The Federal Board of Revenue (FBR) has proposed establishment of a special Revenue Generation Task Force (RGTF) as a part of its three-pronged strategy to improve tax collection in the short-term, says a Recorder Report.
The task force, to be headed by a director-general and staffed by relevant personnel, will, firstly address the problem of "stop filers"; secondly, it will improve compliance by the "short filers", and thirdly it will detect under-reporting through cross-checking of sales and purchases within the supply chain.
The task force will prepare a plan with clearly specified targets for the Large Taxpayer Unit (LTU) and the Regional Tax Office (RTO) in all the three issues. According to details, cases will be selected by the Inland Revenue Wing and sent to LTU and RTO for action. For the initial operation it would select non-filers in the income tax 2008, and the sales taxpayers, who are underreporting taxes or have skipped filing returns during January 2008 and March 2009.
The Inland Revenue and Enforcement Wings will estimate the resources required for conducting this operation in the field. A three-phase strategy to measure the performance of RGTF team has also been firmed up. First, data on the number of "stop-filers" who have filed returns due to enforcement of the new strategy along with the amounts paid will be compiled.
Secondly, the recoveries from short-filers, including the number of short-filers will be computed. And thirdly, the number of cases referred for single-item audit as a result of automated cross-checking of purchases and sales reported on the sales tax, as well as the amounts of tax collected as a result of action by RGTF will be collected.
These performance evaluation measures would provide senior FBR management with an overview of the effectiveness of the actions undertaken by RGTF. This would also help determine the number of cases handled by the region in terms of income and sales tax, and prioritise the cases for each LTU and RTO.
The initiative taken by FBR is well timed, as poor compliance by taxpayers and a low tax-to-GDP ratio of only around 9.5 percent has created serious revenue generation problems. At 9.5 percent, Pakistan's tax-to-GDP ratio is one of the poorest in the whole region. (The IMF has set a ratio of 40 percent for high-income countries, while for the middle-income economies it is around 25 percent.
Further, in emerging economies such as Singapore, Malaysia and Indonesia the ratio between direct taxes and GDP ranges between six to seven percent, while in Pakistan it has stayed stagnant at around three percent over the last many years.) The country's tax base has remained narrow due as much to tax exemptions as to large-scale tax evasion in all its varied manifestations, including non-filing and under-filing.
The sub-sectors whose tax contribution does not match with their share in GDP include wholesale and retail sectors, aside from transport and construction industry. Then, there is the problem of recovery of outstanding taxes, which can only be tackled, with the help of a task like the RGTF, whose basic function will essentially involve identification of non-filers and under-filers.
Livestock (including poultry industry, animal farming, milk, meat etc) contributes about 50 percent of the value added in agriculture, although it has virtually no share in taxes. Likewise, the contribution of orchards and horticulture too is negligible.
As we have argued in this space earlier, the basic structure of tax compliance and tax administration has remained a lop-sided affair while the failure to mobilise adequate revenue has particularly hurt uplift projects, with adverse implications for efficient utilisation of resources. In fact a weak tax administration in the country is largely to blame for the whole problem.
The strategy usually pursued in times of revenue crunch is to effect a shift of emphasis from formal to the informal sector, which remains perhaps the largest non-compliant sector. Has the FBR so far effected any such shift? If not, it should do so at the earliest to tap the untapped/partially tapped informal sector, which can become a dependable source of additional revenue generation for the country.
We believe that agricultural income can serve as a major revenue booster for the economy if those at the helm can manage sufficient political will. Tax collection from this major sector, which accounts for as much as 20.9 percent of the GDP, is said to have remained stagnant at around Rs 2 billion a year. The government should, therefore, seriously consider this option for revenue enhancement. Meanwhile, the establishment of RGTF is a good initiative that needs to be implemented in letter and in spirit, under due oversight of the FBR high-ups.