The Federal Board of Revenue (FBR) failed to achieve the tax revenue target for the fiscal year 2017-18. According to the data released by the FBR on 9 July 2018, the provisional ax collection stood at Rs. 3,751 billion, which is Rs. 184 billion less than the revised tax revenue target of Rs. 3,935 billion. The original tax revenue target for the FY2017-18, though, was 4,103 billion rupees. The data of tax collection do not include collection of 90 billion rupees under the tax amnesty scheme for undeclared foreign and domestic assets, which remained effective from 10 April 2018 to 30 June 2018. The date for the amnesty was later extended to 31 July 2018.
Though tax collection registered a growth of 11.37 percent in the overall tax collection as compared to previous year, failure to achieve tax revenue target means increase in fiscal deficit, which will compel the upcoming government to seek borrowing for balancing the budget. This dismal failure can be attributed to many reasons. Some of them are being discussed hereunder:
1. Shortfall in income tax collection
The FBR has experienced a major shortfall in collection of income tax. As against the assigned target of Rs. 1,562 billion, the FBR could collect 1,441 billion rupees reflecting a shortfall of Rs. 121 billion which was higher than the expected shortfall. Surprisingly, the shortfall is observed despite the implementation of many additional tax revenue measures through the Finance Act, 2017 (Budget 2017-18). These included higher rates for non-filers, increase in withholding tax provisions, expansion in the presumptive tax regime, etc.
2. Shortfall in sales tax collection
Sales tax is the leading revenue-spinner for the government. However, the sales tax collection fell short by Rs. 53 billion as it stood at Rs. 1,488 billion against the target of Rs. 1,541 billion. Failure to achieve tax target from the sales tax is astonishing because the FBR had implemented a number of measures to plug revenue leakages through fake and flying invoices. For instance, Sales Tax Real-Time Invoice Verification System (STRIVe) was launched to check usage of fake and flying invoices and to control the sales tax fraud.
3. Loss of revenue due to tax expenditures
Inadequate or lax tax policy could be another major reason for the wide tax gap. During 2017-18, the magnitude of tax expenditures was as high as 4.4 percent of the gross domestic product (GDP), amounting to Rs. 540,980 million. Tax revenue losses occur mostly due to special provisions in the Income Tax Ordinance, 2001 (ITO). As a result, higher tax burden remains on lesser number of existing taxpayers. For example, the highest income tax rate is attained at 50 times the per capita income in Pakistan as compared to 8-10 times in India and Bangladesh. The effective rate of taxation of unearned capital income is very low because it is largely taxed as a separate bloc of income, thereby reducing progressivity. The high net worth individuals (HNIs) are not being taxed properly. Lifetime or multiple year exemptions from corporate income taxation to Independent Power Producers (IPPs) and other entities, virtually no taxation of agricultural incomes and low incidence of taxes on property are other examples of weak taxation policy. In FY 2017-18, the loss of tax revenue due to exempt business income of IPPs was Rs. 179,290 million.
4. Tax evasion
Tax evasion among the corporate and non-corporate taxable persons is another principal contributor to tax gap. There is ample evidence of significant tax evasion in the sector. For example, one-third of the companies registered with the Securities and Exchange Commission of Pakistan (SECP) filed returns of income for the tax year 2016. Nonetheless, bulk of tax evasion is in large and growing informal economy of Pakistan as 40-50 percent of Pakistan’s economy is untaxed. Assets and incomes of the resident Pakistanis are substantial in the foreign countries. For example, the collective wealth of the Pakistani nationals hidden overseas is around US$ 300-500 billion, which is more than or at least equal to the country’s current GDP of US$ 300 billion. The Panama Papers and the Paradise Papers included the names of 450 and 193 Pakistanis, respectively, who owned as much as 5 percent of the total hidden global wealth of US$ 10 trillion.
5. Weak enforcement
The huge tax gap and widespread tax evasion also provide an evidence of weak tax enforcement, which is due to either fewer, or unskilled and ill-trained tax administrators, auditors, inspectors and other staff or lack of technological resources to catch tax-evaders and fraudsters. Massive declarations through the tax amnesties also provide evidence of weak tax enforcement. In the past, an amount of Rs. 1.12 billion was recovered from undeclared assets in the 1958 amnesty scheme. The FBR collected Rs. 920 million in the 1968 amnesty, Rs. 1.5 billion in the 1976 amnesty, Rs. 10 billion in the 2000 amnesty and Rs. 3.16 billion in the 2008 amnesty. There are several other schemes which were offered in 1985, 1991, 1998, 2012 and 2016 but their impact on revenue and tax base was not made public.
6. Narrow tax base
Tax base in Pakistan is limited and narrow as is evident from the fact that only 0.61 percent of the population filed tax returns in the tax year 2017. Only 1.39 million people filed income tax returns in the tax year 2017. The number of return filers in India is 29 million, almost twenty-five times the number of filers in Pakistan. The table below shows the diminishing trend in the filing of income tax returns even after the introduction of higher withholding tax rates for non-filers during 2012-13. Decline in the return filing was the maximum during 2014-15. Although there has been increasing trend in filing of returns during the last two years, the figure is far below the potential tax return filers.
Interestingly, out of 2.8 million commercial electricity connections given across Pakistan, holders of only 0.6 million filed tax returns.
It is worth mentioning here that the resources for raising non-tax revenue are diminishing. However, the governments are exercising the option of raising tax revenue through direct and indirect taxes for balancing the budgets. In the advanced economies, the tax-to-GDP ratios are much higher because it is almost impossible for taxable persons to escape taxation in the wake of effective taxation and prosecution systems. As a result, actual tax collection is nearly close to potential tax revenue. Conversely, the developing countries like Pakistan have significantly lower tax-to-GDP ratios. So far, these countries have failed to explore tax potential. As a result, significant tax gaps exist in these countries. For example, in Pakistan, tax gap has been estimated to be equal to current tax collection.