Major sources of black economy identified: tax losses on understated imports stand at Rs 75.9 billion

The commission on ''smuggling of arms and ammunition'' has recommended redrafting of provisions of the Income Tax Ordinance 2001, which encourages black economy and help identify the tax evaded on imported goods, tax-free baggage, purchases from Duty Free Shops, illegal refunds, concessionary regimes and misuse of exempted agricultural income as major sources of black economy.
Sources told Business Recorder on Monday that the former FBR Member Customs, Ramzan Bhatti has identified main sources of black economy within tax regime in his one-man commission report on ''smuggling of arms and ammunition''. The commission has estimated loss of all taxes on under-stated value of imports has been worked out to the tune of Rs 75.9 billion, sources added.
According to sources, main causes of black economy in the tax regime could be taxes evaded on (i) imported goods; (ii) goods brought in tax free baggage; (iii) tax-free purchases from duty free shops; (iv) diplomatic bonded warehouses and supplies to ship-stores; (v) concessionary regimes to boost exports by importing tax-free goods; (vi) refunds on inflated/misdeclared exports; (vii) wrongly claimed input sales tax adjustments (fake and flying invoices); (viii) claims of sales tax refunds on fake documents; (ix) calculation of output sales tax on lower/depressed values; (x) evasion of sales tax on zero-rated goods; (xi) evasion by calculating excise duty on lower/depressed values; (xii) under-declaration of annual turnover with a purpose to remain out of the sales tax and federal excise net; (xiii) evasion of income tax by showing business income as agricultural income exempt under Section 41 or foreign exchange receipts exempt under Section 111 (4) of the Income Tax Ordinance, 2001; (xiv) claiming refunds of WHT by under declaring the taxable income and filing of below tax limit (BTL) returns or hedging the other taxable income as income derived from the presumptive tax regime. The volume of all these tax evasions/frauds can be more than the total taxes collected by the FBR. No diagnostic studies have been conducted so far but the data retrieved from the International Trade Center (a subsidiary office of the United Nations Statistics Division indicates that the importers in Pakistan are under-declaring the value of imports from the selected 15 countries to the tune of $3.59 billion. The importers of goods from China only understate the value of goods by $2.5 billion. The estimated loss of all taxes on such under-stated value of imports works out to Rs 75.9 billion, sources quoted commission''s report.
The commission recommended that there is a need to re-phrase the provisions of sections 41, 111 (4) and 153 of the Income Tax Ordinance, 2001 with a view that no income earned in the black economy finds shelter under these schemes of no taxation and no investigations. The agricultural income only earned by the owners or tenants/cultivators proven through the Provincial Revenue record should remain outside of federal tax net provided the provincial agriculture income tax has been paid and the cumulative income from the agriculture and business does not exceed the threshold fixed for the purposes of levy of income tax. Similarly, the foreign remittances only earned from the declared businesses and services may remain exempt, sources said.
There is also a need to convert the "withholding tax regime" into a "minimum tax regime" without any possibility of refunds. The withholding tax except on salary becomes part of the price and is passed on to the ultimate user or consumer of goods. There is, therefore, no justification to allow refund of the same. All other income tax exemptions to be withdrawn in the light of international/national studies which have proven that exemptions of tax on income did not encourage the documented economy and rapid industrialisation. The investors all over the world desire to be saved from the front cost, ie, customs duty and Sales Tax, etc on imports of machinery and nobody minds paying income tax on the income earned through profitable businesses/industrial undertakings. In nut-shell, all persons including legal persons shall be bound to file income tax returns and declare their income separately from each source whether exempt or otherwise. These measures are expected to diminish the level of black economy and reduce the gaps between haves and haves not, sources referring to the report added.