Pressures On Taxation Machinery

ByAsrar Raouf

Former Civil Servent


October 2, 2022

Asrar Raouf Describes the Taxation Blues

In the midst of devastating rains and a sluggish economy, the FBR is facing difficult pressures on taxation machinery. As it has not been able to meet the revenue demands of the IMF which was Rs.683 billion and FBR was banking on avoiding slapping additional taxes under the Extended Fund Facility (EFF) program. It is indeed a tough time for the Pakistani economy as the country is devastated by floods that have also affected revenue collection but the incumbent government is pressing the FBR to meet the targets agreed upon with the IMF as it has renewed the EFF after a long hassle. FBR is anticipating that advance tax installments will become due soon and it has geared up efforts to get as close as possible to the stipulated revenue collection target.

In this context, the FBR has so far collected Rs.380 billion in revenue collection and it is expected that it will be able to collect Rs.303 billion in the remaining few days of this month so that the target amount of Rs.683 billion is achieved. It is certainly a tall order and going by the past performance the collection may fall short. This issue is required to be viewed in the backdrop of the fact that materializing revenue collection targets become immensely important, as in case of failure the IMF will come up with prescription to apply alternate avenues to impose more taxes to restrict the budget deficit target within the agreed limits.

The situation is certainly complicated as the FBR is in receipt of representations from different parts of the country to extend the 30 September 2022, deadline for filing income tax returns and it has still taken no decision so far. It is reported that the FBR has envisaged an annual revenue collection target of Rs.7,470 billion for the current fiscal year but the complication will arise if it fails to achieve the target as the government will not be able to stick to the budget deficit target of 4.9 percent of GDP and get a primary surplus of 0.2 percent of GDP equivalent to Rs.153 billion in the current fiscal year.

Pressures On Taxation Machinery

Keeping in view the current paucity of revenue collection the FBR has increased the valuation rates of properties in over 20 cities ranging between 10 and 30 percent on average and also included certain rural areas to bring them at par with the DC rates during the current fiscal year. Under the World Bank (WB) loan of $400 million titled ‘Pakistan Raises Revenues (PRR)’, the revision of valuation tables of properties in one condition is attached with it. The revised valuation rates will help collect more taxes from immovable property. However, the FBR’s notified rates are still lower than the existing fair market value. Realizing this situation the FBR has started revising upward the valuation tables of properties in different cities silently during the current fiscal year 2022-23.

FBR has included certain areas of Islamabad that were excluded during the tenure of the previous government. The cities that FBR has now upwardly revised the valuation rates of immovable properties for cities include Rawalpindi, Dera Ismail Khan, and Attock. In totality, the FBR has raised the valuation rates of properties in 40 cities and decided to bring them to par with the valuation rates notified by respective DC in their areas. It was mentioned that this increase was notified through an SRO issued on 13 September and the details are more elaborate and specific as could be borne out by the fact that only for Attock city the FBR issued detailed valuation tables of 139 pages and included many parts of the city in line with the notified rates. Similarly, in Gwadar, the FBR notified revised rates on 1 August, 2022 and issued 24 pages of detailed rates of valuation of immovable property in different parts of the city.

On the other hand, it was reported that the FBR had to take flak from the Lahore High Court (LHC) which expressed doubt on the competence of a senior member of the FBR who could not defend his actions during a hearing in a case about the constitutionality of the 20% deemed income tax on the real estate. This performance brings to the fore the oblique process of devising taxation policy just weeks after the incumbent prime minister instructed to determine how Rs.6,000 fixed tax had been imposed on traders in their electricity bills. The court openly castigated the concerned member of FBR who proposed this provision of law and is making decisions for the most important department of Pakistan, particularly when Pakistan is facing a financial emergency.

In this context, it was reported that the petitioners have challenged the federal government’s decision to charge 20% deemed income tax imposed on the real estate sector in the budget to raise Rs.15 billion in taxes. However, under the Constitution, the federal government cannot impose income tax on the real estate sector which is described as a provincial subject. In this connection, the government had introduced a new Section 7E in the Income Tax Ordinance whereby a resident who derives income equal to 5% of the fair market value of the capital assets situated in Pakistan, will be charged tax at the rate of 20% adding that the effective tax rate is 1%. It was mentioned that the government would generate revenue of Rs.30 billion from the deemed income.

However, before approval of the law, the government made certain changes to the definition of properties that would be subjected to the levy, and resultantly the additional revenue estimates were reduced to Rs. 15 billion. It was also reported that the policy wing of the FBR has been in hot waters owing to taking certain actions such as including imposition of taxes on foreign diplomats and foreign missions. The withdrawals of tax concessions given to Chinese power plants under sovereign agreements also created irritants between Pakistan and China relations.

The LHC in its interim order stated that the court examined entry 50 of the legislative list of the Constitution but the member of the FBR could not respond. The court further asked him that till the decision about the legality of the new tax, whether the petitioners and other taxpayers, who were caught under the mischief of Section 7E can be accommodated but the member replied in the negative. The order noted that the court tried to understand from the FBR lawyer regarding the mechanism of proposing any amendment to the taxation laws to ensure competence for imposing the proposed tax he answered that his aspect is looked into by the Secretary of Law. Quite obviously the court was not satisfied with the replies.

Clarifying the matter the FBR specifically pointed out that it was not the FBR member policy, that took such decisions on its own as the FBR drafts the law on the directions of the government. It then goes to the Law Division for vetting and then after approval of the finance minister is placed before the cabinet. They mention that sometime before the finance ministry decided to withdraw section 7E but he was not permitted by the IMF. The reason for withdrawing the levy on the real estate sector was not about its constitutionality but about the pressure from the real estate sector that was not willing to pay this tax. The Weekender


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