The Federal Board of Revenue (FBR) is under immense pressure to improve tax compliance in the country. It’s because the number of income tax return filers is consistently lower than what is required. Low taxpayer compliance is a matter of serious concern for the government as tax-GDP ratio remained less than 10pc during the last decade. The income tax returns filed by individuals, partnerships and companies during 2011-12 were around 1.29 million — less than 1pc of the total population. In addition, weak tax culture is manifested in the fact that only 0.9pc of the population pays taxes, against 4.7pc in India, 58pc in France and 80pc in Canada.
The share of voluntary payments in the overall tax collection is extremely low in Pakistan. Traditionally, around 60pc income tax collection comes through withholding tax (WHT). With the prevalent withholding regime, one may feel that the low number of returns filed does not explain the whole situation sufficiently. It is because there might be situations where people pay their share of taxes in the form of WHT. But, since they are not registered with the tax authorities as taxpayer, they don’t file the return. However, such cases are only a few when compared to those who neither pay taxes nor do they file their returns despite having taxable income.
Through the Income Tax Ordinance, 2001, the Universal Self-Assessment Scheme (USAS) was introduced in Pakistan. Under this scheme, the taxpayer is required to assess his income and calculate tax thereon by himself and then voluntarily pay that amount. It is important to mention here that before the introduction of the USAS, the tax department used to make annual assessments in most cases and only a handful of cases were allowed to avail the self-assessment scheme (SAS).
The government has, however, expanded the purview of withholding regime in recent years. The exponential growth of this regime owes a lot to the low compliance levels and withholding is considered an expedient way of collecting taxes. It is evident that, in Pakistan, taxpayer compliance needs immediate improvement as it is the only way to enable the country to generate revenues that are so crucial for sustainable public sector development and also to lessen the increasing dependence on foreign and local borrowings.
The government has adopted extraordinary measures for improving tax compliance for the tax year 2016.
First, WHT to the tune of 0.6pc has been imposed on bank transactions exceeding Rs50,000 per day for non-filers. The rate has been revised to 0.3pc for three months through an ordinance under pressure from trade bodies. However, through Income Tax Laws (Amendment) Ordinance, 2015, the reduced rate will remain effective until 30.09.2015. Rate of deduction of tax shall remain 0.6pc from 01.07.2015 to 10.07.2015 and from 01-10-2015 onwards. But agitation against this tax is still on and the government is sustaining huge pressure of business community. The government seems sincere about increasing the number of income tax return filers irrespective of the fact that such a measure can encourage cash transactions and discourage use of banking channel.
Second, every person is subject to WHT from the gross amount of dividends — 17.5pc for non-filers and 15pc for filers. It is pertinent to mention here that in order to persuade the public companies to distribute dividend among their shareholders and to encourage investment in stock market, a 10pc tax has been imposed on every public company except scheduled banks or a modaraba that derives profits in a tax year but does not distribute cash dividend within six months of the end of the tax year or where the said company distributes dividend in such a way that after distribution, the company’s reserves are in excess of hundred percent of its paid up capital. The said amount of reserves in excess of its paid up capital shall be treated as income of the company and will be taxed at the rate of 10pc.
Third, the non-filers who receive profits on debt exceeding Rs500, 000 shall pay tax at the rate of 17.5pc instead of 15pc for filers on the gross amount of such profit. For example, if amount of profit is Rs1,000,000, the amount of tax for non-filers shall be Rs175,000 whereas for filers it shall be Rs150,000. Similarly, every banking company shall deduct tax on cash withdrawal exceeding Rs50,000 in a day at the rate of 0.5pc from filers and 0.6pc from non-filers.
Fourth, the rates of advance tax collected along with motor vehicle tax for filers have been reduced and the rate of tax for non-filers has been enhanced through the Finance Act, 2015. The rates are as under:
Fifth, the rate of advance tax to be collected by manufacturer or commercial importer at the time of sale to distributors, wholesalers and dealers (including both wholesalers and retailers) on sale of fertilizer is 0.7pc in case of filers and 1.4pc in case of non-filers of income tax returns. Thus cost of doing business by non-filers has been substantially increased as compared to filers.
Sixth, non-filers who will receive brokerage and commission as provided in Section 233 of the Income Tax Ordinance, 2001 shall, at the time of receipt, pay higher tax at the rate of 15pc on the gross amount as compared to 10pc by filers.
Seventh, there are differential rates for filers and non-filers who are involved in importing gold, cotton and LNG under section 148 of the Income Tax Ordinance, 2001. The rates vary from 1pc to 6pc for filers while for non-filers these range between 1.5pc and 9pc.
Eighth, the rates of advance income tax on payments made for sale of goods, for rendering and providing of services and for execution of contracts under section 153 (1) are higher for non-filers as compared to filers.
The withholding agents are required to ensure implementation of above extraordinary measures by collecting/deducting taxes at higher rates while making payments to non-filers as provided in the Active Taxpayers List, which is available at FBR’s website www.fbr.gov.pk. A substantial increase in tax return filers is expected with implementation of these measures.