Tax collection issues

Inexplicably the Federal Board of Revenue (FBR) has reportedly analysed data that has led to the conclusion that there needs to be an analysis of the tax gap that exists due to the illegal economy that comprises more than 60 percent of the documented economy. The fact that the illegal economy is large, more than 60 percent of the legal economy, has long been known to the FBR. Additionally, it is by now generally acknowledged that the FBR is not only responsible for massive loss to the exchequer due to corruption and leakage as revealed by the former Finance Minister Shaukat Tarin, but has also exhibited a penchant for going for the easiest option possible to generate revenue. Thus FBR focus has not been on enhancing documentation and withdrawing exemptions on the income of the rich and influential but on levying taxes that are easy to collect notably the sales tax and the withholding tax that allows for an automatic deposit on sale of identified products. But this process does not work well on all products/utilities. For example, there is a sales tax on electricity that is deposited in the government exchequer once the bill is made. However the percentage of clearance of electricity bills is around 70 percent with the major offenders being government ministries/departments/autonomous entities. In short, the energy sector burdened with the circular debt, sourced to the non-clearance of bills by state institutions, has been compelled to pay the sales tax even on those bills that have not been paid. This, in turn, contributes to the severe liquidity constraints in the energy sector that periodically disables it from paying for the critical fuel imports. In this context, it is relevant to note that the relevant authorities have directed the FBR to desist from claiming sales tax on electricity bills that have yet to be paid. However, the FBR has yet to issue the notification that would implement this decision. Additionally the FBR has also relied on a petroleum levy that is budgeted to account for 120 billion rupees in 2011-12. This is irrespective of the fact that it is not a direct tax, which implies that its impact on the poor is greater than on the rich. The same applies to other indirect taxes, namely customs and federal excise duty. In its own defence, the FBR would, without doubt, aver that Pakistani income tax payers employ all means, legitimate and not so legitimate, not to pay their due tax. It is fairly well-known that the motivation to pay as little tax as possible is not unique to Pakistan however, in our case FBR corruption is often cited as the reason for evasion. Considering that Pakistanis per capita donations to charity are one of the highest in the world, it is only logical to conclude that if the FBR cleans its own house the likelihood of the taxpayers honestly paying their dues would rise. In addition, the FBR also maintains that the onus of not taxing the income of the rich landlords rests with the parliament, which has shown singular lack of interest in levying a tax on farm income at the same rate as levied on business and the salaried class. However the fact remains that the FBR too has been unable to increase its income tax collections due to its failure to proactively go after the evaders. Be that as it may, the black economy in Pakistan is large and suffers from a lack of legal ownership of property, making it difficult to obtain credit, sell the business, or expand. In addition, those who operate in the black economy simply cannot seek legal remedies since they do not have legal ownership. In short, those operating in our illegal economy are unable to benefit from the law and globalisation and remain stuck in poverty or in some instances profits that could be multiplied many times over from their existing level. In short, it is in the interest of the FBR, the country, as well as those operating in the black economy to begin documentation. If the labour laws are an impediment in this drive for documentation, then they should be suitably amended. For this purpose, a public awareness campaign needs to be launched and the benefits that would accrue from enhanced documentation, identified through debate. Many in Pakistan who operate in the illegal economy are too poor and uneducated to take advantage of the benefits associated with entering the legal economy. The first target of the FBR must therefore necessarily be those wholesalers and retailers, who can benefit significantly from joining the legal economy. Over time, however, the FBR must support policies that would erode the black economy. Copyright Business Recorder, 2012