FBR approves new strategy to net informal economy

KARACHI: Seeking to dismantle a parallel economy dragging on economic growth, the Federal Board of Revenue (FBR) has approved a new strategy to document informal businesses and bring them into the reach of the tax man, sources said on Friday.
A consensus emerged during a recently held top-level meeting between the Special Assistant to Prime Minister on Revenue Haroon Akhtar, Chairman Federal Board of Revenue (FBR) Tariq Bajwa, Member Inland Revenue (Operation) Muhammad Ashraf Khan and other senior officials, to review the tax collection target of the Large Taxpayers Unit (LTU) Karachi for the first quarter of the fiscal year of 2015/16.
Sources said the high-ups allowed LTU Karachi to use all resources in achieving the revenue collection target and bringing persons in the informal economy to justice.
More than half of the country’s economy is informal, some studies say, from large companies evading taxes to individuals selling items for cash at roadside stands.
And it's not limited to traditional cash businesses like the retail trade. Even some professionals will accept cash only, a practice that makes it easy to hide revenue from tax officials.
Successive governments wrestle with how to bring the underground economy out of the shadows and onto the tax rolls.
While not new, the problem has become urgent of late.
The government desperately needs to find new revenue to bolster a budget full of holes and turn around a fragile economy as the country’s tax-to-GDP ratio is around 10 percent, one of the world’s lowest. Less than a million people are taxpayers in a nation of 192 million.
Sources said the issue of withholding tax on non-cash based transactions was also discussed in details in the meeting at the LTU Karachi.
It was approved that the LTU Karachi would have jurisdiction of collecting withholding tax under Section 236P of Income Tax Ordinance, 2001 from banks having head offices in Karachi.
The sources said the tax officials were asked to ensure implementation of the Section 236P as it was crucial in identifying the undocumented and black economy.
Tax officials at LTU Karachi informed the high-ups that banks were reluctant in depositing the due share. The LTU Karachi has jurisdiction over 24 banks.
“The August collection has been neither encouraging as the banks deposited Rs675 million in the first three weeks of the current month,” the source said.
The meeting was informed that banks had been warned of stern action in case of concealing the actual amount that was payable.
Banks are required to deduct 0.3 percent on a transaction exceeding Rs50,000/day from non-filers of income tax returns (from those who are not on the active taxpayers list) and deposit the same to national exchequer within one week of the deduction under the said section.
Last month, FBR had allowed banks to deposit the amount by 31 July, considering the problems faced by them. The unit received Rs748 million in July 2015, which is much lower than the estimated Rs1.5 billion for a month. The sources said the Section 236P has become most important as the cases of corruption and money laundering are surfacing.
They said FBR is waiting the two-month withholding statement to be filed by banks to tax authorities by September 15.
The financial institutions will declare details of each transaction above Rs50,000/day made by non-filers in the statement.
The statement will contain detail of a person, including name, computerised national identity card, address and number of transactions.
Tax officials said the information will be used for identifying the potential taxpayers and helping the authorities in detecting money used for money laundering and other illegal uses.
They said the government is committed to enforce the Section 236P and there is no plan to withdraw it.