In a radical move, the government has proposed disconnecting cell phones, electricity and gas from non-submitters of income tax returns, and banning business people from using banking instruments such as checks in their desperate attempts to broaden a narrow tax base.
The proposal also calls for 35% additional income tax on utility bills from lawyers, dentists, doctors, accountants and sharing all kinds of existing taxpayer data with the National Database Registration Authority (Nadra), sources told The Express Tribune. This will raise their total income tax to 43% of the amount billed.
“The drastic steps will be enforced through the promulgation of an ordinance, and a bill was sent to the Justice Department this week for review by the Federal Treasury,” they added.
Read: Reforms to improve the tax system underway: Prime Minister Imran
Steps are being taken to expand the narrow tax base, which now includes only three million income tax filers, after all efforts and policies to date have failed to produce the desired results.
“The most drastic measure is the introduction of a mandatory digital payment method by the corporate sector,” the sources noted. They said the move is recommended after businessmen and companies start trading cashier’s checks rather than cashing them in order to avoid full disclosure of their sales.
The FBR has proposed an amendment to Section 21 of the Income Tax Regulation, which states that when calculating the income of a person under the heading “Income from business activities” from a taxpayer who is not a company, no deduction is allowed.
Similarly, any expenditure by a taxpayer who is a corporation on any transaction that is or is payable under a single account holder and that exceeds Rs 250,000 in total is made in a manner other than digitally from the taxpayer’s commercial bank account, rather than Income deals with expenses.
Only small payments of up to 25,000 rupees and expenses for electricity bills, freight costs, travel costs and taxes are excluded from digital payment. If the cabinet approves, this step will benefit digital payment service providers enormously.
However, the government has decided to enforce digital payments without first closing loopholes that have led to the creation of black money such as the difference between market value and FBR values of real estate, agricultural income tax exemptions, and tax-free overseas transfers.
Shutdown of essential services
Sources said the FBR proposed adding a new clause to the Income Tax Act to give it the power to suspend essential services used by those who fail to file their income tax returns.
The FBR first declares persons who are not included in the list of active taxpayers to be liable to pay taxes by means of a general income tax decree. If they fail to file the statements, the FBR will ask the affected service providers to turn off cellular service and disconnect electricity and gas, the sources said.
Continue reading: Government shares tax records with NADRA
Grant NADRA access
Sources said the government has also proposed adding a new Section 175B to the Income Tax Ordinance to hand over all data from both existing and non-existing taxpayers to Nadra in an effort to expand the tax base. In the past, powers were only limited to the extent of the unregistered people.
Nadra will then develop a citizen portal to identify unregistered taxpayers, expand the tax base and identify tax evasion or avoidance by registered taxpayers.
It will also use information available with Nadra and data shared by the board to calculate the indicative income and tax liability of unregistered as well as registered individuals using artificial intelligence and mathematical modeling, sources said.
The sources revealed that in 2019 the FBR discreetly handed over the tax filing of the income tax returns for the 2014-2018 period to Nadra. Sources added that the FBR had already submitted withholding tax returns to Nadra from unregistered individuals but was unwilling to provide information on income tax returns for 2019 and 2020.
Pakistan has barely three million income tax filers who often complain of inappropriate harassment from FBR, and Nadra now appears to be another entity to be added to the list.
The government then hoped that Nadra would help the FBR improve tax collection by analyzing information on income tax return filers. But despite the information exchange with Nadra, which apparently violated the income tax law, nothing concrete could be achieved.
For nearly a decade, Nadra has claimed it can help meet the goals of broadening the tax base and increasing tax collection through artificial intelligence-based mathematical models.
In a further significant step, the FBR has proposed charging up to 35% additional input tax for workers who are non-registrants but who work from residential buildings with domestic electricity connections. These professionals include accountants, lawyers, doctors, dentists, health professionals, engineers, architects, IT professionals, tutors, trainers, and others involved in the provision of services.
This increases the total tax on the electricity bill to 50% of the amount billed on the monthly bill from over 75,000 rupees, 45% to under 75,000 rupees, 40% to 50,000 rupees, and 35% to 40,000 rupees monthly bill, the sources said.
Identifying these skilled workers in residential areas will be challenging for the FBR as it does not have such skills.