ISLAMABAD: The Federal Board of Revenue (FBR) has worked out overall tax gap of Rs1,289 billion during 2022, which is, 26 percent of potential collectable tax under the current taxation regime.

According to the first ever report of the FBR on tax gap analysis-2022 finalised on Monday, the sales tax gap is Rs519 billion that is 24 per cent of potential collectable tax under current sales tax regime. The income tax gap is Rs730 billion that is 31 per cent of the potential collectable tax under current income tax regime.

The customs duty gap is Rs40 billion that is 11 per cent of the potential collectable customs duty. The tax gap is broadly defined as the difference between what taxpayers should pay and what they actually pay.

During calculation of sales tax gap, the FBR has excluded underground economy for the tax gap calculations as the official underground economy estimates are not available.

The FBR has also excluded the agriculture sector as it is largely exempt from the sales tax. The economic activity in the construction sector largely comprises construction-related services that fall within the provincial domain; therefore, the FBR has excluded this sector from sales tax gap calculations. Since sales tax on services is within provincial domain almost all the services sectors are excluded from the sales tax gap calculations.

To arrive at the precise corporate income gap estimates, the FBR has covered sectors including Large Scale Manufacturing (LSM); Electricity and Gas Distribution; Information and Communication and Financial Intermediation and Insurance Sector.

The FBR report said that the overall shortfall in tax collection is comprised of the tax compliance gap and the tax expenditure gap. The compliance gap is generally the difference between tax collectable under the existing regime and actual tax collected. This report only takes account of the tax compliance gap. The tax expenditure is the shortfall of tax revenues arising from policy provisions relating to exemptions, deductions, reduced rates and other such provisions providing relief to the taxpayers.

The tax gap estimates show that the tax gap is approximately 26 per cent of potential collectable tax by FBR that represents 2.9 per cent of GDP in fiscal year 2020. The sales tax gap is estimated at approximately Rs519 billion which is 24 per cent of the potential collectable sales tax.

The income tax gap is estimated at about Rs730 billion which is 31 per cent of total collectable income tax. In case of customs duty, the gap is Rs40 billion which is 11 per cent of total collectable customs duty. Due to data availability challenges, this report is based on data relating to different financial years. For sales tax, the data relating to FY2020 has been used whereas for Income Tax and Customs, the data relating to FY2019 has been used. The applied rates of taxes and customs duty correspond to the same year to which the data relates, FBR report added.

Copyright Business Recorder, 2023