Federal Board of Revenue Chairman Salman Siddiq on Monday expressed his full commitment to reduce the existing tax gap of 79 percent saying that the Board would eagerly pursue the target of Rs 1,952 billion in 2011-12 by taking administrative measures worth Rs 50 billion to broaden the tax base.
Sharing the strategy to increase revenue collection and documentation of economy at a press conference here on Monday, the FBR Chairman was confident that the documentation of 700,000 wealthy people would also be instrumental in reducing the tax gap in the country. A World Bank report compiled in 2009 suggested that the tax gap in Pakistan is around 79 percent. We have to reduce the tax gap gradually through administrative and enforcement measures. Even if we reduce the tax gap from 75 to 70 percent, there will still be huge tax gap. There is need to reduce tax gap by 40-50 percent by taking enforcement measures including withholding audit of different sectors. The administrative measures would help in reducing tax gap of 2 to 2.5 percent.
FBR Chairman said that the tax gap in Pakistan was quite huge and in the range of 79 percent in accordance to the World Bank report. If the tax collection target is taken at Rs 1,580 billion then 79 percent gap stands around Rs 1,215 billion.
The tax to GDP ratio, he said, in case of achieving the desired target of Rs 1,588 billion would be around 9 percent of GDP while this ratio would go up to 9.5 percent of GDP for next year in view of FBR target of Rs 1,952 billion. "We have estimated to generate Rs 50 billion through administrative efforts out of Rs 1,952 billion envisaged target for the next fiscal year and if we reduce tax gap by 2 to 2.5 percent this assigned tax collection target can be easily achieved," he added. In Pakistan there was huge gap and now focus would be diverted to narrow it down that possessed a potential for taking the tax collection up to Rs 2,000 billion on June 30, 2012.
Salman further highlighted that it would be the test for the FBR to achieve its desired tax collection target of Rs 1,588 billion for out-going fiscal year ending on June 30, 2011. "If we fail to deliver I will accept my responsibility but in case of success it will be our team effort in this regard," he said and added that the slippage would have far reaching impact for fiscal framework and Pakistan could not afford such a situation on the economic front.
There is no country in the world where the tax gap is zero. Even best tax administrations have some gap between the actual tax collection and the potential to pay taxes. For example, tax gap in USA is 22 percent and US 8 percent. He categorically said that the FBR will not only be able to achieve the target set for next fiscal (2011-12) but also bring 700,000 persons into the documented regime.
"The biggest test is to achieve the target of Rs 1588 billion for 2011-12. Some economists estimated that the FBR will be able to reach Rs 1530 billion or Rs 1540 billion, but we are fully determined to meet the target of Rs 1588 billion by June 30, 2011. We have to work within our system and we will deliver the desired results by taking extra revenue efforts. It is a make or break like situation and the tax machinery seem fully determined to amass the revenue targets", he added.
He further stated that the FBR has raised huge demands to the tune of Rs 42 billion through risk-based audit and recovered an amount of Rs 3.4 billion during this exercise. The monitoring of withholding taxes is another key area, which would be focused by the FBR for reducing the tax gap in the country. The FBR has detected short-deduction of withholding tax in banks of Rs 25 billion out of which Rs 19 billion is related to Karachi. In 2009-10, 50,000 withholding agents withheld an amount of Rs 298 billion, which contribute 52.7 percent of the overall revenue collection. However, there is a need for proper deduction and subsequent deposit of the deducted amount of withholding tax. Besides these areas, the FBR is also pursuing cases in courts where stay orders have been vacated. The recovery of Rs 130 billion stuck up in courts would also contribute in improving the revenue collection. The FBR will also recover illegal input tax adjustments of Rs 26 billion.
We have huge potential to generate revenue from withholding taxes and audit of withholding agents, he stated. By making extra administrative efforts for generating revenue, the FBR will not only meet Rs 1588 billion during 2010-11, but also meet revenue collection target of Rs 1952 billion during 2011-12, he said.
To another question, Salman Siddiq informed that the tariff reform report of the Planning Commission would be duly considered to facilitate the local industry. The viable recommendations of the report would be moved to the Economic Co-ordination Committee (ECC) of the Cabinet for reduction in tariff. In case of very high tariff rates, the FBR will also consider the report of the Planning Commission. The tariff reforms would be continued taking into account the report of the Planning Commission. The reduction in the rates of customs duty would facilitate local businesses by reducing the cost of doing business. "We are going to launch centralised audit system in the FBR from July 1, 2011," he added.