These days taxes paid by politicians are a hot topic in Pakistan and after recent work by journalist Mr. Umer Cheema on politicians’ tax returns, bashing politicians on taxes has become talk of the town. But it is sad to note that not only common public but also people of knowledge like Mr. Umer Cheema does not know the basics of taxation system in Pakistan while targeting politicians. There are usually three most important features of taxation system of Pakistan, which we ignore when we discuss how much tax has been paid by a person:
1. If you have a company registered in your name and you pay tax on behalf of that company, you do not need to pay tax on your income as a person. For example if I have a company ‘Majid Enterprises’ and Majid Enterprises pays taxes than Majid as a person does not need to pay tax.
Example: Almost every parliamentarian who has its own business and every businessman Pakistani. This is one of the reason many politicians’ tax returns are showing negligible taxes or not any tax at all because they are paying taxes from their companies as per the rules of FBR which is completely legal and permitted.
2. Another very important law is that if a person having a salary from abroad no matter if s/he is living in Pakistan or abroad, is exempted from taxes inside Pakistan. You do not have to pay a single paisa tax even if your salary is 10 million Rs. per month. This principle was implemented by Mian Muhammad Nawaz Sharif in his first govt., when Pakistan liberalized its economy. Pakistani banks used to cut tax from foreign remittances. Principle behind this law is simple. It is the duty of that country to deduct taxes where one is getting salary from. Pakistan has no right to deduct salary when one’s company transfers one’s salary to Pakistan from abroad. Bringing foreign reserves to Pakistan is already a great job by that person and hence no tax should be deducted by Pakistani bank as a token of gratitude and to motivate one’s action of bringing foreign reserves to Pakistan. So if a person is doing job in a UAE company while sitting in Pakistan and getting his salary from UAE directly in his account in Pakistan, Pakistani bank is not allowed to cut any taxes from his salary.
Example: Sen. Ishaq Dar of Pakistan Muslim League N working as finance consultant for Govt. of Abu Dhabi.
Note: Sen. Ishaq has been minister of finance under PMLN govt. and he had proposed the concept of ‘wealth tax’ to get a better measure of taxation. The law was later abolished by the subsequent govt.’s to get sympathies (nobody likes paying tax) to support anti-PMLN activities.
3. There is no agriculture tax. So even if you earn multitude of money, you do not need to pay taxes on your agriculture income.
Example: Many politicians in general and mostly PPP parliamentarians.
What is ‘Tax Returns’?
There is another important feature which is ‘Submitting tax returns’. According to constitution of Pakistan every earning Pakistani must have an NTN (National Taxation Number) and should submit ‘tax returns’. But note that submitting tax returns does not mean that you have to pay tax. For example if you fall on any of the three categories above, you do not need to pay any tax.
So when we discuss politicians’ taxes, we must keep in mind above points. Filling and filing tax return is a different thing; paying tax is different. If a person files tax returns but does not pay tax, he is fulfilling his duty. There may not be any tax showing on your tax return but there could be multitude of money being paid as taxes by your company.
Loop Holes:
1. According to point no.1, you do not liable to pay tax If you pay tax through your company. This is a very nice clause and one of the brilliant feature of ‘economic reforms’ brought by Mian Nawaz Sharif, but we know that Pakistani system is very much overwhelmed by corruption. So the taxes which should be paid during your business processes are usually paid in much less amount than required under the laws of FBR due to prevailing corruption. It is very difficult to get rid of corruption. Recently Mian Muhammad Nawaz Sharif has suggested to lower the amount of taxation (Only high tax percentages) to motivate tax payers to pay original tax and not to use unlawful means to avoid taxes.
2. Many people say that there should be agriculture tax.
