Tax gap stands at Rs3,000bn: FBR chief

ISLAMABAD: Pakistan’s potential tax gap stands at Rs3,000 billion on an annual basis mainly in the shape of tax exemptions for powerful lobbies, massive tax evasions, and the inability of the machinery to collect due taxes.

On the directives of Prime Minister Shehbaz Sharif on eve of the budget-making exercise for 2022-23, the Federal Board of Revenue (FBR) has been assigned to conduct the first-ever formal study to assess the ‘tax gap’ keeping in view jurisdictions of the federal government under 1973 Constitution for the imposition of taxes. Under the existing constitutional arrangements, the GST on goods is the domain of the federal government while the GST on services is the jurisdiction of the provinces. The income tax on agriculture is the domain of the provinces.

Chairman Asim Ahmad said that the FBR conducted a study after hiring a consultant and so far found that out of the total size of economy to the tune of Rs67 trillion, the federal government levied a sales tax of Rs32 trillion and then calculated income tax, customs duty and federal excise duty potential. “We have found that the total tax potential under jurisdiction of the federal government stands at Rs9,000 billion out of which the FBR collected Rs6,000 billion so the tax gap was assessed at Rs3,000 billion on a per annum basis,” the chairman shared the outcome of tax analysis gap while addressing a Summer Camp 2022 arranged by Pakistan Tax Bar Association Friday night.

He said that there was a tax gap of Rs3,000 billion out of which Rs1,800 billion was a policy gap, as it occurred mainly because of tax exemptions/incentives provided by the FBR to different sectors.

“There is a remaining compliance gap of Rs1,200 billion,” he said. The chairman said that if the FBR abolished all kinds of tax exemptions and ensure full compliance the tax to GDP ratio could touch 14 percent with a maximum collection of Rs9,000 billion on an annual basis.

He said that the tax to GDP ratio was the lowest in the country but if full tax potential was collected to the tune of Rs9,000 billion even then tax to GDP did not cross 14 percent mark.

He said that there were legal issues and cited example of agriculture which contributes 22 percent to the GDP but its collection was less than one percent because it is not jurisdiction of the federal government to collect tax on agriculture sector. He said that tax rates were also on the lower side as maximum limit of corporate tax stood at 29 percent while salaried individual paid 35 percent. He said that the corporate sector was paying after adjusting all its expenses while salaried person was paying tax on gross amounts so distortions created in our taxation system.

He said that the FBR focused on direct taxes as the FBR took taxation measures of Rs600 billion in the budget 2022-23 and after excluding relief measures the net taxation measures were aimed at fetching Rs545 billion.

“Out of total taxation measures of Rs545 billion, 80 percent tax measures have been taken on the direct taxes side,” he said and added that there would be a shift after year 2006 when the direct taxes would be the major revenue spinner compared to indirect taxes. It is now going to happen after 16 years as the contribution of direct taxes will be on the higher side than indirect taxes.

The reliance had shifted to indirect taxes because its collection was easy but now effort was made to bring in a shift, he added. He said that the IMF wanted to impose tax on pension under Personal Income Tax (PIT) reforms as it was agreed with the fund to bring it in tax net in 2019 but the FBR arranged workshops to save pensions from income tax.

He said that the broadening of tax base would be accomplished with the help of technology for bringing whole supply chain to the tax net and the FBR prepared a plan to move towards this objective. Turkeyie had done it but so far, the FBR could not move towards digitisation of payment. He said that the tax evasion of GST stood in the range of Rs250-300 billion. The FBR slapped fixed rate through electricity bills but it is not a permanent solution. The FBR will have to move on the pattern of Turkey model for placing digitisation of payment at all stages from manufacturer to retailer. He said that the FBR would collect Rs42 billion through electricity bill from retailers as step was taken to recover its due taxes.

He said that there were five million registered persons who did not bother to file returns.

On broadening of tax base, he said that the FBR was working on increasing narrowed tax base with help of technology. He offered tax bars to assist the FBR for achieving the desired objectives. He said that both the taxpayers and tax advisers were respectable to the FBR and he believed on resolving issues so the FBR’s senior management would sit together to resolve issues. The cause of problem will be resolved at all stages, he added.

Asim Ahmad said that the FBR borrowed the concept of integrating supply chain and implemented tier-1 retailers and tier-II retailers and they took 10 years for accomplishing whole mapping. The FBR, he said, would not take 10 years to implement this model. He said that the big retailers were brought into tier-I retailers and only furniture business was brought on the basis of area of shops. On their demand, the area was revised and fixed at 2000 square feet. Now they demanded to increase area further and decision was yet to be taken by the government, he added.

He said that the FBR surpassed its upward revised target of Rs6,100 billion despite facing negative revenue impact of Rs45 billion per month owing to zero GST on POL products.

The IMF had predicted that the FBR would not be able to achieve its target for the last fiscal year ended June 30, 2022, and there was a written document from the IMF for conveying their concern. He recalled that the finance minister received call from IMF’s mission chief on occasion of Eidul Fitr whereby the fund conveyed its concerns that the FBR would not be able to achieve its target for the last fiscal year. The IMF also inquired what the government would do owing to FBR’s revenue shortfall, he said.

He had assured the finance minister that he reposed full confidence in his team and the FBR would achieve its target of Rs6,100 billion. When he had returned back, he discussed revenue collection target of Rs6,100 billion with FBR’s members who also declared that it would be impossible to achieve the desired target. “The achieving of FBR’s target is paramount to continuing the IMF programme,” he said.