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Inefficiencies failing the Tax Apparatus in Pakistan

The following write-up was published in the Oct-Dec 2017 Quarterly Edition of “Policy Insights”, the largest accountancy body ACCA’s regional publication covering MENASA

Link: ACCA’s Policy Insights’ Published Link

Link: Main Page

Inefficiencies failing the Tax Apparatus in Pakistan

(by failing the genuine Taxpayers)

Federal Board of Revenue (FBR) is a semi-autonomous federal institution that is responsible for auditing, enforcing and collecting revenue for the government of Pakistan. It’s one of the most critical components of the revenue collection apparatus in Pakistan. As such it is supposed to be the pinnacle of professionalism, discipline and support to tax payers.

During the last budgetary season, Chairman FBR invited this writer, while representing ACCA (UK) and LTBA at a historic pre-budget seminar that was organized with the collaboration of ICAP, ICMAP, ACCA, LTBA, PTBA, LCCI and several other Tax Bars, to send him proposals about the issues in and reforms for FBR. Below is a brief overview from that perspective.

Currently there are approximately 1,210,000 active income tax return filers as per the FBR directory issued in August 2017, out of a population of roughly 218 million in Pakistan. This is a meager 0.55% of the total population. A huge proportion of these filers, file NIL returns is another topic. On the other hand every Pakistani is paying indirect taxes on whatever they consume. The evident lack of trust of the taxpayers on the system and the resulting regressive taxation policies are a big hindrance in the attainment of an optimal taxation system. We’ve often discussed the problems with the taxation policies in Pakistan and proposed practical solutions. Frankly speaking there is only so much FBR can do in this regard since the policies are often driven by the IMF, World Bank and/or the political interests in the country. However the areas where FBR can and should play a very effective role are not in the best of states either.

Considering the tiny tax base it was only natural for FBR to attempt to broaden it. However the way they went about it, has been unprofessional to say the least while messing up a good endeavor big time. Notices claiming no existing tax registration based on “economic activities”, usually citing vehicle purchases were sent out to masses. Sounds positive? Hang on, what if it’s shared with you that many of those receiving these notices were not only tax payers already registered but paying millions in Income Taxes annually? This exemplifies a total lack of coordination within the systems and functions of FBR, which is unfortunately becoming a norm of late. Missing out on the records already held by FBR simply reinforces the misconceptions amongst the tax payers that FBR is out to bother already registered tax payers instead of acting as a facilitator and initiating genuine drives to catch tax evaders.

What’s tragic is that while on one hand such steps are undertaken citing the need to broaden the tax base but on the other hand proposals with huge potential to broaden the tax base such as bringing agricultural income and other exempt sections within the tax net as well as converting the CNIC into National Tax Numbers (NTN) and Sales Tax Registration Numbers (STRN) for broadening the tax base have been falling on deaf ears for almost a decade now.

To underline the vast difference in the workings of FBR and similar bodies in developed countries, a personal experience is hereby shared with the readers to illustrate the significant gulf between the international standards and the ones practiced in our beloved country. While working in UK, I needed to change my tax code. For ease of understanding you can say it was like claiming a tax refund and I was not even a British national. It took me one phone call to UK’s HMRC (Her Majesty’s Revenue and Customs) during my office lunch hour to get it done by the end of the lunch. Yes, just in less than an hour. Now compare it to the experience of genuine tax-payers in Pakistan who are ridiculed and abused for even minor genuine tax affairs. Presumptive and advance taxes are collected but when it is time to issue refunds in line with the law, actual due refunds are held for months and even years despite completion of all legalities and verification. What is worst is that in most cases the FBR officials verbally accept the cases as genuine but claim that due to the pressure to meet revenue collection targets they are unable to follow the law and deliver the tax payer their due right.

The problem manifests from the nepotism and non-professional attitudes of some officers who treat tax-payers with utmost contempt instead of the dignity they deserve. Un-realistic targets setup by higher-ups then further aggravates the matters with coercive, non coordinated and even illegal measures used by certain sections within FBR. The widespread corruption within the department further worsens the matters.

It’d be reasonable to point out that although PRAL (Pakistan Revenue Automation (Pvt) Ltd) does mess up things at times, many of its’ positive endeavors were blocked for fears of eradicating corruption using different pretexts by certain sections of FBR. For example, PRAL once finalized a completely automated system of issuing refunds to tax payers with even an online payment instrument. Naturally there was a huge hue and cry. The project was dumped and the corrupt manual practices continue to date.

Now as if all this was not enough, even the laws governing the whole taxation system are made mockery of within FBR by several officers undermining the good work and efforts undertaken by their more professional colleagues. Just ask any genuine tax payer or tax practitioner about the treatment meted out to them by most FBR officials and you’d be shocked. Due to limited space, this topic will have to be continued in future write-ups.

As for now, perhaps the policy makers and senior FBR officials should consider this dire situation seriously to rectify all the serious problems within FBR. If they fail to do so, the next time they complain about low proportion of tax payers in Pakistan as compared to UK or other developed countries, they should realize that they only have themselves to blame. 

About author:

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading tax expert, experienced fellow Chartered Certified Accountant CFA Charterholder, and anti-money laundering specialist with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Finance Act 2015-16: Dissecting major reforms – I

The following article has been published in Daily Nation, dated 13th July 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-07-13/page-9)

(Onlinehttp://nation.com.pk/business/13-Jul-2015/finance-act-2015-16-dissecting-major-reforms)

Finance Act 2015-16: Dissecting major reforms – I

By: Omer Zaheer Meer

The finance bill for financial year 2015-16 was passed by the National Assembly with some amendments and released as the Finance Act 2015-16. The opposition’s walkout on 23rd June 2015 allowed the finance ministry officials an easy outing with the Treasury benches rendering their support for granting the approval to the finance bill. There have been positive developments in some areas while much is left to be desired in others. The honorable finance minister explained his constraints in his budget speech when the original finance bill was floated, pointing out to the strong lobbies with vested interests and that the incumbent Government is undertaking reforms in a phased manner. We’ll discuss some major reforms, their impact on businesses and economy as well as the reaction of the impacted segments towards them in this write-up.

This is first of a two part write-ups on the above titled subject aimed to enlighten our readers on some of the least understood aspects of the finance act.

First up is the reduction in tax rate for companies which has been reduced for the tax years 2016, 2017 and 2018 to be 32, 31 and 30 percent of taxable income respectively. This is the fulfillment of the commitment by the incumbent Government to reduce the tax rate for corporate sector to 30 percent by 2018. The move is seen positively and welcomed by the corporate sector. Lowering the tax incidence on corporate sector is viewed as an incentive for this segment.

Interest Free Loans for Solar Tube Wells upto Rs.1 Million for setting up new solar tube wells or replacing the existing tube wells with solar tube wells shall also be provided to small farm owners having landholdings of less than the 12.5 acres economic threshold. This is a positive step aimed to address both the energy crisis impacting the agricultural sector as well as providing some relief to the small farmer as most of the other measures for the agricultural sector seems to be aimed at benefitting large landowners and investors.

Next up is perhaps the most controversial and discussed about yet least understood reform of the imposition of advance tax on banking transactions by non-filers. A lot of hue and cry including strikes by traders has resulted in the original levy of 0.6 percent withholding tax halved to 0.3 percent till end of September 2015 by way of an ordinance promulgated by the President of Pakistan. The original reform required all banking companies to collect advance tax at the rate of 0.6 percent on all transactions from an account either by way of sale of any instrument including demand draft, pay order, etc. and/or transfer of any sum through cheque and other similar manners or clearing interbank transfer through cheques etc which meant that all debits (amounts taken out) of an account shall be liable to this tax.

There are a few important qualifications to this advance tax though. Firstly this is only applicable to non-filers. Secondly the provision will apply only where the sum total of payments for all transactions in an account shall exceed Rs 50,000 in a day. Also this tax will be adjustable against the tax liability if the person files his/her return of income. Furthermore, the onus is on the account holders to inform their banks/financial institutions about their status of being a filer sans which collection will become applicable on their accounts.

Last but not the least, this provision is in addition to the existing provisions of Section 231AA of the Income Tax Ordinance where in all cases (being a filer or non-filer) a collection of tax is made on cash transactions. This effectively means that the new tax will apply to non-cash transactions of non-filers whereas section 231A and 231AA shall continue to apply on cash transactions. The rate of withholding tax on cash withdrawals under section 231A (in case of non-filers) and section 231AA (in case of both filers and non-filers) has been increased from 0.5% to 0.6%.

If we look at this reform from an objective perspective, though cumbersome administratively it incentivize businesses and individuals to come within the ambit of filing tax returns. The objective is to broaden the tax net. However the structural inefficiencies, rampant corruption within most tax authorities and a regressive taxation system all act as a deterrent against becoming a filer. This reform alone does not address all these issues and therefore this context can help us better appreciate the negative reaction from masses particularly businesses instead of simply dismissing their concerns as the prevalent tax avoidance culture.

Another interesting reform is the imposition of a one-time “super tax” for tax year 2015 for the rehabilitation of temporarily displaced persons on all those with income of Rs. 500 million or more as below:

  • (i) banking companies at 4%
  • (ii) all other taxpayers at the rate of 3%

This is an example of a reform pursuing the progressive tax regime by taxing those with higher income to the advantage of the downtrodden sections of the society. If the entire taxation system is revamped with a focus on direct taxation pursuing a progressive tax regime many of the ills facing our revenue generation and thereby economy can be rectified.

We’ll continue with some more interesting amendments, issues and structural reforms introduced by the Finance Act 2015-16 in the second and last part of this writeup.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced Fellow Chartered Certified Accountant and Anti-Money Laundering Expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk