Facing renewed pressure to improve the countrys tax-to-GDP ratio under the IMFs ever-watchful eye, Pakistans taxmen have launched a flurry of initiatives aimed at improving collections and broadening the tax base.
So while the government is busy courting coalition partners and opposition parties to implement new taxes on agricultural income, property and the controversy-prone RGST, the FBR has teamed up with NADRA to reign in the countrys most prolific tax evaders.
The high incidence of tax evasion and tax avoidance has been fodder for debates everywhere from the parliament to drawing rooms. So, heres another ingredient while the kettle is still hot.
The World Bank published a report titled, Pakistan Tax Policy Report 2009, which has asserted that the tax gap in Pakistan was around a hefty 79 percent of total tax receipts. In other words, tax authorities collected about Rs1.1 trillion while the actual amount of tax that should have been collected under the existing tax regime was Rs1.896 trillion.
This titbit of information became part of contemporary vernacular, courtesy of Chairman FBR Salman Siddique, during his appearance at the apex court, earlier this year.
A lesser-known statistic appeared in a similar research report published in 2005 by the Georgia State University which estimated that the countrys tax gap at that time stood around 69 percent. Simply put, despite the relatively upbeat economic performance witnessed until 2008 (average GDP growth between FY05 and FY08 stood about 6.3 percent), the tax gap has continued to rise.
Research suggests that there are three main reasons causing this difference between taxes owed and taxes paid: tax authorities ability to audit and oversee, complexity of tax regimes, and perceived risk/benefit of tax evasion versus payment.
In the period under consideration, there have been few significant improvements in FBRs ability to audit and implement taxes and the complexity of tax laws and procedures has also received limited, if any, review.
However, during the same period (FY05 to FY10), the countrys perceived level of corruption has been on the rise, particularly since 2008. It may be argued that more and more individuals and corporations have wilfully either avoided or evaded taxes in recent years, arguing that they are not receiving the level of government services they should.
While this argument obviously fails on moral grounds, it highlights the detrimental effects of increasing the tax burden on existing taxpayers. Additionally, WB-sponsored research shows that excessive tax burdens act as an incentive for individuals and corporations to avoid taxation.
It also contends that members of higher income groups tend to have more avenues for tax avoidance, hence creating greater vertical inequity.
Daniel Mitchell, a senior fellow at Cato Institute - a US-based public policy think tank - asserts, "A 1 percentage point increase in marginal tax rates is associated with 1.4 percent point increase in the underground economy."
The brunt of the evidence suggests that continuing to pile on more tax burden on existing tax payers also increases the risk of eroding the already-narrow tax base. Also, it appears that given the dismal perception of government services, enforcement drives can only deliver temporary and limited benefits.
For its part, the FBR has identified more than 700,000 potential taxpayers with the help of NADRA, while a corporate tax gap of Rs557 billion has also been identified with efforts underway to improve collections on this front.
However, it seems that the government will have to enhance transparency in its workings and improve its overall image if it hopes to change the mindsets of those who have dodged their national responsibilities thus far.
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