Poor tax compliance

Tax compliance in Pakistan has always been poor. According to a report in "Business Recorder", the performance during the current year has been particularly disappointing. The income tax returns filed by retailers, corporate sector, Associations of Persons (AOPs), salaried class and other categories of taxpayers upto October 5, 2007 showed declines of varying magnitude as compared to the returns filed in the corresponding period of last year.
It may be recalled that the Federal Board of Revenue (FBR) and retailers' associations had inked an agreement to broaden the tax base during 2007-08 on payment of reduced amount of sales tax/income tax, but the compliance of retail sector, which was expected to improve, has been dismal. Only 11,530 retailers had filed income tax statements upto October 5, 2007 as against 28,989 filed during the same period last year, reflecting a huge drop of 17,459 statements or more than 50 percent.
A break-up of the data shows that 10,868 retailers having annual turnover of upto Rs 5 million and 662 retailers having annual turnover of above Rs 5 million filed income statements as against 26,847 and 2142 last year, showing a sharp decline of 15,979 and 1,480 statements respectively. Negative trend was also observed in the corporate sector, as only 536 corporate entities and multinational companies filed income tax returns upto October 5, 2007 as against 1206 last year.
Declines in returns were also recorded in the case of AOPs from 19,429 to 13,587 returns and in non-salary group from 492,915 to 427,253 returns. Although the final position would only emerge after the last date of filing returns, the trend so far is quite disturbing. The case of retailers is particularly disappointing as they seem to have failed to comply despite obtaining concessions in the budget. This also raises a question mark on the tax authorities' efforts to broaden the tax base through automation, enforcement and compliance.
The taxation authorities may attribute the negative trend in filing tax returns this year to a variety of factors including extension in the last date of filing returns, distraction due to presidential election, political uncertainty and the month of Ramazan, but to be honest and objective it reflects very poorly on the morality of tax payers and the efficiency of FBR. It is true that poverty is rampant in the country, but looking at the growing number of cars, luxury houses, shopping plazas and the Pakistanis travelling abroad, it is more than clear that our tax system is unable to deliver and highly ineffective in collecting taxes from the sectors/individuals who are required to pay taxes or in punishing the evaders.
It is a pity that even the month of Ramazan now does not invoke the will to be honest and fulfil our tax obligations. In almost all the countries, filers of different kinds of taxes would automatically increase with the growth in GDP and per capita income, but the situation in Pakistan seems to be entirely different. The irony is that the country is witnessing this outcome despite investing lot of efforts and resources to improve and strengthen its tax collecting machinery. During the last few years, a broad-based tax policy, administrative reforms and other radical changes were initiated by the Board of Revenue to improve resource mobilisation and increase tax compliance by providing a congenial environment to the tax payers.
The Tax Administration Reform Programme (TARP) included the implementation of universal self-assessment, creation of a functional organisation, building of a tax payer service mechanism, use of a modern work layout for conducting tax administration, establishment of a data base for management reporting, audit selection, statistical analysis, automation in the Board of Revenue and other human and infrastructure development. The major emphasis was on voluntary compliance and direct taxes which are more equitable. Looking at the record of this year, the reform efforts of tax collecting authorities do not seem to have yielded the desired results and this calls for a reappraisal of the approach taken so far.
Although FBR needs to undertake an in-depth analysis of the situation itself, there are certain things which are quite obvious. For instance, the FBR must fix the last date of filing of returns after considering all the relevant factors, and then stick to it without yielding to any kind of pressure. The extension of last date almost every year sends a signal to the tax payers that FBR is weak and feckless. Also, like in most other countries, the FBR needs to be very firm while dealing with the would be tax payers and tax evaders without humiliating or harassing them.
They should be told in clear terms that it is their responsibility to file their tax returns, otherwise they would face severe consequences. In our view, the matter of filing tax returns and collection of direct taxes (excluding presumptive and withholding tax) is too important for the country to be easily ignored.