The Minister for Finance, Shaukat Tarin, has said that the Federal Board of Revenue (FBR) has identified approximately 2 million National Tax Number (NTN) holders and potential un-registered businessmen who have not filed their income tax returns for the Tax Year 2009, which calls for an enforcement drive at national level.
Briefing the meeting of the Senate standing committee on finance here on Wednesday, he said that capital value tax (CVT) on immovable property would be converted into capital gain tax (CGT) in consultation with the provinces in the meetings of the National Finance Commission (NFC). The collection mode of CVT on real estate would be converted into CGT under the plan to raise tax-to-GDP ratio, and broaden the tax base.
Expressing confidence in the tax machinery, he said that the Federal Board of Revenue (FBR) would achieve the target of Rs 110 billion, set for October 2009, as the provisional collection stood at Rs 88 billion, reflecting improvement in collection during the current fiscal year. If the gap in direct taxes collection is narrowed, the revenue collection would be back on track. "There would be no need of IMF program and Kerry Lugar Bill in case Pakistan improves its revenue collection system, raising the tax-to-GDP ratio and broadening the tax-base," he added.
However, he said, there was need of collaborative efforts of the business community and tax authorities to bring new taxpayers into the tax net. The FBR NTN Master Index has identified around 2 million NTN holders, who are not filing income tax returns. In other cases, there are people who are required to pay taxes but are not depositing due tax in the national exchequer. The government would give them a last chance to file their income tax return by December 15, 2009. In case of failure the government would proceed against them according to the law.
Under the new enforcement strategy, Tarin said, the FBR has obtained names of the persons who are earning huge income but are still out of the tax net. The FBR would provide ample opportunity to the non-filers of income tax returns and unregistered potential businessmen to voluntarily come forward and pay due amount of taxes. The FBR would actively involve associations and trade bodies for bringing potential businessmen, particularly retailers, into the tax net. This would be a collaborative effort of all stakeholders, including business community and tax department.
The FBR would give chance to the non-filers and unregistered units to file their returns by December 2009. The representatives of the associations would be involved in this exercise. "We have the names of the non-filers and we would politely ask them to file returns". Once the returns are filed, the FBR would ensure that there should be no harassment of new taxpayers.
When asked about shutterdown strikes by retailers/shopkeepers, the Minister said that FBR would try its level best to convince the potential persons to come into the tax net. In case business and trade go for shutter down strikes, the government would be left with no option but to take action against the tax evaders.
In this regard, the FBR would launch an awareness campaign to increase compliance for broadening the tax base. If everybody could discuss the text of Kerry Lugar Bill, why the key issue of tax-to-GDP ratio and broadening of the tax base could not be discussed publicly? he questioned.
Tarin said that revision of Afghan Transit Trade Agreement (ATTA) also includes revision in import tariff scheme and tariff to be brought at par in both countries so that no incentive is left for the smugglers. On under-invoicing issue, he said that Pakistan has posted its representatives in five countries to check under-declaration by importers.
He informed the committee that "we are trying to develop linkages between Gwadar to China and Gwadar to Central Asian States. In this regard a corridor is being developed. This would help investors facing increase in cost of doing business in their countries, especially Japanese, Chinese, Korean and Vietnam".
About audit, he said that the FBR would select 5 percent income tax cases for audit on random basis through computerised selection criteria. The audit of corporate sector would be conducted by Institute of Chartered Accountant of Pakistan (ICAP) for one-year period.
About comparison of revenue collection during first quarter of 2009-10 with the same period of last fiscal year, Tarin said that last year oil prices were at peak which helped in better collection of sales tax at the import stage. Due to high oil prices, the profitability of the oil sector showed improvement which resulted in improved collection of direct taxes during last fiscal year. Simultaneously, the commodity prices were high contributing in substantial amount of customs duty during this period. The banking sector also showed healthy performance during fiscal 2008-09.
He admitted that a budgetary error was made when high growth of 22 percent was anticipated in first quarter (July-September) of 2009-10, taking into account growth in the same period of last year. The originally envisaged target was worked out on the basis of wrong estimation. Secondly, change in the payment of advance tax regime had also impacted the voluntary payments made during first quarter (2009-10). However, the comparison of the first four months (July-October) 2009-10 as compared to previous year would show improved revenue collection, incorporating advance tax payments.
The Finance Minister said that the government is committed to achieve the revenue collection target of Rs 1380 billion by the end of current fiscal year. The re-adjustment of targets would not affect the overall target of Rs 1380 billion for 2009-2010. The collection review of July-October 2009-10 would reflect that gaps have been narrowed and revenue collection has been improved during this period. As compared to last year, oil prices have gone down, having negative impact on sales tax collection during 2009-10. The commodity prices have also gone down, reflecting decrease in customs duty during this period. The profits of the manufacturing sector have gone down, which had negative impact on the direct taxes collection during first quarter of 2009-10. The gaps seen in the tax collection would be met till finalisation of figures for first four months of 2009-10. The inflation is coming down, which would have impact on the revenue collection.
The manufacturing sector and trade contributes around 60 percent of the total revenues. On the other hand, 49 percent of taxes come at the import stage in the form of sales tax and customs duty. Both these factors have a negative impact on the revenue collection during first quarter of 2009-10.
Presently, the FBR is gaining momentum in improving revenue collection due to enforcement and ongoing reforms in the tax administration. Large-scale manufacturing has also shown improvement which would have positive impact on the economy. The comparison of collection during four months period would reflect that the FBR would manage to recover the revenue shortfall during this period.
Giving picture of regional countries in contributing taxes, Tarin said that the sales tax is under-performing area in the tax system as GST collection amounts to 3 percent of the GDP in Pakistan and "we are way behind other countries whereas it stands at 7 percent in Sri Lanka and 9.5 percent in Turkey. We are far behind in contribution of taxes to GDP due to distractions in the tax system like zero-rating and poor performance of the retail sector".