The Central Board of Revenue (CBR) has admitted that improper implementation of Self-Assessment Scheme (SAS) and a number of amnesty schemes launched during the last many years have played a key role in narrowing income tax base.
A CBR draft working paper for the Third Technical Conference of the Association of Tax Authorities of Islamic Countries (ATAIC) reveals that a number of amnesty schemes resulted in low income tax yield.
The CBR has underlined various amnesty schemes included special national fund scheme 1985; foreign exchange bearer certificate scheme 1985-89; US dollar bearer certificate scheme 1991; foreign currency account scheme 1992; foreign currency bearer scheme 1997; tax amnesty scheme 1997 and tax amnesty scheme 2001.
According to the paper, about 12.5 million people living in Pakistan are earning taxable income, therefore, the estimated income tax return filers should be around 7-7.5 million.
Exempted sector of economy ie agriculture contributing 25 percent to the GDP. Hence, a safe estimate of the "return filers" to be 7.0 to 7.5 million ie 5 percent of the total population and 20 percent of the earning population.
The paper questioned that why our country has such a narrow tax base comprising about 1.7 million taxpayers with population of 160 million.
To enforce compliance in the case of existing NTN holders and taxpayers, there is a need for enforcement of existing legal provisions in letter and spirit; prosecution of at least 5 top tax evaders each year; use of huge bulk of available information to discover potential taxpayers and distinguish between the facilitation and unbridled freedom.
With the help of database, information from different agencies like Nadra, car registration authority, SECP, Sales Tax, Customs etc, desk analysis to be made followed after field survey. This information should be bifurcated as under: Identification of key untaxed areas for devising a method to increase the tax base; with each property transfer transaction return acknowledgement should be made compulsory; for the purchase of car, instead of NTN, return acknowledgement should be the integral document and all types of business transactions and registrations should not be materialised without return acknowledgements.
The analysis of problem of low yield of income tax shows that there are policy impediments in the growth of income tax; administrative defects and shortcomings; tax evasion and lack of proper documentation of the economy has made collection of tax difficult and costly.
Large sectors of the economy have been kept outside the scope of income tax by way of exemptions and exclusions. It encompasses exemption on agricultural income; exemption to people living in Fata, Northern Areas and Provincially Administered Tribal Areas; tax holidays, tax credits, initial depreciation allowance available to industrial sectors; exemption to welfare trusts and foundations and exemption to pensions and allowances.
Improperly implemented Self Assessment Schemes (SAS): The real philosophy behind self-Assessment scheme as a cost-effective tax collection procedure has been adversely affected by defective policies regarding processing of self-assessment returns, blanket immunity from audit, haphazard, random selection of cases for audit and stereo type desk audit. There is no proper investigation mechanism whereas absence of deterrence has affected revenue generated adversely.
The paper disclosed that the administration failures are because of the following reasons: Lack of proper information system, facilities and resources; too much stress on achieving revenue targets; shyness from physical audit and desk bound assessments without any investigation; lack of training and skill of the workforce; bad working environment; outdated procedures and processes; lack of functional division of work; over centralisation of the work and poor human resources management.
The CBR has aggressively addressed these problems on top priority basis. There is a great deal of emphasis on training and new training modules for new entrants to the Income Tax Group are being implemented.
Important initiatives have been taken to ensure functional division of work at all tiers. The working environment is much improved. The size of the workforce is being trimmed. The revised training modules make specific provision for imparting training in scientific investigation techniques and the first lessons in forensic audit and computer forensics are being given to the new officers while the skill level of the existing workforce is being enhanced through a regular capacity building programme.
The paper further pointed out that the problem of tax evasion is reflected from non-reporting and under-reporting of income.
Sources of tax evasion can be traced to the following reasons: Cash/undocumented economy; poor development of property rights and documentation relating to it; corruption in the tax department and lack of exemplary punishment for tax evaders.
Presently, 30-35 percent of the economy is placed in the Informal Sector and it is estimated that some Rs 180 billion direct tax revenues lost annually.
Steps have been taken to counter any unhindered growth in the informal economy. As per Income Tax Ordinance 2001, it is now mandatory for all taxpayers to maintain accounts and the so called "no accounts" category has been done away with even for the smallest taxpayer on the rolls. Internal and external survey has been accelerated and information technology is being put to use to collate the mass of data gathered through survey. In-depth studies of various sectors are being undertaken to properly appraise the problem of underreporting of income.
To achieve the targeted tax base (7-7.5 million return filers), there is a need to create a reliable database. Effective database should be the starting point of tax base expansion programme. A reliable data base will save time and remove duplication of work, it added.
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