FBR estimates potential Rs3trn tax gap

ISLAMABAD: The Federal Board of Revenue (FBR) has estimated a potential tax gap of Rs3,000 billion on an annual basis which exists due to tax exemptions to powerful sectors/lobbies, massive tax evasion, and the inability of the tax machinery to collect the due taxes.

Sharing the outcome of the latest tax gap analysis, FBR Chairman Asim Ahmad stated this while addressing the Summer Camp-2022 arranged by the Pakistan Tax Bar Association at a local hotel in Islamabad.

On the directives of Prime Minister Shehbaz Sharif on the eve of the budget-making exercise for 2022-23, the FBR has been assigned to conduct the first-ever formal study to assess the “tax gap” keeping in view jurisdictions of the federal government under the 1973 Constitution for the imposition of taxes, the FBR chairman said.

FBR Chairman Asim Ahmad said that the FBR conducted a study after hiring a consultant and so far, found that out of the total size of the economy to the tune of Rs67 trillion, the federal government levied sales tax on Rs32 trillion and then calculated income tax, customs duty and federal excise duty potential.

“We have found that the total tax potential under the jurisdiction of the federal government stands at Rs9,000 billion out of which the FBR collected Rs6,000 billion so the tax gap was assessed at standing Rs3,000 billion on per annum basis,” FBR Chairman Ahmad stated.

The chairman said that there was a tax gap of Rs3,000 billion out of which Rs1,800 billion was a policy gap as it was the gap that occurred mainly because of tax exemptions/incentives provided by the FBR to different sectors. “There is remaining compliance gap of Rs1,200 billion,” he added.

The FBR chairman said that if the FBR abolished all kinds of tax exemptions and ensured full compliance, the tax-to-GDP ratio could touch 14 percent with maximum collection of Rs9,000 billion on an annual basis.

He said that the tax-to-GDP ratio was the lowest in our country but if full tax potential was collected to the tune of Rs9,000 billion even then tax-to-GDP did not cross the 14 percent mark.

He said that there were legal issues and cited the example of agriculture which contributes 22 percent to GDP but its collection was less than one percent because it is not the jurisdiction of the federal government to collect tax on the agriculture sector.

He said that tax rates were also on the lower side as the maximum limit of corporate tax stood at 29 percent while salaried individual paid 35 percent. He said that the corporate sector was paying after adjusting all its expenses while the salaried person was paying tax on gross amounts so distortions are created in our taxation system.

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He said that the FBR focused on direct taxes as it took taxation measures of Rs600 billion in the budget 2022-23 and after excluding relief measures the net taxation measures were aimed at fetching Rs545 billion. “Out of total taxation measures of Rs545 billion, 80 percent tax measures have been taken on the direct taxes side,” he said.

There should have been a major tax policy shift after 2006 when the direct taxes would be the major revenue spinner compared to indirect taxes. It is now going to happen after 16 years as the contribution of direct taxes will be on the higher side than the indirect taxes.

The reliance had shifted on indirect taxes because its collection was easy but now effort was made to bring this tax policy shift, he added.

He said that the broadening of the tax base would be achieved with the help of technology for bringing the whole supply chain in the tax net and the FBR prepared a plan to move toward this objective. Turkey had done it but so far, the FBR could not move towards digitization of payment.

He said that the evasion of sales tax stood in the range of Rs250-300 billion. The FBR slapped a fixed rate through electricity bills but it is not a permanent solution.

The FBR will have to move on the pattern of Turkey model for placing digitization of payment at all stages from manufacturer to retailer. He said that the FBR would collect Rs42 billion through electricity bills from retailers as a step was taken to recover its due taxes.

He said that there were five million registered persons who did not bother to file their income tax returns.

In order to broaden the tax base, he said that the FBR was working on increasing the narrowed tax base with help of technology. He offered tax bars to assist the FBR for achieving the desired objectives. He said that both the taxpayers and tax advisors were respectable to the FBR and he believed in resolving issues so the FBR’s senior management would sit together to resolve issues. The cause of the problem will be resolved at all stages, he added.

Chairman FBR Ahmad said that the FBR borrowed the concept of integrating supply chain and implemented Tier-1 retailers and tier-II retailers and they took 10 years for accomplishing the whole mapping.

The FBR, he said, would not take 10 years to implement this model. He said that the big retailers were brought into Tier-I retailers and only furniture business was brought on the basis of the area of shops. On their demand, the area was revised and fixed at 2,000 square feet. Now they demanded to increase the area further and the decision was yet to be taken by the government, he added.

He said that the FBR surpassed its upward revised target of Rs6,100 billion, despite facing negative revenue impact of Rs45 billion per month owing to zero percent sales tax on petroleum products. The IMF had predicted that the FBR would not be able to achieve the tax collection target for the last fiscal year ended on June 30, 2022, the FBR chairman said.

He recalled that the finance minister received a call from the IMF’s mission chief on the occasion of Eid-ul-Fitr, whereby, the Fund conveyed its concerns that the FBR would not be able to achieve its target for the last fiscal year. The fund also inquired what the government would do owing to the FBR’s revenue shortfall, the FBR chairman further said.

He had assured the Minister for Finance that he posed full confidence in his team and the FBR would achieve its target of Rs6,100 billion. When he had returned back, he discussed the revenue collection target of Rs6,100 billion with the FBR’s members who also declared that it would be impossible to achieve the desired target. “The achieving of FBR’s target is paramount for continuing the IMF programme,” the FBR chairman added.

Copyright Business Recorder, 2022