The IMF’s has been pushing Pakistan to make tax efforts equal to 1.7 per cent of GDP that requires at least Rs600bn additional taxes or tax collection; the World Bank says additional revenue can be achieved through compliance, not raising taxes. WB has estimated the cost of tax exemptions in place in various sectors is 2 per cent of GDP, and that the State’s gap between actual and potential tax recovery is 50pct.
PKONWEB Report — The State’s ongoing campaign to rope in tax defaulters and non-compliant high-net-worth individuals (HNWI) in the net has helped the Federal Bureau of Revenue (FBR) scrape in additional Rs14 billion in the first nine months of the fiscal year (Jul 2018-Jun 2019).
The drive has also helped the total income tax return increase by 39pct; it reached 1.92 million for the tax year as against 1.38m in corresponding period last year.
According to a tax official, some 540,000 additional tax returns for the tax year 2018 were received till May 31.
World Bank believes the FBR methodology to assess tax liabilities for some sectors like the electricity consumption bills for the steel sector is leading to huge tax losses.
Pakistan’s current tax-to-GDP ratio is 12.6 per cent of the GDP, which according to the World Bank should be 23 per cent of the GDP. Only 1pct of the 220m population pay tax– “far less than what’s considered economically sustainable by international standards and that of emerging economies,” say experts.
A recent WB document revealed that Pakistan needs to increase tax compliance, not new taxes.
FBR has the mandate to enforce tax compliance. It has sought a $400 million loan from WB for tax reforms. This will be the second full-scale attempt by the WB to reform the FBR in the past 14 years. Its earlier $150 million worth of “Tax Administration Reforms Project” badly failed to yield the desired results, and the money went down the drain, according to The Express Tribune.
The most recent WB project document says Pakistan needs to broaden the tax base instead of burdening the existing taxpayers. However, FBR’s campaign to contribute an increase in domestic revenue hinges on broadening the country’s tax base and facilitating compliance, experts say.
The WB has suggested to withdraw multiple exemptions and discounted rates to selected industries, economic actors, and economic activities like sugar, textiles, fertilizer industries, the real estate sector and make adjustments in agriculture tax regime “considered the most politically volatile issue and with many from the industry being lawmakers,” the experts added.
The most recent FBR drive has yielded some increment in tax payer’s number, as well as additional tax collected figure. The State has also extended the last date for filing of tax returns for TY18 until June 30 as part of the tax amnesty scheme which also ends June 30.
Some 260,000 SMS notices were issued to non-filers, according to a tax official, and of these, 240,000 were also sent emails and asked to file returns. Among them, only 50,682 returns were received and enforced.
Maximum tax evasion was detected in sugar and retail sectors.
The WB has suggested withdrawal of multiple exemptions and discounted rates to selected industries, economic actors, and economic activities like sugar, textiles and fertilizer industries, and the real estate sector.
The tax demand created in the sugar sector was Rs3.39bn and out of which only Rs583m was recovered so far, showing a meager recovery of 17pct from the powerful mill owners.
Contrary to this, recovery from the retail sector is 100pct against the tax demand created. According to one expert, the sales tax regime enforced played a bigger role on the retail, as detecting their revenue and operating profit is easier.
The tax recovery from real estate sector was only 65 percent and from other sectors only 21 percent.
The recovery from High Net Worth Individuals (HNWI) was 65pc.
According to a tax official, tax demand worth Rs13bn has been created in offshore cases of which a recovery of Rs6.5bn has so far been made. In order to streamline its related recovery procedure, the FBR has established six business units called “Offshore Taxation Commissionerates”. These units will handle offshore information at Karachi, Lahore, Islamabad, Peshawar, Quetta and Multan, the official said.
Under the offshore initiatives, the State has signed an agreement with the Organization of Economic Cooperation and Development (OECD) for automatic exchange of information and has received accounts information of about 152,000 Pakistani tax residents. Similarly, it has started receiving information in 525 cases from UK relating to investments/rental income of Pakistanis there.
Similarly, the FBR has selected hundreds of cases of high profile individuals in the country whose income does not commensurate with their life style and shared details with field formations during the last 10 months. On the basis of available data, several dozen cases have been selected for detail audit.
Pakistan needs to increase its tax base and tax revenues to ensure fiscal sustainability, says the WB project document in which the FBR seeks additional $400mn– for ‘capability and capacity building’ which some experts say is of no value-addition unless lawmakers make this matter a non-negotiable social contract.
At the moment, neither the FBR is organized along functional lines nor does it have a clear hierarchical structure, the WB project document said, adding FBR has a nationwide presence with more than 21,000 staff.