ISLAMABAD: State Minister and Chairman of Reforms and Resource Mobilisation Commission (RRMC), Ashfaq Tola, said Wednesday that the country needed a major surgery in the taxation system to check parallel economy, as tax evasion in five sectors has reached Rs965 billion per annum as disclosed in the “IPSOS Report”.
He was addressing the launching ceremony of a report by the IPSOS regarding tax evasion in key industrial sectors. The report disclosed that annual tax evasion in real estate, tobacco, tyres, and auto lubricants, pharmaceuticals and tea has reached Rs965 billion.
He said the government had considerably increased the federal excise duty on cigarettes which was under review in the coming budget (2023-24).
He said “we will see a drastic change in the tobacco sector as the track and trace system has been successfully implemented at the cigarette manufacturing units.”
He said, “The prime minister is very much serious about giving tax relief to the masses in the coming budget”.
The salaries of government employees would be increased by around 20 percent in the upcoming budget.
He said the salaries of the lower-grade government employees were significantly low and it needed an uplift.
He said tax evasion was a menace and it had developed a parallel economy in the country, and apart from lobbying by various interest groups one part of the problem was a lack of coordination among different government departments.
“The solution lies in automation and financial inclusion as it was important for the economic growth of the country,” he said, adding that steps must be taken to boost financial inclusion.
He said “tax evasion is rampant in our society where Zakat of over Rs300 billion is being paid by recognised non-profit organisations and NGOs. If the amount of Zakat paid by the individuals has been added, the figure would go up to Rs500-550 billion.”
He also criticised the existing state of 18th amendment on the grounds that while 58.5 percent of national resources were been transferred to the provinces, but the responsibilities and accountability related to their responsibilities were not accounted for.
He announced that Pakistan would not default as around 85 percent of the debt was either government to government or with multilateral donors while only 15 percent of it was with private lenders.
He said that most of the valuation tables of immovable properties in major cities had now close to the market value despite the fact that the system of three rates (DC-rate, FBR-rate, and market-rate) was not viable. The business of the real estate sector is down due to multiple reasons including the current economic situation.
He further stated that traders had now agreed to file their income tax returns, which was a major achievement. The government would give maximum facilitation to the traders’ community, he added.
As per IPSOS research, tax evasion in the real estate sector is driven by legislative gaps, poor valuation methods, under-invoicing, and cash transactions. Estimates suggest that the untaxed potential in the real estate sector could range up to PKR 500 billion.
The report emphasizes enhanced documentation and enforcement by regulators to curb tax evasion.
The tobacco industry in Pakistan is one of the most heavily-taxed industry in the country, hence, it is also the most lucrative to avoid taxes. Locally manufactured tax-evaded cigarettes hold a significant part of the market and an estimated 38 percent of the overall cigarette market in Pakistan is composed of such brands. Smuggled cigarette brands enter the country through illegal channels, evading taxes and disregarding local regulations. The IPSOS research has found that the illicit trade in cigarettes stands at 48 per cent of the total market. This includes 38 percent of locally-manufactured tax-evaded cigarettes and 10 percent of smuggled cigarettes. According to the research, 48 percent or around two billion cigarette packs are evading taxes to the tune of Rs240 billion annually.
According to the IPSOS report, 65 percent of the tyre market is met by illegal or smuggled tyres, while only 20 percent of the total consumption is locally manufactured and 15 percent is imported legally. The FBR data of 2022 reveals that the PKR 20 billion was collected from the industry which was contributed by the documented players, having 35 percent share of the market. Industry experts say that 25 percent of the tyre import is under-invoiced which increases the loss to the government to the tune of 50 billion rupees in total.
The Government of Pakistan collected 187 billion rupees in taxes from the lubricants industry. This collection is done against 70 percent of the industry as 30 percent of the oil is reclaimed. If the use of reclaimed oil is clamped down, then the government can add a staggering 56 billion rupees to its kitty. A total of PKR 106 billion is being evaded from the tyre and auto lubricant sector.
According to the IPSOS study, the pharmaceutical sector is plagued by the menace of counterfeit and smuggled drugs. The financial impact of these illicit drugs is almost PKR 60-65 billion. This loss is further exacerbated by the presence of unregistered and unlicensed pharmacies along with a lack of awareness of the regulators to differentiate between legitimate and illicit drugs.
The estimated amount of tax evasion in tea sector is PKR 45 billion annually. According to the IPSOS report, large-scale importers meet approximately 55 percent-60 percent of the country’s tea demand, while small traders fulfil the remaining 40 percent-45 percent.
Copyright Business Recorder, 2023
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