What is the benefit of becoming a filer in Pakistan

Should I Become a Tax Filer?

This is a common question asked by non-filers who receive incomes from registered entities and maintain bank accounts. Currently, there are some 2.5 Million filers in the the system, representing less than 1% of total population.  Among the 99% of the population as non-filers, at least 50% receive a regular income and maintain a bank account.   

With each fiscal budget and need to increase revenues, FBR keeps increasing the collection targets and adopts measures of increasing tax rates and categories for taxation. At the same time to rope in more filers new measures are adopted to tighten the noose on non-filers with double withholding tax rates on large purchases, cash withdrawals, and slapping other penalties.

Most non-filers opt for paying additional penalties over having to disclose income and risk being hounded by tax officials for additional liabilities.  If they are not at peace with making this choice they may wonder what they miss.  

Should an earning person and bank account holder become a filer voluntarily or continue to hold their ground? Even if everyone pays income tax and other taxes one way or other, an account of all implications can guide in making this choice.

Both filer and non filer pays tax at source

If you are a non filer, but are paying income tax on your salary and additionally advance income tax on luxury purchase, you may be paying extra tax but there are no means available to you to recover the excess amount.

As a proverb goes “nothing is certain, except death and taxes”. This is true for every human being in general. Whatever we consume which is not essential for survival is direct or indirect taxes built in the price, regardless of being a filer or non-filer. Sales tax on goods and advance income tax on (supposedly) luxury goods and services from the government is applied at source. Examples are mobile phone recharge, landline phone bills, purchase of movable and immovable assets and electricity bills over 25,000 for domestic consumers.

The assumption for imposing this advance tax is that one must have enough income to afford these indulgences so one must pay tax upfront.

Do Filers pay more or less tax?

Any advance tax paid is adjustable in income tax liability for filers. If you are a filer, your income tax liability is reduced by the amount you pay in advance through purchases of such goods and services. This is one benefit of becoming a filer in Pakistan.

If you are a salaried person or get any income from a registered entity then you are also paying income tax every month at source. That is income tax is deducted from your salary every month. Your employer makes the deduction according to applicable rate based on the income bracket. Whether it is deposited into the national treasury or not is the responsibility of the employer. You can find ask the employer to show you the deposit challan to confirm if tax payment was indeed made in National Bank. Otherwise, you never find out where this money went.

How much withholding tax for filer on saving account

If you have a savings account in the bank then tax deduction at a maximum rate of 15% is applied at source on the profit received from the bank. If the total profit received within the year is under PKR 5.0Million, no additional liability is applicable at the end of the year. The income received and tax paid at source is adjusted within the system automatically. But if the total profit in a year exceeds PKR 5.0 Million, then system will calculate an additional liability at a higher rate than 15% already deducted by the bank. And you will be pinched hard for the additional amount payable. In this case it is unlikely that you would ever pay more taxes than your liability.

Do filers get audited by fbr?

Once you submit your assessment based your return is subject to audit within a period of six years. So keep all supporting documents for at least six years. They are usually 2-3 years behind in performing audits. For example in 2023, you may be subject to audit for the assessment filed in 2021. For completing the audit you need to provide them with all supporting documents on which you have based your assessment. In some cases, a smart auditor may prepare a set of specific questions in support of your declarations.

What is the benefit of becoming a filer in Pakistan
keep all supporting documents for at least six years

Disadvantage of being filer

Filing of Income tax returns is indeed a time consuming and undesirable task. And it is worse to engage a tax consultant for additional burden on your pocket and the risk associated with disclosing private and sensitive information on your wealth and possessions to an outsider. Once you start filing your tax returns then you are compelled to continue following this annually to avoid receiving intimidating notices of being a defaulter. This would eat away on your peace of mind.

Do filers get tax refund

Filers are entitled to refund of the excess amount. You have to file an online application for refund. After a scrutiny and verification process, the refund is made ultimately but this could take considerable time.

Another means available to you is to share your payment receipts with payroll officials at your work and ask them to adjust the income tax liability accordingly. Some officials will agree to do this with proper documentation and reflect into their accounting systems accordingly.

Overall benefit of becoming a filer in Pakistan

  1. If you are going to apply for a bank loan or benefit from a government scheme, being a filer may be one of the eligibility criteria.
  2. Learning and understanding the system through website of FBR; or engage a consultant who supposedly understands the system and process;
  3. Subject yourself to risk of disclosing your private information to a consultant, who may or may not keep your best interest in mind when filing the return.
  4. Disclose all your income and taxes paid truthfully; no matter how honest you are, the officials assumes you are hiding something and system uses the word “admitted” income tax.
  5. Account for all purchases wherein income tax (Withholding Tax) is deducted at source at the time of purchase. This will reduce your income tax liability directly.
  6. Before you make submission, you have to disclose Wealth Statement in which your assets (including bank accounts) and expenditures have to be accounted for.
  7. Your inflows through income, outflows through expenses and increase/decrease in assets should reconcile completely to enable submission.
  8. If you have paid taxes more than your liability, you may recover by applying for refund. How likely it is that you will ever receive a refund is an unknown through a real life example.
  9. Be prepared to receive notice of audit and subjected to scrutiny of all documents in support of your declarations.
  10. If the audit officials don’t agree with your declarations, be prepared for imposition of additional tax liability and penalty for false disclosures. Not paying additional taxes imposed risks freezing of your bank accounts and eventual withdrawal of funds in case of failing to settle it.
  11. Should you miss a filing deadline or choose not to file in a particular year, you may receive intimidating notices of being a defaulter and threats of imposition of penalties;
  12. Lose peace of mind and face sleepless nights;

Do non filers pay more or less Tax

Higher rates of advance tax apply on non-filers on purchase of assets and banking transactions. For example in purchasing a new vehicle, non filers pay twice the amount of advance income tax than filers. While filers can adjust this amount in their income tax liability, non-filers do not have an immediate recourse to recover this; but they can certainly build it into the resale price of the vehicle.

On banking transactions, this tax can be avoided by staying within the limits of cash withdrawals. But if one must pay, it is an added cost of having operating a bank account for a non-filer.  

Benefits of staying a Non filer

  1. Saving time on learning the system
  2. Saving time and expense in engaging a consultant.
  3. Maintaining your privacy and information on wealth and income sources
  4. Pay additional fees and taxes on transactions involving income tax deduction in advance at source. Most of these taxes would likely be recovered in resale of assets.
  5. Not being subjected to audits and intimidating scrutiny of your wealth information.
  6. Latest news on tightening measures is that non-filers may face blocking of phone SIMS and disconnection of utilities, etc. This may apply to those having enormous savings in bank accounts and engaged in high value transactions of buying and selling. Such harsh measures have rarely been adopted by the government or they have not been sustained in the long run.

There is no benefit of becoming a filer in Pakistan

So it appears that non-filer have a better deal in staying as non-filers. One has to choose based on income level and the type of monetary transactions you are likely to be engaged in. For example, applying for bank loans or benefit from a government scheme mandate becoming a filer.

I became a filer for having nothing to hide. In following the saying, “if you run away from a growling dog, it will chase and bite you in the arse”. In citing the benefit of becoming a filer in Pakistan, I think of the value of the letter X. If no words begin with X, many words end in X. And it completes words like Extra, Expensive, Experiment and Exit. Bye Bye….

image credit: Photo by Olga DeLawrence on Unsplash