Stalemate over tax on bank transactions
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SINCE the announcement of the federal budget 2015-16, the business-friendly government has been at odds with the business community over the 0.6pc withholding tax on bank transactions for non-filers.
For about two months, the matter has been under discussion between the government and the trade bodies, but an amicable solution has not been reached. The situation has now almost changed into a crisis where the business community has threatened to opt for extreme actions — like going on strike and boycotting banks — whereas the government seems determined to carry out its agenda of tax reforms.
Before looking into the adequacy or otherwise of the much-trumpeted arguments and justifications provided by both sides, it seems pertinent to first answer a few mainstream questions being repeatedly asked about the country’s tax culture.
Firstly, it is a generally held belief that people do not pay taxes. Now take the example of a common citizen who pays more than 15pc tax on the use of mobiles and internet.
And there are five types of taxes and levies on the use of electricity (as shown in bills for July) that amount to over 30pc of the electricity cost. For example, the cost of about 800 units of electricity is around Rs11,000, but the actual payment after taxes and levies aggregate to Rs15,000. Similarly, there are a number of taxes and levies on fuel.
Our tax system is standing on its head. Poor people (non-filers) pay more in the shape of withholding taxes etc than their capacity, whereas people of bigger means have the will and the skill to avoid tax payments on varying pretexts
There is also a 10pc withholding tax (WHT) on bank accounts and funds held in National Savings Schemes. Another 10pc WHT is there when some service has been rendered. The story does not end here. If a common citizen saves a certain amount to book a car, he has to pay a withholding tax on it. And both sellers and buyers have to pay tax at prescribed rates on the sale/purchase of a property.
In addition to the above-mentioned levies, there is the WHT on the withdrawal of one’s own money from banks. And then we say ironically that people here do not pay taxes.
The second question relates to the controversy regarding filers and non-filers. Let us see which segments of society come under non-filers: a big chunk of around 40pc of the population living below or slightly above the poverty line, which is not taxable. Then there is the large number of people of small means who pay small amounts of taxes but do not fill tax returns, largely due to complications involved in the filing of returns.
The third segment of non-filers comprises traders, businessmen, politicians and various other service providers who have taxable incomes but are not prepared to file tax returns, mainly to conceal their real income. And the tax-filer class is very little — around 1m people out of the overall population of around 200m — and more than half of these are salaried people; the captive taxpayers.
Seen in this context, almost the entire nation is non-filer and has a strong desire to remain non-filer due to a host of factors. These include fears of coming under the tax net, unfriendly behaviour of tax personnel, and a lack of confidence in government policies etc.
As a matter of fact, everyone who earns should pay tax. However, everyone also has a tendency to escape paying taxes to the extent possible. It is the tax-collecting mechanism that forces people to pay believing that every taxable income is reaching the tax net. A good tax system is thus supposed to be progressive in nature; taking more money from those who have more capacity to pay and vice versa.
Our tax system is standing on its head in this regard. Poor people (non-filers) pay more in the shape of withholding taxes and other levies than their capacity, whereas people of bigger means have the will and the skill to avoid tax payments on varying pretexts.
This is the crux of the problem, and every tax reform agenda should essentially focus on bringing this segment of society directly under the tax net. The current strategy of increasing tax levies on non-filers is not likely to realise larger amounts of revenue. Rather, it will certainly ignite the wrath and dislike of people against the government in the shape of demonstrations and strikes, as is being done by traders.
Despite these ills, a great deal of improvement has occurred in the tax collection system in the last decade. The culture of online filing of tax returns is taking roots. In post offices, the facility of online verification of filers and non-filers has become available. The banking sector’s payment system is fully automated and capable of providing detailed information about cash inflows and outflows between different accounts and individuals.
However, a lot more needs to be done to make the tax system free from discretions and exemptions. Still, it is not easy to get refunds from the income tax department on final assessment.
The withholding tax is generally levied on income, rents, fees and royalties. Withdrawal or transfer of cash from bank accounts does not necessarily constitute an income in a situation when a large segment of eligible taxpayers are non-filers. Against the actual collection of less than Rs3tr, the real tax potential is said to be in the range of Rs7-8tr.
Instead of getting Rs30-40bn from the levy on bank transactions amidst uproar from the business community, the government should persuade the traders to come under the tax net under a phased programme.
The writer is President, Institute of Banking and Business Learning Lahore.
Published in Dawn, Economic & Business, September 7th, 2015
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