Achieving tax revenue target remains the top priority of the Federal Board of Revenue (FBR). For this purpose, the FBR employs conventional and unconventional methods. However, historical data indicate that the FBR missed the tax targets for the most of fiscal years (FYs). For example, the FBR could not achieve even the revised tax revenue target of Rs 3.5 trillion for FY2016-17 as the actual tax collection stood at Rs 3.3 trillion.
The shortfall in tax revenues could be attributed to numerous factors; major two of them are discussed hereunder:
1. Poor Taxation Policy
An immediate reason behind failure to meet the tax revenue targets is inadequate tax policy that allows the taxable persons to escape taxation under one pretext or another.
1.1 Tax evasion on account of foreign remittance
Undoubtedly, huge untaxed money is being converted into foreign currency through money changers or other sources to avoid taxation under the pretext of foreign remittances which are exempt from income tax as per Section 111(4) of the Income Tax Ordinance, 2001. Likewise, the possibility that the taxable persons might have parked considerable untaxed money in foreign currency accounts within the country could not be ruled out as the tax authorities are barred from obtaining information regarding foreign currency accounts under the Protection of Economic Reforms Act, 1992.
1.2 Tax evasion owing to money laundering
It is also not out of place to mention that money laundering through hundi/hawala or over/under invoicing has been a lucrative business activity in the recent past. Just look at the evidence. More than 200 cases involving transactions of billions of rupees have been reported by the Financial Monitoring Unit (FMU) to the FBR for initiation of proceedings under the Anti-Money Laundering Law. Money laundering has severe consequences for the economy and the society as a whole.
1.3 Tax exemptions
Another aspect of faulty tax policy might be the exemptions, allowances and deductions on incomes or transactions that do not add any value to the economy and merely result in revenue losses. For example, overall tax expenditures (cost of exemptions, allowances and deductions) on account of federal taxes (income tax, sales tax and customs duty) for FY2016-17 stood at Rs. 416 billion, estimated to be 1.3pc of GDP.
During the same fiscal year, sales tax revenue of Rs. 250 billion was sacrificed owing to exemptions on taxable supplies and concessionary regimes introduced for certain taxable persons or for specific sectors of the economy. This also included relief measures of sales tax to the tune of Rs. 169 billion in petroleum products, fertilizers, zero-rated sectors, pesticides and Prime Minister’s Textile Package, which was announced on 9th of January 2017, to boost economy by reducing cost of doing business, increasing exports by creating a competitive edge, reviving closed capacity and creating new employment opportunities. For this purpose, the import of cotton and manmade fibres – other than polyester – was declared exempt from customs duties; sales tax exemption was provided on the import of cotton; and textile machinery and duty drawback rates were reduced to 7pc for textile garments, 6pc for textile made-ups, 5pc for processed fabric, 4pc for yarn and grey fabric and 7pc for sports goods, leather and footwear. However, the package has failed to boost exports.
Likewise, tax expenditure of direct taxes in the form of tax credits, exemptions, relief measures and rationalization of corporate tax rates stood at Rs. 14 billion and cost of customs duty (exemptions and concessions given through statutory regulatory orders) was Rs. 152 billion during FY2016-17.
2. Weak Tax Enforcement
Limited tax capacity in terms of number of tax administrators and skill level of the tax authorities to bring in the tax net all those persons who are liable to pay tax but are not paying due taxes is another explanation for the revenue shortfall. Furthermore, the rich individuals or high net worth individuals are not being taxed in accordance with their capacity to pay. Such a lopsided taxation has resulted in increased income inequalities and has been causing deprivation among the low income groups of the society. In fact, limited tax capacity is one of the leading reasons for not levying and collecting taxes in accordance with the principle of capacity to pay tax.
2.1 Ineffective tax audits
Tax laws provide for audits of the taxable persons to ensure that they are paying due taxes. However, the tax authorities lack resources required for conducting effective audits. In majority of cases, audit is based on the business record provided by the taxpayers. Audits based on manoeuvred record do not prove effective in detecting tax evasion. To check veracity of business health to impose due taxes, it is imperative to conduct visits to business premises of those taxpayers whose cases are selected for audit to retrieve actual record in order to make this exercise revenue-yielding, subject to strict monitoring of those tax administrators who are given such discretional powers to prevent any eventuality of harassment of taxpayers.
2.2 Limited tax capacity
Knowing limited enforcement capacity, the taxable persons are encouraged not to conceal revenue or claim unjustified expenses. Similarly, taxable persons tend to conceal investments and wealth knowing that the tax authorities would not be able to tax concealed investments or assets under the Income Tax Ordinance, 2001, after lapse of the limitation period.
For FY2017-18, the government has set a gigantic tax revenue target of Rs. 4.01 trillion – direct tax revenue target of Rs 1.595 trillion and indirect tax revenue target of 2.418 trillion. It is indispensable to implement revenue measures such as reducing tax expenditures, gradually raising petroleum taxes, further strengthening the system of withholding taxes for non-filers and rationalizing tax expenditures to ensure achievement of the revenue collection target. Administratively, improving access of tax authorities to third-party information, enhancing tax audits, building a centralized electronic fiscal cadastre and facilitating taxpayers in paying taxes are further measures to realize the target.
To boost tax collection, similar measures are also recommended by the International Monetary Fund (IMF) for Pakistan’s tax authorities in its Article-IV report.
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