Budget 2018 (Finance Act, 2018 Approved) had some good news as well not so good news sandwiched secretly for example lowest income tax rates in the history announced and implemented for Individual taxpayers(Salaried as well as Business Individuals), removal of law for automatic selection for tax audit if return is late filed.

However some really harsh steps were taken one of which is ‘If a person failed to file his/her Income Tax return within due dates then he will remain non-filer for the whole year even if he file it one day after the due date’              

Due Dates for return filing

Currently, if you are non-filer, but files your return of income on any day in a year, your name is immediately included in Active Filers’ list maintained by FBR on very next Sunday of the week.

Check your filer status in FBR records

But the situation will be different from Tax year 2018, as mentioned above, now return is compulsorily required to be filed within due dates otherwise the person will remain non-filer for a complete year. In author’s view, this extreme measure is taken to recognize the importance of tax return filing in Pakistan. Taxpayers casually file their returns or when they encounter the need to file the return usually in two situations

  1. When any notice to file return of income is received from FBR
  2. When planning for any transactions on which withholding tax is to be deducted.

Who will be the winner of this new policy

This strict policy measure while inculcating the sense of return filing may have devastating effects on the person who missed the due dates and Government will also suffer from this.

Here is how

Persons who genuinely missed the due dates would curse the this harsh policy every time withholding tax is deducted from his / her banking transactions or other transactions that are subject to withholding.

Argument in favor, that the excess may be claimed as refund is not practical in the current scenario where payment of refunds to the taxpayers is at the last number of FBR’s priority list.

Government will also suffer

Now how the Government will suffer from this, in order to understand this, we need to look at the numbers of return filing trend that follows near or at due dates for return filing and after due dates.

Shocking total number of Filers in Pakistan

On the date of this article, there are about 1,406,135 Active filers on FBR Active filer list (which corporate as well as other than corporate). Active filers on this date, means who filed theirs return of income for tax year 2017, however this number was just approximately 0.8 Million on the last the date of return filing which means difference of about 0.6 Million (43%) returns were filed after due dates.

43% of the persons filed their returns after due date of Filing returns

We cannot ignore the impact of this new policy as it will definitely push existing filers and potential filers to file their returns within due dates but at the same time equal but opposite reaction will be followed by non-filers, to not file their returns at all if they missed the due dates. So in author’s view the impact of excitement to file within due dates will nullified with person who would drop the idea to file if they missed the due dates, so the same difference of 43% approx. may be assumed to be there i.e. Total returns filed minus returns filed within due dates . So the Government has to suffer by losing 43% of the persons from its tax base and missed an opportunity to issue notices, call inquiry, conduct audit and document economy.

Notice to file return of income may still be issued without any efficacy to the taxpayers, as this is against one of the principles’ of Taxation that there should be an element of benefit to the taxpayers in respect of levy of tax.

More Non-filers means More Tax for Governments may not be case

Argument that the Government will be able to collect more taxes in the form of more non-filers is again lacking practical aspects. This can be understood from a hidden secret that when the Government introduced separate tax rates for filer and non-filer applicable to winner of prize bonds, for the very first time, it was anticipated that more tax will be collected from non-filers as majority of prize bonds holders are non-filers, however the results were not that desirable, as this new measure created a new line of ‘business’ for filers, filers started to offer their Name and NTN to encash prize bonds winning money at tax saving ratio for example there is prize money of say Rs 100,000 and the holder is non-filer then tax deduction would be at 25% which means Rs 25,000 as tax deduction and non-filer would get only Rs 75,000/- there comes filers to offer their name and NTN, as in case of filers, tax deduction would be at 15% i.e. Rs 15,000/= so a win-win formula derived, prize money is encashed on filer’s name and tax saving of Rs 10,000 (Rs 25,000 – Rs 15,000) is shared by both in mutually agreed ratio causing loss to Government’s exchequer.

The author of this article agrees that prize bonds winning money transaction is much different case from banking transactions, nonetheless, in view of this much strict policy victims would definitely derive some way out to avoid tax deduction as non-filer which is against the interest of Government’s revenue.

The success of this new policy is yet to be seen, whatever be the scenario it should be in the interest of Pakistan and for the betterment of the society as tax evasion has ultimate negative effects on every citizen of Pakistan in the shape of external debts, lack of Government’s funds for development work and inability of Government to perform their duties etc.

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