All about tax

The game of cat-and-mouse between the FBR and tax-evaders is showing no signs of stopping – but it is not yet clear who is winning. For its part, the FBR has continued to insist that it is not backing down from even its more controversial initiatives. Speaking at a convention in Karachi, FBR Chairman Shabbar Zaidi on Wednesday promised a new war on smuggling from the next month onward. Details on this initiative are still scant, but one is always forced to wonder why such action was not already being taken. For those who understand smuggling rings in Pakistan, much of the flow of goods happens with the involvement of state officials. It has been rare to see any state officials prosecuted on aiding smuggling, which should be where such an effort starts. The trouble is that the FBR chairman is trying to clean up what is outside, without cleaning up his own house. Unless there is accountability within the tax infrastructure, success is unlikely in the taxation drive. Standing outside shopping areas to check shopping bills may seem like a good idea, but such measures only show how little information the FBR possesses.

Much of the FBR’s talk about documenting and taxing parts of the economy that have been ignored is positive. But the priorities continue to be skewed. Why has there been so little progress reported on taxing private service providers, such as schools, hospitals and restaurants? These are formal institutions that need government approval to be set up and must undergo monitoring. Tax authorities can surely set up shop in these places to compare their real earnings with their declared earnings. Similarly, the FBR would be correct in monitoring sales at any big retail store, but would be wasting its time going after customers. Such a situation gives an impression that the war is not just on tax avoidance, it is on all forms of economic activity.

What is also notable is the change in approach. The FBR chairman is separating the manufacturing sector from the trade and service sector; where the former pays tax, and the latter does not. The recent agitation from manufacturers may be taking its toll. Perhaps others too will be taken out of the target list if they mobilise well enough. The FBR has issued around 100,000 notices to professionals it thinks are outside the tax net, and the FBR chairman himself has noted hitches in identifying the real owners of benami properties. At this point, the revenue authorities may be guilty of trying to putting their hands in too many pockets. It might be better for the FBR to choose its priorities. Otherwise, it risks losing the opportunity it has of documenting and taxing Pakistan’s economy.