Yet another extension


WEB DESK: Although the Federal Board of Revenue (FBR), upon the end of the period specified for availing of the Voluntary Tax Compliance Scheme (VTCS) for traders, 29th February, directed Chief Commissioners of Regional Tax Offices (RTOs) to immediately begin inspection of tax records of all withholding agents throughout the country.

The audit would include stocks of agents, actions against non-filers of withholding statements and verification of tax declared in the withholding statements. Disturbingly on the ides of March the government granted a 15-day extension to the scheme, till March 15, however, instead of the 0.3 percent on all banking transactions, a rate pending the outcome of negotiations with the traders, the government raised it to 0.4 percent. The rate in the finance act for banking transactions of non-filers is 0.6 percent with analysts arguing that the government would slowly raise it to 0.6 percent if the outcome of negotiations remains inconclusive.

The Finance Ministry had already begun to separate the filers of income tax returns from the non-filers with respect to the withholding tax and advance tax regimes on payments and purchases for quite sometime with the latter paying a higher rate than the former. To further penalise the non-filers, it subjected all bank transactions of non-filers to a 0.6 percent levy. The objective: to document the large parallel illegal economy by incentivizing tax filing. This objective of the FBR is fully supported by Business Recorder as it is necessary to ensure that everyone files their returns to end the large parallel illegal economy that is operating within the country.

While the government has levied withholding/advance taxes on several imports, airline tickets, use of internet, cellular phones/landlines, local supply of goods, industrial and commercial electricity but it is generally believed that the objective of the most recent FBR directive to RTOs pertains to the levy on bank transactions including cash withdrawal. The focus of the audit would be on banks and particularly those core branches that contribute to the bulk of their business, expected to be in commercial centres in major cities and towns.

This newspaper fully supports this move on two counts. First, this would generate revenue that would enable the government to meet the unrealistic budgeted revenue targets from a source that was hitherto out of the tax net. It would also reduce pressure on the government to pass yet another mini-budget where the bulk of resources would have been extracted from existing taxpayers as well as from raising indirect taxes whose incidence on the rich if greater than on the poor.

Second, though the government has extended the date of the VTCS by 15 days, its decision to increase the levy by 0.1 percent can be supported as it does send a message that the government would continue to raise the rate to what was budgeted in the event that talks with traders drag on and remain inconclusive. In other words, the government has shown a will to put its money where its mouth is and that sends a message that this time around it means business.

While there is little doubt that the government would generate considerable revenue from this levy yet at the same time there is a danger that there would be massive withdrawals prior to the end of VTCS and this money maybe lost to the banking sector for the foreseeable future.

This, of course, would have obvious negative implications on the financial strength of the country’s banking sector. In addition, given the past allegations against FBR officials there are serious reservations about the possibility of harassment of payees/withholding agents and, in the event that the audit is carried out as per procedure, a stay order from the courts may inordinately delay the implementation of the audit directives. One would hope that these two major impediments are dealt with appropriately.

To conclude, there is more work cut out for the FBR with respect to its latest directives and one would hope that the Board begins to look at reforming the tax structure which at present is heavily reliant on existing taxpayers as well as on indirect tax collections.

Source: Business Recorder