The tax return a double-edged sword

KARACHI: A recent incident of mistreatment of an elderly pensioner by tax officials sent shock waves through the public. Calling it a shameful act, they said, it caused embarrassment to the whole nation.

Aware of the seriousness of the problem, President Dr Arif Ali apologized to the elderly person, an 82-year-old Abdul Hamid Khan, who ran from pillar to post to get a pittance of his pension worth 2 333 rupees withheld under the Income Tax Ordinance, 2001, by telephone companies. After intervention by the Federal Tax Ombudsman (OTF) and by order of the president, the amount was then returned to the retiree.

Abdul Qadir Memon, boss and former president of the Pakistan Tax Bar Association (PTBA), said taxpayers should not harass taxpayers, but rather facilitate them.

“Respect is the cornerstone of any system. Revenue authorities should respect taxpayers as they contribute to the national pool for development spending,” he said. “If the FBR owes even a penny, it must be paid because it is the taxpayers’ right.”

Muhammad Zeeshan Merchant, chairman of the Karachi Tax Bar Association (KTBA), described the mistreatment of the octogenarian pensioner by tax officials as unfortunate.

“The president himself has apologized to the senior citizen but this is a common practice of the FBR. Tax authorities have stopped refunds in many cases since 2009 and millions of taxpayer rupees are blocked.

Abdul Hamid Khan is not the only case. There are hundreds where federal tax authorities give similar treatment in refund cases.

Interestingly, there have been reported incidents where tax officials are actively involved in issuing bogus refunds, amounting to billions of rupees.

On August 22, 2021, President Arif Alvi dismissed the FBR’s appeal and ordered stern action against officials involved in reimbursing sales tax refunds to bogus claimants.

Given the attitude of the tax authorities, it may be believed that genuine refunds are difficult to obtain, but fictitious refunds are easily transferred.

Memon said issuing bogus refunds on bogus bills and fly bills has been nearly eliminated. “However, the FBR should monitor rapid refund systems to stop leaks,” he said, adding that to eradicate corruption, it is necessary to automate the whole system. Pakistan has a narrow tax base with only 3.5 million tax returns out of 220 million people. The tax/GDP ratio is around 10%, which is the lowest in the region.

People are reluctant to be part of the tax system mainly because of unreliable tax administrations. The government is also faced with collection through withholding tax instead of mobilizing tax services to broaden the tax base.

The collection of withholding taxes accounts for about 72 percent of the total collection of direct taxes. The FBR with the help of withholding officers collected Rs 1.237 trillion in the financial year 2020/21 with the total direct tax collection being Rs 1.726 trillion.

Ali A Rahim, director of tax advisory services at Bakertilly, an international audit firm, said Pakistan needed revenue.

“The withholding tax provisions are a major source of revenue generation. Nowhere in the world do people pay taxes voluntarily. In Pakistan, the tax authorities forcefully collect withholding tax. Most retainers are either adjustable against a person’s liability or the person can claim a refund. It will be an ideal situation if the amount deducted from withholding tax is refunded in the same year,” Rahim said.

The income tax laws contain a provision that the FBR collects minimum tax from natural and legal persons, regardless of their annual losses. Under this article, a company or a person with a determined turnover during a year is required to pay a minimum tax even if the balance sheet shows losses.

In the event that a person or company pays the minimum tax but the actual tax payable for the entire year is less than the minimum tax, the tax administration does not refund the excess amount. It allows the excess amount to be carried over to subsequent tax years.

However, if a minimum tax is less than the actual tax payable, then the person is liable to pay the remaining amount in the same tax year.

“Taxpayers should be refunded the excess amount in the same year. This will build their confidence in the tax authorities,” Rahim said, adding that the apex trade body should avoid the mechanism of collecting excess amounts through withholding tax, as this amounts to double taxation, by especially in a scenario where getting a refund is a mammoth task.

There are many withholding tax provisions in the Income Tax Order 2001 under which a person is obliged to pay income tax, which will be refunded when filing the tax return for the same year.

The withholding tax is deductible and adjustable or refunded on transactions such as the purchase of a car, properties, telephone cards or the use of telephone services, etc.

A person who pays withholding tax is required to report on their tax return and separately claim reimbursement of transactions which they have carried out and paid withholding tax, in accordance with the Income Tax Order 2001 on income.

The person is required to submit a challan as a claim for reimbursement is subject to verification. It is mandatory that the withholding agent has also submitted proof of the same transaction, otherwise the claim will not be processed for reimbursement payment.

The same thing happened in the case of the elderly citizen Abdul Hamid Khan.

The president in his order observed: “… the plaintiff had certainly provided copies of the withholding tax according to the certificates collected by the telephone companies. In case the unit officer [the dealing tax officer] was not satisfied with the copies of the certificates, he could not only have obtained the same verification from the PTCL and the mobile company, but verification was also possible through an online system.

“It appeared that unlawful treatment was inflicted in this case for the purpose of angering and humiliating the aging pensioner,” notes the presidential order.

In the case mentioned above, the elderly person had a withholding tax certificate to verify his claim. But in many cases, the withholding agent withholds the tax but does not provide a certificate to the taxpayers.

Zeeshan Merchant said there have been cases where a power company withheld electricity consumption tax but taxpayers were denied reimbursement by tax authorities, arguing that cross-checking n was not possible.

Over the past two years, particularly after the enthronement of Dr. Muhammad Ashfaq as Chairman of the Tax Authority, the FBR has introduced measures for prompt settlement of income and tax refund claims. sales. In addition, withholding tax provisions have also been reduced to ease the burden on taxpayers. However, these measures are still not enough to encourage people to broaden the tax base.

Abdul Qadir Memon praised the FBR for making prompt refunds, but said the tax authorities were paying income tax up to 50 million rupees for the current year, but there was no payment for claims from previous years.

Similarly, the fast sales tax refund is only available for export-oriented sectors, he said.

“The FBR must ensure the prompt release of refunds for each amount withheld for both income tax and sales tax,” he added.

Under the current tax system, a person is required to file a return to obtain the refund. But the withholding tax is made on all these transactions, which were made even by the people who have no income or are below the threshold.

Under the Income Tax Ordinance 2001, the minimum taxable income for a salaried person is Rs 600,000 per annum. The person whose income is less than this amount is not required to pay income tax, nor is it required to file a return. Yet the person makes such a transaction, which is subject to withholding tax, then the person to get a refund has to go through a reporting process and later a cumbersome procedure of getting a refund amount.

“It’s a travesty of the tax system that a person with less than tax income also pays taxes, which is illegal. Also, the person has no choice but to file a tax return. revenue to recover the amount paid,” Merchant said.

Currently, the apex tax body collects source deductions. Tax rates are higher but many people are reluctant to get refunds because of the cumbersome process. They are also afraid of monitoring and auditing once they have filed the tax return. This is the reason why the country has a narrow tax base.

Qadir Memon said that to widen the tax net, the FBR should streamline the withholding tax provisions with lower tax rates.

“The FBR fears that the lower withholding tax rate will affect tax collection. But I think that’s not true. The lower rate will encourage more people to pay taxes and revenue collection will not suffer.

For Zeeshan Merchant, the withholding tax is counter-productive for broadening the tax base. The withholding tax rates are applicable regardless of the amount of income. Therefore, high and low income groups pay an equal amount of withholding tax.

Withholding tax is a major component of tax collection and accounts for about 80 percent of direct taxes.

“Withholding tax should be phased out and tax should only be levied on actual income. People are doing paperless transactions. Broadening the tax base is not possible without documenting the economy,” Merchant said.