State Bank for strong audit, penalty: Flawed tax system
By Sabihuddin Ghausi
KARACHI, Oct 31: The State Bank of Pakistan has pleaded for a strong audit system and a severe penalty structure in the tax administration to check tax frauds, concealments of income, bogus claims of refunds and misuse of government’s goodwill gestures to the taxpayers.
In its annual report for the year 2004-05 released on Saturday, the State Bank declares in clear words that tax evasion in Pakistan is rampant and a voluntary compliance from taxpayers remains a much sought after objective even after implementation of a World Bank funded tax reforms programme for last five years.
The report has ridiculed the often repeated government assertion that “broad based policy and tax reforms have substantially improved the tax collection and opened new avenues of tax generation”. “The increase in tax revenues in recent years cannot be attributed to the tax reforms”, the report declares while referring to more than 100 per cent increase in tax collection in last nine years from Rs282 billion in 1997 to Rs591 billion in the year 2005.
Pakistan’s total tax collection increased from Rs347.1 billion in the year 2000 to Rs591 billion in the year 2005, but its ratio with the GDP has dropped down to 9 per cent as against 9.6 per cent in 2003 and about 10.5 to 11 per cent prevailing in 90s.
In a separate chapter the SBP report attributes tax evasion either because of under reporting of taxable income, profits, sales and receipts or over reporting of tax exemptions, allowances, relief and credits.
While proposing to put more resources in tax administration to enhance the tax collection capacity, the report gives a detailed analytical chart to point out that the cost of tax collection as a percentage of tax collected has come down from 0.67 in 1997 to 0.56 in 2005. “Pakistan’s tax authority has been collecting revenues at a very low cost even before the reforms,” it says.
The revenue-expenditure ratio was highest at 0.84 in the year 1999 and came down drastically to 0.66 when reforms were taken up in tax administration with the help of a $150 million loan from the World Bank.
Two committees were formed one headed by Saeed Ahmad Qureshi, then secretary general in the finance ministry, and the other by Syed Shahid Hussain. Saeed Qureshi’s report pertained to reforms in income tax and it sought guidance from a mission of the International Monetary Fund. Syed Shahid Hussain’s Task Force offered a package of reforms for entire tax administration and included an interesting study on corruption in government agencies particularly in tax collection agencies. The two reports were finalized one after the other in February and April 2001.
Since the year 2001, the Central Board of Revenue started implementation of the reforms and has (1) simplified income tax law; (2) introduced universal self assessment scheme in income tax; (3) minimized interface between the tax official and the taxpayer; (4) re-structured CBR on functional lines; (5) automated assessments and refunds; (6) established Large Tax Payers Units (LTU), Medium Taxpayers Unit (MTU) and Tax Facilitation Centre (TFC); and (7) integrating income tax and sales tax systems, effective dispute resolution system and Customs Administration Reform to reduce the cost of doing business.
A large number of persons were engaged from outside the government service structure at fabulous salaries and perks in position of members of the CBR and at other positions.
Even after implementation of all these steps as a part of reforms programme, the withholding tax in the year 2005 increased to Rs109.6 billion, showing a rise of 20.3 per cent. The total income tax collection was Rs172 billion.
According to the SBP report the income tax collection on demand in Pakistan is on decline in last two years during which the income tax audit activity remained almost suspended and no audit case under universal assessment scheme was carried out. The report observes that additional tax generation and collection as a result of audit of taxpayers is an important indicator of efforts made by tax administration in detecting under reporting of income, sales or profits or over reporting of expenditure of claiming inadmissible expenses.
Similar laxity shown in sales tax resulted in sharp decline in audit to 4,437 cases in 2005 from 22,267 cases in 2002.
“The increasing reliance on voluntary compliance, in the absence of effective enforcement, appears to be having perverse consequences for the stability of tax receipts and documentation of the economy”, the SBP report declares in a firm tone.
