Tax authorities have collected Rs85 billion in six months on account of cash withdrawals and electricity consumption by non-filers of income tax returns, indicating that law violators are mostly concentrated in the two biggest urban centres – Karachi and Lahore.

Out of the Rs85 billion collected from non-filers under just two heads, nearly 60% was pooled from Karachi and Lahore. These urbanised cities are the biggest in Pakistan, and the Federal Board of Revenue also has the maximum presence, with eight out of 25 field offices based in Karachi and Lahore.

The Pakistan Democratic Movement government imposed a 0.6% tax on over Rs50,000 cash withdrawals by non-filers of income tax returns. Similarly, domestic electricity consumption of over Rs25,000 per month by non-filers of income tax returns also attracts a 7.5% withholding tax.

Under these two taxes, the FBR pooled Rs85 billion from July through December of this fiscal year – up by nearly half, or Rs27.5 billion, according to the data.

Charging higher taxes from non-filers of income tax returns has become a source of easy revenue generation, rather than expanding the tax base. Due to this policy being implemented for the past 10 years, Pakistan’s tax base remains extremely narrow.

The details showed that after the restoration of the 0.6% tax on cash withdrawals, the government collected Rs15.2 billion during the first half of this fiscal year. The maximum amount of Rs6 billion was collected from Karachi, followed by Rs4.5 billion generated from Lahore.

The 0.6% tax on cash withdrawals had originally been introduced by former Finance Minister Ishaq Dar during the PML-N’s 2013-18 tenure as part of his strategy to bring retailers into the tax net. However, the policy did not yield the desired results, and instead, people started keeping cash out of banks. The currency in circulation during that period had jumped to 26%.

But during the first half of this fiscal year, the currency in circulation decreased from 29.2% to nearly 26% due to high-interest rates. People took advantage of high returns on saving accounts due to record-high interest rates.

From Peshawar, the FBR collected Rs523 million on account of cash withdrawals, and Rs531 million were generated from Multan. From the small city of Sargodha, the FBR collected Rs327 million from non-filers on cash withdrawals, and Rs451 million was collected from Sialkot – the hub of sports industries. An amount of Rs69.4 billion was also collected on monthly bills of over Rs25,000 for non-filers. There was an increase of Rs12.5 billion or 22% under this head, mainly because of an increase in electricity prices that doubled the bills of households.

Read FBR staff unveiled as non-filers

Lahore contributed Rs23.5 billion to electricity consumption – over one-third of the total collection under this head. Similarly, the collection from Karachi was Rs15 billion.

As part of its plan to meet commitments given to the International Monetary Fund and the Special Investment Facilitation Council, the FBR is required to increase its tax base to 6.5 million filers by June this year. However, the number of filers as of end December was only 3.6 million for the tax year 2023.

The FBR has planned to disconnect the electricity and gas connection of the non-filers along with blocking their mobile phone sims. The FBR has not yet issued the Income Tax General Order to block the sims of these people or disconnect utility connections.

During the first half of this fiscal year, the FBR also collected Rs47 billion from telephone and internet users, including filers.

The interim government and the military establishment had conceived a plan to expand the tax base through administrative reforms in the FBR. But these reforms have now boiled down to the separation of Inland Revenue Service and Custom Service Group by ceasing the FBR.

Both the service groups are now pitched against each other, and this may undermine the FBR’s revenue collection efforts. The Large Tax Office Karachi – the country’s highest revenue collecting field office, on Friday observed a strike against the FBR restructuring.

Customs officers argue that customs functions are increasingly less of tax collection and more of trade facilitation and application of regulatory controls.

Already the FBR has agreed under several reform programmes to lessen its reliance on withholding taxes at the import stage, according to them. During the first half of the fiscal year, the FBR collected from 40% of the total taxes at the import stage, including withholding taxes, sales tax at the import stage.

The custom officers further said that such collection leads to several distortions in the economy, and fewer countries rely on it. Therefore, if customs and IRS are separated, each can grow on their own professional trajectory.

However, the Inland Revenue Officers are of the view that they would simply not accept the restructuring at this stage. They are now threatening to slow down the collection, and the first resistance came from Pakistan’s largest tax office in Karachi.

Published in The Express Tribune, January 14th, 2024.

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