'Only 25 percent of declared corporate income tax returns showed taxable income'

The highest level of non-compliance on the direct taxes side has been witnessed by the corporate sector where only 25 percent of declared corporate income tax returns showed taxable income during a tax period.
The data of non-compliance by the taxpayers has been shared by Federal Board of Revenue (FBR) former Member, Fiscal Research and Statistics Dr Ather Maqsood Ahmed at a pre-budget seminar organised by the Pakistan Institute of Development Economics (PIDE) here on Wednesday.
Dr Ather said that the biggest obstacle in the case of direct taxes is extremely low compliance rate by the corporate sector. To add insult to injury, less than 25% of declared returns show taxable income; all other companies report either business losses or NIL income. These companies are showing losses for the last many years, but still charring out their businesses.
Secondly, the heavy reliance on withholding taxes (59% of gross collection), which depending upon taxability, are indirect in nature. Thus the burden is on final consumers and not the corporate sector. The role of withholding agents is also questionable as whether they are depositing the deducted amount in the national kitty, he stated.
The analysis of Dr Ather further revealed that without complete records of business establishments (big or small) and a reliable automated system to verify records and refund claims it is quite unlikely that the desired results of documentation will be achieved.
He further informed that the imposition of one- percent special excise duty and increase in its rate up to 2.5 percent during current fiscal year is a clear policy reversal. He said that the FED is not a buoyant tax. Thus to raise equivalent revenue it requires serious distortion as compared to a buoyant tax like GST. Similarly, increase in the rates of customs duty for the so-called 'luxury items' has not paid of. The FBR should get rid of these distortions as early as possible and allow business activity to flourish.
He suggested that the extension of taxation net to 'hard to tax areas' like GST on services and Agriculture Income Tax do not have enough potential because of lack of honest commitment, administrative weakness, and lack of operational readiness. The 'integrated' IT supports covering all four federal taxes to confront delinquent taxpayers is also not in place. At the same time, the provincial governments are not ready to raise their contribution in Tax/GDP ratio. Finally, an effective system of audit and punishment is not being pursued. Resultantly, evasion and avoidance is increasing rather than decreasing, he added.
Dr Ather further observed that the two recent studies on Provincial taxation and Tax-Gap Analysis by researchers of the Andrew Young School of Georgia State University and FBR have shown that the contribution of provincial taxes could be increased to 1% of GDP within the existing tax structure, if administrative bottle-necks are removed and tax effort is increased; similarly. Using tax return data it has been estimated that there is a tax gap of more than Rs 500 billion that remains un-collected. Again there is a question mark on the existing tax effort, which unfortunately is declining as evident from tax/GDP ratio.
He pointed out that growth in tax collection during current fiscal year is also way below the required rate and the chances of missing the target are more than obvious. The start of the year target was set at Rs 1667 billion which has been twice revised downward to Rs 1604 billion and Rs 1588 billion. With Rs 1327 billion collection in FY 09-10, the required growth with original target was 25.6% and final revised target 20 percent. So far (till April 2011) FBR has collected Rs 1156 billion with a growth of 12.6%, it means to reach the revised target, Rs 432 billion are needed and the required growth is 43.5%, which is next to impossible.
"It is impossible for the FBR to meet the even revised revenue collection target of Rs 1588 billion" Dr Ather remarked. He stated that the FBR never missed its revenue target during 2002 and 2007. Resultantly, the economic management was smooth and there was no pressure from IFIs. During this period, the share of direct taxes increased from 18% to 40% and that of indirect taxes reduced accordingly.
The reduced rates allowed commercial and corporate sector to flourish, thereby generating economic activity and creating ample employment opportunities. Consequently, the per capita income doubled during this period and the incidence of poverty also reduced. However, there is absolutely no progress on the revenue side despite ad hoc measures and policy reversals. The tax revenue target of FBR was missed by Rs 89 billion in 2008-09 and by Rs 52 billion in 2009-10.