KARACHI: A recent incident of an old pensioner’s maltreatment by the tax officials sent shockwaves among the people. Terming it a shameful act, they said, it caused embarrassment for the entire nation.

Taking cognizance of the severity of the issue, President Dr Arif Ali apologised to the senior citizen, an 82-year-old Abdul Hamid Khan, who ran from pillar to post to get a paltry amount of his pension worth Rs2,333 withheld under the Income Tax Ordinance, 2001, by the phone companies. After intervention of the Federal Tax Ombudsman (FTO) and on the orders of the president, the amount was later released to the pensioner.

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

“Respect is the cornerstone of any system. The tax authorities should respect the taxpayers because they are contributing to the national kitty for development expenditures,” he said. “If the FBR owes even a single penny then it has to be paid because it is the right of the taxpayers.”

Muhammad Zeeshan Merchant, president of the Karachi Tax Bar Association (KTBA), termed the maltreatment of the octogenarian pensioner at the hands of the tax officials unfortunate.

“The president himself apologised to the senior citizen but it is a common practice of the FBR. The tax authorities have stopped refunds in many cases since 2009 and millions of rupees of taxpayers are stuck up.”

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

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

On August 22, 2021, President Arif Alvi rejected the appeal of the FBR and directed harsh action against the officials involved in reimbursing sales tax refunds to fake claimants.

Considering the attitude of the tax officials, one can believe that genuine refunds are hard to get but bogus refunds are being easily transferred.

Memon said that the issuance of bogus refunds on fake and flying invoices has been almost eliminated. “However, the FBR should monitor expeditious refunds systems to stop leakages,” he said, adding that to root out corruption, there is a need to make the entire system automated. Pakistan has a narrow tax base with only 3.5 million filing tax returns of the 220 million population. The tax-to-GDP ratio is just around 10 per cent, which is the lowest in the region.

People are shy to become part of the tax system mainly owing to untrustworthy tax authorities. The government is also contended with the collection through withholding instead of mobilising the tax offices for broadening the tax base.

The collection of withholding tax contributes around 72 per cent of the total direct tax collection. The FBR with the help of the withholding agents collected Rs1.237 trillion during the fiscal year 2020/21, as the total direct tax collection was Rs1.726 trillion.

Ali A Rahim, Director of the Tax Advisory Services at Bakertilly, an international audit firm, said that Pakistan needs revenue.

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

The income tax laws have a provision where the FBR collects a minimum tax from the individuals and corporate entities irrespective of their annual losses. Under this section, a company or a person having specified turnover in a year is required to pay a minimum tax even if the balance-sheet is showing losses.

In case a person or a company pays minimum tax but the full-year actual tax liability is lower than the minimum tax, then the tax authorities do not refund the excess amount. It allows the excess amount to carry forward in subsequent tax years.

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

“The taxpayers should be refunded the excess amount in the same year. It will boost their confidence on the tax authorities,” Rahim said, adding that the apex trade body should shun the mechanism of collecting excess amount through withholding tax, as the same are tantamount to double taxation, especially in a scenario when obtaining a refund is a gigantic task.

There are plenty of withholding provisions in the Income Tax Ordinance, 2001 under which a person is forced to pay income tax, which will be refunded on the filing of the tax return for the same year.

The withholding tax is deductible and adjustable or refunded on transactions such as purchase of car, properties, phone cards or usage of phone services, etc.

A person who pays the withholding tax is required to declare in his tax return and separately claim refund for the transactions he/she made and paid the withholding tax, according to the Income Tax Ordinance 2001.

The person is required to present a challan as a refund claim is subject to audit. It is mandatory that the withholding agent has also submitted the proof of the same transaction, otherwise the claim will not be treated for refund payment.

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

The president in his order observed: “… the complainant had admittedly furnished copies of the withholding tax as per the certificates collected by the telephone authorities. In case the unit officer [the dealing tax officer] was not satisfied with the copies of the certificates, he could have not only got the same verified from the PTCL and cell phone company but the verification was also possible through an online system.”

“It appeared that unlawful treatment was meted out in the instant case with a view to irritate and humiliate the ageing pensioner,” the presidential order noted.

In the above mentioned case the senior citizen had a withholding certificate to verify his claim. But in many cases the withholding agent deducts tax but does not provide a certificate to the taxpayers.

Zeeshan Merchant said that there had been cases where a power company withheld the tax on electricity consumption but taxpayers were denied refunds by the tax authorities, arguing that cross-verification was not possible.

Over the last couple of years, especially after the induction of Dr Muhammad Ashfaq as the chairman of the revenue body, the FBR has introduced measures for swift clearance of refund claims of income and sales tax. Further, the withholding tax provisions have also been reduced to ease the burden on the taxpayers. However, those measures are still not sufficient to attract people to broaden the tax base.

Abdul Qadir Memon praised the FBR for making expeditious refunds but said the tax authorities were paying income tax up to Rs50 million for the current year but there is no payment for the refund claims of past years.

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

“The FBR must ensure fast-track release of refunds to every amount withheld in both income and sales tax,” he added.

In the current tax system, a person is mandatorily required to file a return to obtain refund payment. But the withholding tax deduction is made on all those transactions, which were made even by those persons who have either no income or have below the threshold.

Under the Income Tax Ordinance, 2001, the minimum taxable income for a salaried person is Rs600,000/ annum. The person earning below this amount is not required to pay income tax and also not required to file a return. Yet the person makes any such transaction, which is subject to withholding tax, then the person to get a refund must go through a return filing process and later a cumbersome procedure of obtaining a refund amount.

“This is a mockery of the tax system that a person having below taxable income is also paying tax, which is illegal. Further, the person has no other option but to file an income tax return to get back the paid amount,” Merchant said.

Currently, the apex tax body is collecting withholding taxes. The tax rates are higher but many people are reluctant to obtain refunds because of the cumbersome procedure. They are also afraid of monitoring and audit once they file the tax return. This is the reason that the country has a narrow tax base.

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

“The FBR fears lowering the withholding tax rate will affect the tax collection. But I think this is not true. The lower rate will encourage more people to pay tax and the revenue collection will not suffer.”

For Zeeshan Merchant, withholding tax is counterproductive to broadening the tax base. The withholding tax rates have been applicable irrespective of the size of the income. Therefore, higher income and lower income groups are paying an equal amount of withholding tax.

The withholding tax is a major component in the tax collection and it accounts for around 80 per cent of the direct taxes.

“The withholding tax should be abolished in a phased manner and the tax should only be collected on the real income. People are making transactions without documentation. Broadening the tax base is not possible without the documentation of the economy,” Merchant said.