Rule of law and equality before law are hall marks of civilized societies. Laws in money matters are aimed at , inter alia, providing a fiscal balance in the society as well as funds for development of a nation as a whole. Tax laws should be effective to achieve these goals. And like all other laws what makes them effective is the way in which people feel it runs with their interests and not against them.
In this article, as the title suggests, we would see why people do not file tax returns as required under the law. Are there lacunas in the law? Are laws irrational? Are they discriminatory? Do they promote inequality? Are they creating distortions in the system? Is it reflective of the general attitude of our society towards law of land? Or is trickle down effect of big-wigs’ flouting of the constitution of Pakistan? These and similar other questions are relevant to understand the behaviour of non-compliance of tax laws in general and non-filing of tax returns in particular. So in effect, it boils down to one question- is it worthwhile to file a tax return or is escape the better strategy from the point of view of a (non-)filer of returns.
Who are required to file return of income tax?
According to the Income Tax Ordinance, 2001, the following persons are required to file tax returns.
(a) Every company irrespective of income earned.
(b) Every person other than a company whose taxable income for the tax year
exceeds Rs. 100,000/-
(c) Every person who was charged to tax in any of the two preceding tax years.
(d) Every person who owns immovable property with a land area of two hundred
and fifty square yards or more.
(e) Every person who owns any flat located in areas falling within the municipal
limits existing immediately before the commencement of Local Government laws
in the provinces; or areas in a Cantonment; or the Islamabad Capital Territory.
(f) Every person who wants to claim a loss for carry forward.
Prior to finance Act, 2005 the following persons were also required to file returns:
(a) Every person who was a subscriber to telephone whether mobile or landline.
(b) Every person who was an owner of a motor vehicle.
(c) A member of a club having either admission fee of Rs. 25,000 or monthly
subscription of Rs. 500/-
(d) Everyone who took foreign travel other than for Umrah, Hajj or Ziarat.
Some of the criteria looked ridiculous, however they remained on statute book for a long time. If data of the CBR given in the Year Book 2004-05 is correct, then it is a cause for great concern. Total number of NTN holders in a population of 152.5 millions is only 2.28 million. Out of NTN holders, only 1.23 millions filed returns in 2004-05. Whereas return filers are only 1.23 million and details are given by the CBR as under:
“Whereas the share of return filers to NTN holders has been around 54%, the share of the same to live cases has been 72.4%. Segregating this information into individuals and corporate categories it has been observed that within the former category (salaried and business persons and AOPs) having NTN, nearly 50% had filed their returns and within the corporate sector, the compliance rate has been around 55%. However, the compliance rate of private companies was at least five times superior to that of the public (listed) companies where it was in the range of only 10%. Incidentally, the compliance rate of the foreign companies has been extremely low at around 3%. Since this situation requires immediate correction through further research, CBR has already embarked upon an extensive effort to streamline the income tax base including the list of withholding agents.”
Whereas as per SECP total number of registered companies as on 31st December, 2004 was 45028, total returns from this sector during 2004-05 were only 12526 (27.8% of registered ones) which indicates the huge task CBR faces and requires skilled staff instead of wasting time in planning what to do about 11000 officials feared to be redundant as a result of so called reforms.
CBR thinks further research is needed for correction of the situation as if it were not evident. CBR keeps harping on the same string that tax base is small and it is trying to broaden the tax net. Far from truth. Pakistan has a very large tax base. Courtesy of the CBR’s policy of withholding and collecting taxes at source, almost everyone is now either tax payer or tax collector (Unpaid Tax Collectors). Even if sales tax is ignored, see the “net” of indirectly collected direct tax. The following data will indicate the number of taxpayers in Pakistan which denies claims of CBR.
Total population 152.5 Million
Labour force 45.76 Million
Unemployed 3.52 Million
1/3rd labour force below poverty line 15.00 Million
If all the balance labour force is assumed to earn taxable income, it would be 27.24 Million. Now let us see how many tax payers are there in Pakistan on account of tax collection at source from 3 venues only.
Profit and loss account holders/
Fixed or Term deposits 20.00 million
Telephone subscribers cell phone users 23.20 million
Commercial and industrial connection of
electricity (KESC not counted) 2.20 million
Tax on cash withdrawals (all accounts) 26.00 million
Apart from it, tax is also collected/deducted at source on rent paid, value of imports and exports, payments made for supplies and services rendered, salaries, brokerage and commission, from motor vehicle owners, etc.
In my humble view instead of broadening the tax base it is time to narrow the tax base. Instead emphasis should be on recovery of “due tax” from the persons who should pay tax as required under the law of land. Emphasis should be on getting returns filed where they are due. Mindless imposition of withholding taxes is not panacea to broaden tax base. Why people do not file returns when tax is deducted at such a large scale? The possible explanations might be as under:
- The tax deducted/collected at source like electricity bills, prepaid phone cards, etc. is so small at individual level and people do not want to indulge in the process of filing returns even if they have incomes below taxable limits. They think cost of getting refund of their taxes would be higher than the amount of refund they would get. So they let their money remained with the CBR as unclaimed deposit. As a matter of fact, CBR should indicate figure of tax collected but not due each year so that clear picture of “due” tax collected is reflected. It is highly deplorable that CBR collects advance tax from such persons in the first instance and then retains it unauthorizedly. True tax reforms call for return of “undue tax collection”.
2. Many of them do not want to be in the “tax net” because they understand their actual tax liability would be much higher if caught in the “tax net.” Such behaviour is not irrational even though it may seem unethical.
3. They believe the government is not worthy of more taxes as their money is not spent on them. Corruption and leakages in the system, low priority to social sectors , huge unproductive expenditure on large sized federal and provincial governments and exemptions to vested classes of the society subdue the pricks of ethics in the prospective tax payers.
4. The departmental officials do not see beyond return filers. Once you file a return, the tax collector puts your name on tax rolls and your absence will be noticed. But those who escape this tax roll, they remain unnoticed (sometimes with the connivance of the tax officials) for years and years. Policies of the CBR reward non-filers and punish regular taxpayers. First of all they seldom issue notices to people who are not on tax rolls. The much trumpeted survey conducted by spending millions of rupees failed to increase tax base. Rather it eroded whatever image CBR had in the eyes of people as an enforcement agency. Amnesty Schemes so often offered in Pakistan give message to the tax evaders that they would get such chances in future too. So why pay taxes voluntarily now.
5 Tax amnesties prove effective where laws are enforced with full vigour. It gives tax evaders a window of opportunity to make their record clean.
6. CBR has not taken any action against persons who neither availed amnesty nor paid taxes before or after this amnesty. In a culture of immunities and impunities no one cares such amnesties.
7. Our tax law favours tax evaders and avoiders. Taxpayer and tax-evader are two brothers. Taxpayer kept on paying income tax each year @ 35% of his upper bracket income for 10 years. Tax-evader never filed return. After 10 years he was caught in “tax net”. Notice was issued. He files tax return showing below taxable income. When asked to explain from where he got money to purchase the plot he owned in defence, his explanation was that he got a prize bond and he produces receipt of the same which is obtainable from the market by paying a little more than the prize money and tax deducted would be 10%. That is it. Instead of 35% he ends up with 10% or so and no hassle of filing return over the years. All money is white now. Foreign remittance is perhaps the cheapest way to whiten your money earned in Pakistan but given flavour of foreign remittance.
8. You may purchase a plot for Rs. 15 million and CBR will ask you to explain only to the extent of DC rates of the property. So you plough back your untaxed business profits into cash economy and at the end you will also enjoy legal cover as capital gains on immovable property is forbidden tree for taxation.
9. It looks as if the government chooses to withhold/collect tax from such sectors which it thinks would not file returns and not claim refund of taxes withheld as advance taxes. My this impression emerges from the fact that tax on commercial electricity bills is collected without any lower limit. Similar is the case with pre-paid cards. While capital gains on listed shares is exempt, tax is withheld on transactions of such shares.
Achieving tax revenue target should not be the only criteria to judge performance of the CBR. Ascertainment of actual potential of tax revenue, extent of realization of this potential, progressiveness of structure of taxation, its impact on the economy and extent of reducing income inequalities in the economic system are all relevant in evaluation of the performance. Promoting tax culture is as much need of the hour as controlling unwanted, useless, unproductive expenditure. There is a strong case for paradigm shift in attitude of CBR. The non-compliance gamble which at present swings heavily in favour of non-filers should be shifted against them. They should feel themselves at some disadvantage vis-à-vis tax law compliant citizens of Pakistan. Only culture of fairness and equity can promote tax culture otherwise you may continue to achieve targets without achieving objectives of taxation.
( Published in the Business Recorder, May 26, 2006)
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