The Federal Board of Revenue, in a determined enforcement initiative to broaden the narrow tax base, has identified as many as 700,000 "most rich" non-filers living in the country's posh localities, and has also compiled a list based on Nadra data, complete with their CNIC numbers and permanent addresses, according to sources quoted in a Recorder Report.
These non-filers include many people living in the DHAs of Karachi, Lahore, and Islamabad, Karachi's Clifton, Lahore's Gulberg and Bahria Town, and the posh areas of Islamabad, such as the Diplomatic Enclave, E-7 and F-10. According to sources quoted in our report, the FBR is now focusing on the "elite" class to improve the country's resource base through higher revenue collection.
Significantly, the government has assured the FBR of full political backing to bring the "elite" tax evaders into the net. The FBR has directed the directorates general of the LTUs and regional tax offices to make maximum efforts to broaden the tax base, for which the services of PRAL would also be utilised.
Although, rather late in the day, the initiative can yield encouraging results. Similar initiatives have been mounted in the past as well, but it is for the first time that the FBR is planning to net the "elite" non-filers. The fact that as many as 700,000 "most rich" citizens managed for so long to remain out of the tax net has two aspects to it: one, the non-filers' culpability in not getting themselves registered with the FBR as required under the law, and two, FBR's own failure in bringing them into the tax net, despite its well-staffed intelligence and enforcement wings.
A third aspect that needs to be investigated is the revenue pilferage by "insiders," the most blatant instance of which was the unique ring of sales tax mega scam, unearthed in 2008, at Karachi, in which a gang of "insiders" forged documents of leading companies to claim ST refunds amounting to millions of rupees.
Pakistan's tax-to-GDP ratio of approximately 9.5 percent is already one of the lowest in the region, which does not measure up to the double-digit standard set by the IMF for low-income economies like Pakistan. The ratio is said to be low by around 4 percent (approximately Rs 350 billion) in comparison to the competing economies in the region.
It means that the tax administration reforms, launched about six years ago with a $150 million World Bank grant, and other such initiatives have failed to make a meaningful impact on the tax collection system in Pakistan. One cause of this is that aside from the agriculture sector - the most prominent example of non-compliance - the services sector, also remains a major non-compliant area.
The sub-sectors whose tax contribution does not match their contribution to the GDP include the wholesale and retail sectors, in addition to transport and construction, hotels and restaurants and commission agents. It is said that the contribution by the banking, insurance and telecommunication sectors too remains much below their potential.
Livestock (including the poultry industry, animal farming, milk and meat etc) contributes about 50 percent of the value-added in agriculture, although it is said to have virtually no share in the tax revenue. One possibility is that the 700,000 "most rich" non-filers, identified by FBR, may belong to these non-compliant sectors. The phenomenon of under-filing and non-filing has been largely attributed to a weak tax administration, which has apparently also promoted the "sieve effect."
The tax administration obviously needs to be suitably strengthened, now that the government is said to have also pledged "political backing" to the Board. (It should be mentioned here that some rich German citizens submitted recently a petition to Chancellor Markel to increase the tax rate they were paying, to bridge the fiscal gap caused by the global economic slowdown).
Fiscal reforms in Pakistan are being held hostage by country's two leading political parties. The PPP does not want income tax to be enacted on agricultural income. And, Pakistan Muslim League (N) does not want imposition of sales tax on the retail sector. Both these tax-free segments provide political support, respectively, to these parties. If the FBR could achieve Sri Lanka's tax-to-GDP ratio it would result in an additional amount of Rs 850 billion.
And, if the tax-to-GDP ratio is equivalent to that of Turkey's - the addition would be Rs 1500 billion or even more. Pakistan would not require overseas assistance such as the one that will come to us through highly controversial Kerry-Lugar legislation if the present system could become equitous, with no tax havens. It is not difficult to assess the income of non-filers. They are paying, albeit reluctantly, some kind of tax. Unfortunately, instead of this revenue coming into the exchequer, it is filling the pockets of tax collectors.
A broad-basing tax regime requires legislative changes. However, administrative changes are quite possible because these are not subject to a parliamentary approval. These may include the steps aimed at making zero rated five industries pay sales tax on goods sold locally to non-registered taxpayers.
The collection process can be improved through greater use of technology. However, people pay taxes out of fear (seizure of moveable and immovable property) as well as dread of time in jail. It is highly important to restate some of the functions of a country's tax system.
For example, taxation is also an instrument to attract and channel private investment to desired areas of investment activity through various means, including incentives to attract foreign direct investment (FDI) into the country. Taxation is also used to increase the level of savings and capital formation. It is, therefore, highly important for the government to make all possible efforts to increase tax revenue/GDP ratio and not to reduce it.