35% reduction for taxpayers

Islamabad:

The caretaker government has failed to broaden the tax base, with the number of income tax filers shrinking by 35% to just under 3.9 million compared to last year, amid challenges to meet monthly tax collection targets.

The caretaker government, whose rule has now effectively ended with the swearing in of the new National Assembly, has also remained unable to tax retailers, nor has it been able to suspend the mobile phone connections of those who do not file income tax returns. It was hoped that, unlike the politicians, the technocrats would move against the powerful retailers.

Sources told The Express Tribune that contrary to the hype created to bring about reforms in the Federal Board of Revenue (FBR), the details of the candidates’ income tax returns have come down significantly.

This is the second month in a row that the government has missed its monthly tax collection target. However, due to better collection in the previous months, the FBR somehow managed to meet the eight-month tax target of Rs 5.83 trillion.

FBR, whose performance remained exceptionally good in the first half of the financial year, started facing problems from January this year. This coincided with efforts by the interim finance minister to restructure the tax apparatus despite opposition from some cabinet members and questions about the mandate of officials. The Election Commission of Pakistan has also advised the caretaker government not to restructure the tax machinery.

Shrinking the tax base

In November last year, Pakistan had shared a plan with the International Monetary Fund (IMF) to increase the number of income tax returns to 6.5 million by June 2024. The interim government has decided to set up regional tax offices to expand base by shifting half of the taxing power in the regional tax offices to these new offices.

The Special Investment Facilitation Council (SIFC) had also given the caretaker government a target to increase the tax base by at least one million during the current financial year over the corresponding amount last year. When these targets were set, about 5 million people had filed tax returns for the last year.

By the end of February, sources said, the total income tax returns received by the FBR were just 3.88 million – a figure that was 2.1 million or 35% lower compared to tax year 2022. The government faced a decline in the number of filing in all four categories: companies, associations of persons, private enterprises and tenants.

However, senior FBR officials are hopeful that the number will see a sharp rise in March after the release of the list of active taxpayers on Monday. All names of non-candidates will be removed from the new list, which will double the withholding tax rate on their transactions.

The details showed that compared to 92,704 clubs that filed last year, this year the number has so far remained at 91,135. Accordingly, in the last tax year, around 77,600 businesses had submitted their returns, which have now dropped to less than 72,000, representing a decrease of around 8%.

Reading Income taxation of SMEs

The major drop in the number of filers was in the case of private businesses, as about 1.6 million or 43 percent fewer people filed their tax returns this year, the sources said. Last tax year, about 3.8 million self-employed people filed returns, which has now shrunk to 2.2 million.

Similarly, about 22% or 435,000 fewer wage earners filed their returns this year. Compared to nearly 2 million self-employed people who filed last year, only 1.55 filed their annual property and income tax returns this year.

The FBR had sent a proposal to the finance minister to levy tax on retailers, but she left the matter to the next government, the sources said. Similarly, a committee was also constituted to suspend mobile phone connections of non-filers, but no order was issued.

A senior FBR official said that despite the low number of filings, there were around 840,000 new filers this year, which shows the efforts of the tax machinery. Of this, the large number were entrepreneurs, with 510,000 entrepreneurs becoming first-time return applicants.

Nearly 11 million individuals and companies are registered with the FBR, but less than 7 million have not filed their annual returns.

Collection of Taxes

The FBR managed to achieve its eight-month tax collection target of Rs 5.829 trillion thanks to better performance in the first six months of the financial year. A timely judgment of the Supreme Court of Pakistan in the overtax case also helped the FBR to receive Rs 6 billion on the last day, which in return became the cause of achieving the eight-month target.

The FBR, for the second time this financial year, missed the monthly target by a margin of Rs 33 billion or 4.6%. Under an agreement with the IMF, Pakistan may have to resort to a mini-budget if monthly collection falls short of the target by more than 1 percent.

The tax authorities attribute the shortfall in monthly collections to the caretaker finance minister’s drive to restructure the FBR and the increased number of holidays in February.

Provisional collection data showed that the FBR has so far collected Rs 5.83 trillion, showing an increase of Rs 1.34 trillion or 30% over the collection made during the same period of the previous financial year.

By December, the FBR management was confident of meeting the annual target of Rs 9.415 trillion, despite falling imports. Income tax collection stood at Rs 2.76 trillion, up by Rs 800 billion, or 41%, in the first eight months of this fiscal year.

Sales taxes and customs duties remained the weakest areas. Sales tax collection reached Rs 2 trillion, or Rs 316 billion, or 19%, more than the previous fiscal year. FBR collected Rs 352 billion in FED and duty collection amounted to Rs 710 billion.

The details showed that against the February target of Rs 714 billion, the FBR could provisionally raise Rs 681 billion – a shortfall of Rs 33 billion. However, there was an increase of Rs 162 billion or 32% in the collection compared to the same month of the previous financial year.