FBR starts action against people hiding assets in UK

Islamabad: The Federal Board of Revenue (FBR) has formally announced to have initiated action against Pakistanis who have hidden immovable assets in Britain – a move whose success rate is likely to remain extremely low as the authorities lack actionable information.

The action is initiated on basis of the information received from the United Kingdom. The FBR has been struggling to keep its current narrow tax base after the last Pakistan Muslim League-Nawaz (PML-N) government changed tax structure for individuals.

This effectively excluded roughly 575,000 people from the net, although these people would still be paying up to Rs2,000 annual income tax.

In a terse statement, the FBR chairperson Ruksana Yasmeen on Monday said the FBR has started action against those who owned immovable properties in the UK.

The statement did not specify the numbers of people who have been served notices. But a senior FBR official said the tax notices were served to about 500 Pakistanis who own properties in Britain.

The FBR chairperson said the action was initiated against such Pakistanis who have hidden properties in the UK but did not avail the offshore tax amnesty scheme, which expired on July 31. She said Her Majesty’s Revenue and Customs (HMRC) authority shared this information with the FBR.

In response to offshore and domestic tax amnesty schemes, about 83,000 people whitened their hidden assets. Roughly 5,400 people availed offshore tax amnesty and 77,000 individuals benefitted from the domestic amnesty.

However, sources in the FBR said that like the Panama leaks, the chances of catching big fish remained low due to the nature of information. The Information that the HMRC shared with the FBR only contains names of the individuals and their home addresses.

The FBR does not have crucial details like the Computerised National Identity Card (CNIC) and passport numbers. Because of this, the FBR does not know whether these resident Pakistanis are registered taxpayers and also income tax return filers or not.

The FBR has served notices to these people under section 176 and 114 of the Income Tax Ordinance, said the FBR spokesperson Dr Mohammad Iqbal. He contended that the UK authorities had shared information about only those individuals who are not UK residents.

The nature of these notices further affirms that the FBR lacks actionable evidence against these individuals. The section 114 makes it binding for every company and every person whose taxable income is above Rs400,000 to file income tax returns. This means the FBR does not know whether these individuals are taxpayers or not.

The section 176 allows the FBR authorities to seek information relevant to any tax chargeable under the Income Tax Ordinance or to fulfil any obligation under any agreement with foreign government or governments or tax jurisdiction, as specified in the notice.

The FBR faced similar kind of issues when it started action against about 400 Pakistanis whose names surfaced in the Panama Papers in April 2016. At that time it had also served tax notices under section 176. The FBR never shared the outcomes of the Panama leaks investigations.

But the FBR officials claimed that this time the authorities are expecting better results, as at least the FBR has confirmed residence addresses of these individuals.

Challenge ahead

The FBR faces the challenge of broadening the extremely narrow tax base and enhancing revenues after the change of tax rates by the last PML-N government. In the last tax year 2017, about 1.45 million individuals and companies, forming 0.7% of the total population, filed their income tax returns.

A breakup of this number shows that the FBR’s effective tax base comprises less than 250,000 persons. These are the people whose annual income is above the threshold of Rs1.2 million. Out of 1.45 million people, there are about 640,000 persons who did not pay any tax and just filed their annual returns.

Then there were about 425,000 individuals whose annual income was between Rs400,001 to Rs800,000, and who will be liable to pay only a nominal Rs1,000 in income tax in the new fiscal year.

Another 150,000 individuals showed their annual income between Rs800,001 to Rs1.2 million and thus would pay only Rs2,000 tax in the tax year 2018.

There were about 140,000 individuals who have declared their annual income between Rs1.2 million to Rs2.4 million and will pay 5% tax in the new fiscal year.

About 40,000 individuals have shown their annual income between Rs2.4 million to Rs3.6 million that will be now subject to 10% tax in the new fiscal year. There were another 40,000 people who have declared their annual income above Rs3.6 billion and will attract a maximum individual tax rate of 15%.

After lowering the tax rates, the only option before the FBR will be to go after those people who have luxurious lifestyles but are not contributing to the national kitty. It will be more challenging for the FBR at a time when the Pakistan Tehreek-e-Insaf has announced to double the tax collection to Rs8 trillion.