In a declared attempt to widen the tax base and promote a culture of paying taxes, the government of Pakistan has taken certain steps against the wishes of its people. These include the 0.3 per cent withholding tax applicable on all banking transactions above Rs50,000, higher rates of annual vehicle token fees, increased vehicle registration charges and so on.
This financial year onwards, the vehicle token fee payers are supposed to bring with them to the post office their CNICs along with vehicle registration books and income tax payment certificates if they have any. The tax payment status is verified online by the post office staff and different rates are applied on tax-filers and non-filers as per the vehicle engine capacity.
Similarly, the imposition of withholding tax has deterred bank customers from carrying out bank transactions above Rs50,000. Though there is already an adjustable advance income tax on cash withdrawals, this time it will be applicable on every such transaction regardless of the banking instrument used, and exemption will only be for tax filers.
Even taxpayers, who do not file their return, will have to bear the burden.
There are certain questions that need to be answered here. First, why it is so that many taxpayers, including the salaried class whose tax is deducted at source, do not file their tax returns? Second, is the process of filing income tax returns too complex for filers to file them independently? And third, will these steps help in increasing the tax base or turn out to be counter-productive?
Shahid Ghani, CEO, LIFE — a foreign education consultancy — tells TNS that he has observed that people tend to file returns mostly when they need them for processing of business visa applications, foreign university admission applications, qualifying for bank loans and so on. Otherwise, he says, they see them as a trap laid out by the tax collection machinery to milk more and more taxes on the basis of their declarations made in their tax returns.
The process of filing returns is quite complex and the filers do not take the risk of filing returns on their own, he adds. For example, the filers are supposed to mention the details of their moveable and immovable property, businesses, occupation, main source of income, other sources of income, foreign sources of income if any, liabilities, receipts, personal expenses, savings, gifts, taxable income etc and so on. “How can an individual with limited knowledge of tax laws provide all this information?” he questions.
Ghani says salaried people do not feel the need to file their returns as their tax is deducted at source but the fact is that the Federal Board of Revenue (FBR) is interested in knowing about their total taxable income.
Tax professionals thinks that a tax return filer has to be vigilant as he is giving a declaration and verifying on oath during the process. Therefore, he needs assistance of a tax consultant to avoid discrepancies in the returns. But this is not the case with every person, as people who have single source of income can file their returns if they have basic knowledge of tax matters.
Generally, the public knowledge in this regard is limited and help of a consultant is needed for more than one reason. For example, certain taxes are refundable or adjustable against income tax but people hardly bother to claim them. Ask a salaried person and he will rarely know that he can get the zakat that he has paid through a formal channel, the advance income tax paid on mobile phone bills, vehicle registration and advance tax on cash withdrawals from banks refunded.
Similarly, certain incomes are exempt from taxes and people approach the consultants to guide them on these.
Under the current scenario, even those individuals whose income does not fall in the taxable income limit will have to file “nil” returns to avoid withholding tax deductions on bank transactions above Rs50,000.
Mubashar Bashir, a chief financial adviser with a state-owned enterprise, dispels the impression that people avoid filing tax returns due to the complexities involved. In fact, he says, they have no trust in the state machinery and perceive tax collectors to be predators out to hunt them.
He tells TNS that in the recent past there were self-assessment schemes that required the filers to post 20 per cent more tax than the previous year in order to avoid tax audit by authorities. This led to the exploitation of filers at the hands of tax authorities who wanted them to increase tax deposit by 20 per cent every year.
Bashir suggests that the government shall address the concerns of people and offer incentives to them to increase tax net rather than penalising them. People avoid paying taxes because they have no trust in those who will spend this money, they do not get any preferential treatment for paying their taxes, they fear exploitation in case they get documented and they are uncomfortable with the idea of many sectors and individuals being exempted from taxes. For example, many allowances and pensions of government servants, army officers, judges are tax exempt and agriculture, real estate and rental income are not properly taxed. So, he says, “the government must address these concerns to develop the trust of prospective taxpayers.”
But will the imposition of withholding tax on banking transactions really widen the tax base? Some tax professionals are of the view that it may increase tax receipts by increasing the burden on the existing taxpayers and promote cash transactions.
Nadeem Iqbal, Executive Coordiantor/CEO at the Islamabad-based The Network for Consumer Protection, shares the findings of a USAID-supported study on tax culture in Pakistan. He says they questioned people in four districts on why they do not pay taxes and most of them said that they do not want to become easy prey for tax collectors.
He says they observed that awareness about tax matters was drastically low and the FBR had hardly bothered to inform taxpayers about their rights. “We tried to educate people through pamphlets, brochures etc on how they could get benefits/tax adjustments at which FBR approached us and questioned our authority to launch this campaign.”
Iqbal says fortunately the federal tax ombudsman office has prepared a draft bill for taxpayers’ rights but it has not been presented in the parliament for approval. His point is that the FBR is not serious in educating taxpayers or reimbursing the excess taxes charged from them — “That’s why the claims filed by taxpayers lie unsettled for extra-ordinarily long periods.”
He adds though the FBR has announced to simplify tax returns and print them in Urdu as well, there is need to focus on some other matters. For example, he says, it is very difficult to calculate the market price of one’s property as it may change drastically or remain static for ages in rural areas where there have been no sales of property. A discrepancy may make a filer liable to punitive action if his case is selected under the 10 per cent random samples selected for tax audit through a computer ballot, he concludes.