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10% of tax filers in Pakistan pay 45% of total tax: report

Tax details and figures break the myth that manufacturing sector contributes more tax revenue to the economy than its size.

Ten percent of tax filers in Pakistan pay 45 percent of the total tax collected, a news report published by The Express Tribune claimed on Wednesday. The report further claimed that two out of all three Pakistani individuals and companies who filed income tax returns declared a little over Rs41,000 monthly income in the year 2018.

Amid rapid inflation, financial experts believe this earning is not conducive to a decent average standard of life. Details revealed by an analysis on the tax filed for the year 2018 outline that the manufacturing sector in Pakistan does not, contrary to popular belief, contribute more in taxes to the economy than its fair share.

FBR fails to expand narrow tax base for greater tax collection

Financial, insurance, mining and construction sectors were the ones that were paying more in direct taxes than their shares in the national output. However, it did not mean that these sectors were overburdened, rather a majority of their activities were not regulated.

The evaluation that had been submitted with the federal cabinet suggests uselessness of the tax machinery and impudence of taxpayers who remain scot free.

The FBR’s indifference towards expanding the extremely narrow tax base can be gauged from the fact that even 70 days after the start of the new fiscal year it has not been able to finalise the income tax return form for tax year 2020.

Read More: FBR’s crackdown on tax evasion worth trillions

FBR’s spokesman Syed Nadeem Rizvi did not respond to the question as to why the income tax return form could not be finalised, which is the responsibility of the member Inland Revenue Policy.

Five chairpersons have been appointed in the past two years and some people with tainted background are serving on key positions in the FBR headquarters and its field formations.

The irony was that the federal cabinet never debated these depressing numbers, which had been submitted to seek its nod for the publication of tax directory for fiscal year 2017-18.

Prime Minister Imran Khan’s cabinet gave approval to the summary through circulation instead of tearing it apart in the cabinet of almost 50 ministers, advisers and special assistants.

90% of tax filers paid 170 billion while remaining 10% paid 143 billion

About 2.5 million individuals and companies had submitted their income tax returns in tax year 2018. These included 2.4 million salaried and non-salaried individuals, only 43,191 companies and 62,950 Association of Persons.

Out of the 2.5 million filers, 1.55 million declared annual income of Rs500,000 or below – Rs41,666 per month. The 1.55 million filers were equal to 62% of the total income tax return filers for tax year 2018, according to the FBR documents.

Read More: Shabbar Zaidi resigns, New chairperson FBR notified

Annual income of up to Rs400,000 is exempted from income tax and there are nominal rates for income up to Rs500,000.

The average minimum official wage in Pakistan is around Rs18,000 and the average monthly income declared by two-thirds of the filers was less than two and a half times of the minimum wage.

About 2.4 million salaried and business individuals filed tax returns and 57.5% of them declared annual income below Rs500,000, according to the FBR documents.

About 90% of the individual filers paid Rs170 billion in income tax. The remaining 10% paid Rs143 billion tax, according to the FBR figures.

All the individuals who filed their income tax returns paid a total of Rs313 billion in income tax.

Out of the total, 62,950 Associations of Persons filed income tax returns and 47,287 or an overwhelmingly 75% declared less than Rs500,000 in annual income, according to the FBR statistics. Business associations paid Rs78 billion in income tax.

Similarly, out of the 43,191 companies that submitted their annual income tax returns, 36,193 or 84% declared less than Rs500,000 in annual income. The companies paid Rs496 billion in income tax and Rs378 billion was paid by less than 10% of the total companies.

Respective contributions to tax from all sectors

The wholesale and retail sector, which had 18.9% share in GDP, contributed just 3.8% of the total income tax collected in fiscal year 2017-18, according to the FBR analysis.

The transport and communication sector had a 12.9% share in the real economy but its contribution to the total direct taxes was a mere 1.7%.

The mining and quarrying sector had a 2.9% share in GDP but its share in direct taxes was 3.5%.

The manufacturing sector had a 13.5% share in the economy and its contribution to direct taxes was 13.49%, according to the FBR.

Read more: FBR surpasses its tax collection target by a margin of Rs57 billion in July

The financial and insurance sectors had a 3.4% contribution to GDP and their contribution to direct taxes was 5.7%. The construction sector that had a 2.8% contribution to GDP, paid 4% of the total income tax in that year.

The agriculture sector, which contributed around 19% to the size of the economy, paid as little as 0.33% of the total income tax, according to the FBR.

In absolute terms, the highest sector-wise contribution was from banks that paid Rs71.8 billion in income tax in fiscal year 2017-18, followed by Rs66.2 billion by the petroleum sector and Rs64 billion by the services sector.

The tobacco sector paid only Rs5.2 billion in income tax, textile sector Rs25.8 billion, telecom sector Rs20.8 billion, sugar sector mere Rs2.5 billion and power sector just Rs11 billion.

The pharmaceutical sector’s income tax contribution was Rs18.2 billion, oil and gas Rs19 billion, iron and steel Rs12.8 billion, food products Rs33.8 billion, chemicals Rs10.1 billion and cement Rs10.2 billion.

The construction sector paid Rs7 billion in income tax and beverages Rs6.7 billion. The auto sector’s tax contribution was Rs25.5 billion, according to the FBR.

GVS News Desk with additional input by other sources