Tax targets versus tax gap — II

The State should not collect advance taxes from those who are not chargeable to tax. Provisions like section 236 of the Income Tax Ordinance, 2001 along with many other similar ones providing withholding of taxes on transactions, instead of on real incomes, reflect a bad tax policy—anti-poor and contradictory to FBR’s claim of increasing direct taxes by diligently taxing the rich and the mighty.

Data related to unique mobile users is sufficient to explode the myth of “compliance gap” created/used by FBR in the Report. The poorest of the poor are subject to oppressive and unjustified, rather unconstitutional withholding tax on mobile use, and yet Pakistanis are called tax thieves by FBR stalwarts, so-called local experts working for lenders and donors and some all-knowing anchors of TV talk shows.

The reality is that the rich and mighty are not paying their due taxes and enjoying exemptions, concessions, waivers and immunities in tax codes, besides benefitting from tax and asset amnesties offered frequently by the state about which the Report is completely silent. Adding insult to injury are the following words of appreciation by the Chairman of FBR included in the Report:

“The efforts put in by the Revenue Analysis team, under the able guidance of Director General (Revenue Analysis), in producing this Tax Gap Report are appreciated. I hope the tax gap report will be useful for stakeholders, particularly the policy makers to devise future tax policy and strategies to tap the maximum potential of tax revenue”.

Quite strangely, Chairman FBR forgot that on July 22, 2022, while speaking at the Summer Camp of Lahore Tax Bar, he claimed that “tax gap of Pakistan is not less than Rs 3000 billion”.

According to a Press report [Tax gap stands at Rs3000bn: FBR Chief], he said that this gap “is on annual basis and exists mainly in the shape of tax exemptions for powerful lobbies, massive tax evasions, and the inability of the machinery to collect due taxes”. The FBR Chairman further revealed:

“We have found that the total tax potential under jurisdiction of the federal government stands at Rs 9,000 billion out of which the FBR collected Rs 6,000 billion so the tax gap was assessed at Rs3,000 billion on a per annum basis”.

Tax targets versus tax gap—I

The Chairman FBR reportedly revealed that the tax gap analysis he referred was conducted by hiring a consultant “on the directives of Prime Minister Shehbaz Sharif on the eve of budget-making exercise for 2022-23”.

The Report made public at the website appears to have no nexus with the one that according to Chairman FBR was assigned “to conduct the first-ever formal study to assess the ‘tax gap’ keeping in view jurisdictions of the federal government under 1973 Constitution for the imposition of taxes” [under the existing constitutional arrangements, the general sales tax (GST) on goods is in the domain of the federal government while GST on services is in the provincial jurisdiction including tax on agricultural income].

At the time of preparing the so-called “first-ever formal study” [yet not made public!] or the Report, FBR stalwarts did not mention tax gap study earlier prepared with the help of World Bank—see details in The tax gap, Business Recorder, July 29, 2022.

It needs to be mentioned that the actual tax potential of Pakistan is Rs 16 trillion [Paradigm shift in tax policy, Business Recorder, May 26, 2023] against the claim of Rs 9 trillion by worthy Chairman FBR. In How to bridge huge tax gaps? Business Recorder, April 15, 2011, Bridging the tax gap—I, Business Recorder, October 5, 2018 and Bridging the tax gap—II, Business Recorder, October 7, 2018, earlier studies on tax gaps were cited. In Tapping the real tax potential [Business Recorder, March 24, 2017], the following was mentioned:

“Tax gap of a country is measured by the amount of tax that remains uncollected due to non-compliance with tax laws. A study, ‘Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology’, jointly undertaken by the Federal Board of Revenue (FBR) and Andrew Young School of Policy Studies at Georgia State University, provides details of tax gaps by type of tax and describes the methodologies and data used for such estimates”.

Presently, out of total registered companies, about 50% are not filing income tax returns. FBR’s provisional income tax collection in fiscal year 2022-23 was about Rs 3.3 trillion. On the basis of data presented above, total income tax potential alone is not less than Rs 10 trillion. Sales tax collection in fiscal year 2022-2023 was Rs 2.5 trillion, whereas actual potential is not less than Rs 4 trillion. Similarly, the potential of customs duty is Rs 1500 billion but FBR collected Rs 926 billion. The potential of federal excise is Rs 500 billion, if not more, but FBR collected Rs 370 billion in FY2022-23. The gaps in all taxes are much higher than those mentioned in the latest Report of FBR at Rs 1289 from FY 2019 to 2020.

In view of the above, even under the prevailing economic conditions and current tax rates, total tax potential at FBR level comes to Rs 16 trillion [Income Tax: Rs. 10 trillion; Sales Tax: Rs 4 trillion; Customs Duty: Rs 1500 billion and FED Rs 500 billion] and if we withdraw all exemptions/concessions and waivers as pointed out by FBR Chairman a further amount of Rs 2.2 trillion can be collected.

It is strange that till today neither IMF nor FBR has bothered to determine the real tax potential as discussed above. Fixation of tax target at Rs 9.415 trillion in the budget for FY 2023-24 was too low. It should have been Rs 16 trillion in the light of above studies and facts, and the way it should be collected is explained in Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME Institute, Islamabad, December 2020].

(Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2023