The Prime Minister of Pakistan Imran Khan, while addressing Cabinet members at his weekly update meeting on March 16, said that collection of taxes by the Federal Board of Revenue (FBR) was crucial for the country. He again stressed the need for installation of a track and trace system for checking mass tax evasion in the manufacturing sector. He singled out major sectors of the economy such as tobacco, cement, fertilisers and sugar where tax evasion is committed on a massive scale, but said there was no system in place to check the tax dodging carried out by these sectors.
Tax evasion in Pakistan is very high and has led to a deteriorating economic situation and lack of public service delivery. Tax collection has also been a major problem and is the cause of many ills. FBR, the main body responsible for the collection of taxes from all possible legitimate sources, is assigned a target every year to collect a certain volume of taxes but it falls short in achieving this target due to crass corruption that is inherent in the country at various levels, whether individual, commercial or industrial.
Tax evasion in effect means pilferage of taxes and includes all activities of hiding incomes that lead to deprivation of tax revenue.
The only source from where the FBR is successful in collecting taxes is the salaried class because their taxes are deducted at income source and these people cannot avoid paying tax. However, this is just a small percentage of Pakistan’s total tax-paying population. The remaining people go scot-free and if they do pay taxes, it is only partially. This makes Pakistan one of the lowest tax-paying countries in the world in terms of the individual-to-population tax ratio.
In the March 16 cabinet meeting, the Prime Minister also referred to the Sindh High Court’s recent ruling to stay the installation of a track and trace system by a certain firm, because the other bidders had objected that the selected firm had a direct or indirect “conflict of interest”. They had also alleged that the bidding process was not transparent and needed to be made afresh.
The premier directed the Law Minister, Barrister Farogh Naseem, to work on getting the stay order by the Sindh High Court vacated. He asked the law minister to “convince the Sindh High Court that the non-imposition of the automated system would incur losses of billions to the country”.
To implement a track and trace system, a company must be selected that has experience in the technology but cannot be accused of “conflict of interest”. Unfortunately, the company which was awarded the track and trace contract by the FBR, was found to be involved in the export of ethanol, cement, sugar and fertilisers. This created an obvious conflict of interest as the four industrial sectors it was required to monitor would have been tobacco, cement, fertilisers and sugar. It was also brought to the notice of the Sindh High Court that the bidding process was not transparent as the FBR made all possible efforts to ‘accommodate’ the winning company - with the sole purpose of awarding it the contract.
Installing a track and trace system by the FBR involves an investment of Rs25 billion over five years. The prime minister has emphasised that failure to impose an automated system would cause “losses of billions” to the country. In his view, a track and trace system was crucial for checking mass tax evasion. The prime minister has pointed out that the FBR had been making efforts for the last 15 years to implement a track and trace system, but the move had been regrettably “sabotaged” each time.
The prime minister said that the sugar industry alone had not paid taxes to the tune of Rs400 billion over the past five years. Similarly, he said, in the cigarette industry, only 19 percent of taxes were paid by two big companies, while 40 percent taxes were evaded, resulting in a loss of billions of rupees. He said tax evasion had led to the imposition of indirect taxes by the government which inflated the prices of commodities of everyday use.
A track and trace company must be selected in a wholly transparent manner and with no conflict of interest. Such a company should provide an interface that requires minimum human intervention, prevents revenue leakage, stops under-reported sales and ensures proper payment of duties and taxes.
A track and trace system would be a game-changer for improving revenue and curbing counterfeit products in Pakistan. It would enable the country to firmly fight tax evasion and, as the prime minister said, this could in turn help fight price hikes.
The writer is a communications expert