“THE hardest thing to understand in the world is income tax,” Albert Einstein, one of the world’s smartest minds, said to his trusted tax adviser at the time of filing his income tax returns in the 1950s.

In Pakistan, this quote applies beautifully to the Federal Board of Revenue. It is totally understandable that taxpayers find it difficult to understand and appreciate the intricacies of income taxation; however, it is the state, the supposed custodian and enforcer of tax laws, that has failed to understand the mode and manner of execution of taxation laws. When your resources should ideally be invested in expanding the tax base, unfortunately FBR in an attempt to increase tax collection is focusing on achieving this by harassing existing taxpayers.

In an ideal world, an integral element for the functioning of the state is its capability to raise revenue from direct taxes. The linchpin of a state’s durability is gauged from its ability to tax citizens and collect revenues efficiently. This results in greater fiscal capacity which resultantly grants greater access to the state to resources needed to provide basic amenities, which a welfare state endeavours to provide to its citizens.

However, to the contrary in Pakistan, a deplorable state of affairs is in place when the main source of tax revenue is from either indirect taxes ie sales tax or from the withholding of advance income taxes by withholding agents on the payments they make. It shows how inefficient our tax machinery is. The devastating consequences of low collection of tax are apparent as our governments can’t invest in health, infrastructure and education and are surviving on the edge by taking multiple lifelines from either our ‘brotherly’ countries or the IMF. This reliance on the IMF has only aggravated the pain that the residents of this country have to bear.

The original purpose of the withholding tax has been lost.

Withholding tax on receipts in the modern world is primarily used to expand the tax base. In Pakistan, it will be safe to presume that the intention of the legislature at the time of introduction of the withholding tax regime was to expand the tax base; however, with time, the purpose has been lost or forgotten and instead withholding is used as the main source of revenue.

Withholding tax is like modern-day slavery where the state obligates you to work for them without rewarding you for the work that you do for them. The state has given you the responsibility to deduct and deposit taxes from all the payments, with a few exceptions, that you make in furtherance of business transactions. They will penalise you if you fail in your obligations, which was never your obligation in the first instance. They will penalise you in two ways. Firstly, by asking you to pay the tax that you didn’t deduct on the payments you made from your own pocket and then by imposing penalty and default surcharge.

Secondly, they will even then go a step further and disallow your genuine business expense, on which you were supposed to withhold, thereby increasing your taxable income and the tax that you pay.

It is time that the purpose is restored and aligned with the initial intention and withholding tax on recipients of payment is used only as a means of expansion of tax base rather than collection. Withholding rates should be brought down to one per cent on the gross amount paid across all streams of payments and should only be applicable in cases where the recipient of payments is a non-filer. This data collected by the slaves ie the withholding agents, should be used to start a nationwide crackdown on non-filers.

With an abundance of technology companies/ start-ups connecting undocumented businesses with regulated businesses or end consumers, FBR is sitting on a goldmine of data. All FBR needs to do is to crack down on the undocumented sector by using the data, which if it does, can result in a revolutionary turnaround of this country with an exponential rise in the tax base, and resultantly, in the collection of revenue and documentation of the economy.

FBR just needs to change its target and dedicate half its resources into expanding the tax base rather than squeezing every last drop of blood of the existing taxpayers.

In 1931, Al Capone, an American gangster and businessman who attained notoriety during the Prohibition era as the co-founder and boss of the Chicago Outfit, who avoided various convictions by bribing officials and intimidating witnesses, was found guilty of tax evasion — the only crime for which America’s most notorious criminal was ever convicted. The gangster who had reportedly boasted, “They can’t collect legal taxes from illegal money” was sentenced to 11 years in prison for failing to file his income tax returns.

This is just a slice of what FBR can achieve, if they focus on simplicity, adequacy, transparency and administrative ease without relying on modern-day slaves to do their job for them.

The writer is an advocate of the Supreme Court of Pakistan.

Published in Dawn, February 14th, 2022