the potential tax potential in their respective jurisdictions.

Are you satisfied with the FBR’s facilitation regarding tax returns filing?

As the KTBA president, I am not satisfied with the facilitation by the Federal Board of Revenue (FBR) regarding the income tax returns filing. Whenever a return form is issued, they [FBR] issue it in a paper form not in the electronic form, despite making it mandatory for the taxpayers to file it electronically. The FBR issues SRO to notify the return. They do not let us test the electronic version. We have asked the tax authorities to inform us whenever they make amendment to the return form. They only give us seven days to check the form for errors, which is a very short time.

For the first time, the FBR issued return form on July 1, 2021 as per the law but there are many irritants, which were not rectified yet. It is also worrisome that the FBR makes changes to the form overnight and without informing the stakeholders, which is illegal.

I think the FBR needs to make drastic changes in facilitation regarding income tax returns filing. The introduction of a single sales tax return form is the latest example. The sales tax return form is full of glitches and we have informed the FBR about it.

Do you think pre-filled return forms will help increase the number of taxpayers?

I think pre-filled return forms may not help increase the number of taxpayers. The pre-filled forms will be for those who were already filing their returns. In this regard, the FBR should take stakeholders onboard for taking suggestions and recommendations for successful implementation. This will be a good step and it will discourage concealment of income. But the FBR should implement this in a phased manner.

The government starts Point of sale system to broaden the sales tax net. Do you agree with it?

The point of sale (POS) system is a welcome step. There are still tethering issues in it. The POS integration requires proper training and monitoring. I don’t agree with the way retailers are being forced to install the POS. The retailers should be given time to familiarise the system. The retailers are not against the installations of the POS but they fear about examination of past transactions.

The FBR should assure they will move forward and will not touch the past records then it will be successful. This will help generate substantial tax revenue and document the retail segments.

Do you think POS integration will lead to complete VAT system?

No. This will not help in complete value-added tax (VAT) system, as the apex tax body is focusing on the last leg of the retail chain. Before the retailers, there are wholesalers, distributors, importers and manufacturers who do not declare their actual sale. At present, the retailers are facing a challenge in obtaining input adjustment.

The manufacturers and importers are not issuing proper sales invoices to the retailers; therefore, implementing complete VAT system there is a need to check manufacturers and importers, as well.

What is your take regarding integration of federal and provincial tax systems?

As I understand, there is no such thing. At present, the National Sales Tax Return has been introduced in which all the sales tax returns of federal and provinces will be submitted at a single portal. However, so far all the provinces do not want to integrate on the fear that the federation will not give their due share. In case of integration in future, it will be a good move.

Do you think it was the right time for measures taken through Finance (Supplementary) Act, 2022?

It is not the right time to take tax measures through the supplementary finance act. These measures have been introduced on the directives of the International Monetary Fund (IMF). The lending agency did not ask to do so but the government is taking advantage of the IMF conditions and withdrew exemptions. This will cause problems for the taxpayers, initially, and will also resulted in an increase in inflation. I think tax exemptions and concessions should be on health, education and food items. Other than these, I am personally against the exemptions.

What should be the government’s priority in the budget 2022/23?

The government should manage the prices. Priority should be to broaden the tax base. All non-documented sectors should be brought into the tax net. Focus should be on revenue generation with the facilitation of the existing taxpayers. The government should identify areas where expenditures can be reduced.

It should also prioritise increase in exports by identifying untapped sectors, such as export of halal products. The policy should be for import substitute.

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