The universal self-assessment scheme (USAS) introduced in 2001 has minimised the taxpayer and the tax official interface and has brought a robust growth in voluntary payment of income tax.

The objective of the government to realise more revenue through voluntary compliance by reposing confidence in the tax payers seems to be largely working.

But surprisingly, there has been a sharp drop in the payments along with tax returns during the first quarter of the current year. About Rs5 billion were collected as against Rs20 billion in the same period last year. Could this trend mean that USAS is loosing its momentum ? The FBR officials seem to be perturbed over it.

Effective audit is the only method to detect concealment cases. Unfortunately, audit activities are not visible for the last three years, in spite of the fact that a member from the private sector has been inducted as head of the FBR’s audit wing and a foreign consultant hired to develop a national audit plan. While the new system was a calculated risk, it did evoke positive response from taxpayers.

On the whole, the voluntary payments have increased by 89 per cent -- an increase from Rs87.4 billion in the fiscal year 2005-06 to Rs165.1 billion in fiscal year 2006-07. Of the two components of voluntary compliance, payments with returns have increased by 100.8 per cent and the advance tax payments have reached Rs117.9 billion during 2006-07 compared to Rs63.4 billion over the last year.

Tax officials said the voluntary compliance has shown dramatic improvement over time. The gains can be attributed to many factors including revised regime of advance tax payment and better facilitation, simplification of returns, implementation of self-assessment, and introduction of a simplified procedure of advance tax payments.

According to the SBP’s annual report 2006-07, for the second successive year, there has been a strong growth in the direct tax collection. This has pushed its share in total tax collection from 31.8 in 2000-01 to 2006-07 by 39.4 per cent.

The direct taxes have now emerged as the leading revenue contributor of federal taxation receipts – a transition that had always been desired on equity and efficiency grounds.

However, this growth was made possible due to unprecedented growth in the payment of a few major sectors. Within the advance tax payments category, the combined share of banking, oil and gas, and telecom companies increased from 48.6 in 2005-06 to 54 per cent in 2006-07. Nonetheless, major improvement came from banking companies whose share jumped to 27.5 in 2006-07 from 13.9 per cent in previous year, showing a remarkable increase of about 265 per cent.

According to the FBR annul report, the oil and gas sector has also recorded a healthy growth of 63 percent, but the same was not the case with the telecom sector where advance tax payments declined despite a strong growth in the business. Whereas the overall performance of the corporate sector has been encouraging, the narrowness of tax base remains a major concern.

Another indicator of voluntary compliance is the number of returns and statements filed by taxpayers over the year which was also satisfactory showing an impressive growth of 29.5 per cent over the last year.

The largest increase has been on account of salary certificates. On the other hand, statements submitted by traders and retailers maintained a normal growth trend. It shows that this area has a great potential.

With improvement in voluntary compliance, the reliance of income and corporate taxes on withholding taxes (WHT) at the source deduction fell from 57.3 in FY2005-06 to 49.2 per cent in the FY2006-07. Officials said this feature together with improvement in the share of direct taxes in total federal tax receipts confirms that the overall taxation system is becoming less regressive.

Despite the growth in voluntary compliance, it seems that the natural growth may have reached its saturation point and there may be a need for the tax administration to use the tool of effective audit scheme suspended for the last three years.

Compulsory maintenance of accounts and audit are two pillars of universal self assessment scheme the world over and if the scheme is to be made successful there should be at least a minimum level of documentation. The government made attempts in this direction in the past two years but it could not achieve any results.

The audit exercise suffered due to deficiencies in the selection criteria and actual audit execution while concerns were also shown about a number of other areas, some of which were qualifications of audit personnel; accuracy/ completeness of data provided by taxpayers; accuracy/completeness of data used by the FBR; poor record keeping on the part of taxpayers; and fear on the part of taxpayers.

The tax machinery has failed to evolve an effective audit strategy to detect the non-compliance despite the fact that the FBR has hired the services of an international firm in the year 2003 for the purpose. Besides this, the FBR has also appointed members for the audit purposes for the last six years from the private sector by spending a huge amount from the national kitty to prepare a national audit strategy

The international firm had worked out a detailed report of audit functions for the FBR on the models of developed states indicating the scope, role and responsibilities of all the audit related functions. However, the report did not mention that how these could be implemented in a developing country like Pakistan. Now another international consultant has been hired for the purpose.

Though the FBR said that the department has just started audit of large taxpayers, which mostly involved multinationals at large taxpayers units (LTUs) leaving a lesser chance for tax evasion. It needs to be started on full fledge scale with clear parameters irrespective of pressures tactics from some pressure groups.

Unless the government adopts an effective audit system and ensures documentation by taxpayers, it is feared that self- assessment scheme will continue to be exploited by people.