Chairman FBR, Ali Arshad Hakeem, shares his views regarding broadening the tax net.Q. The FBR claims to have identified more than three million potential taxpayers. What mechanism has it envisaged for making them pay their taxes and ensure that corrupt tax officials get no share of it?
AAH: Currently the number of identified taxpayers is roughly around three million; however, with different algorithms we can vary this number between three to six million. There are certain business rules that govern these algorithms, such as the cut-off age (either 60 or 65) or deciding whether or a not a family can have more than one taxpayer.
In the upcoming scheme the entire database has been centralised, thus ensuring that the data cannot be tampered with. This will, in turn, eliminate the chances of corruption and data manipulation by tax officers. The entire system is electronically monitored which ensures smooth processing of data and minimisation of any error in records. Similarly, the FBR is also utilising new tools at its disposal such as link node analysis which will provide not only a holistic picture of the taxpayers, but will also allow us to delve deeper in each case individually, on a need basis.
Q. The previous exercises in data collection failed to produce any substantial results. What is different about this data? In Pakistan’s undocumented economy where transactions mostly go unrecorded wouldn’t it be more useful to conduct a physical survey of businesses rather than relying on certain data for broadening the tax base?
AAH. The previous data was not systematic or accurate, to a large extent, as it was gathered through small targeted surveys which were then extrapolated to the entire population. These surveys often gave false information, and also led to strikes by trade unions which resulted in skewed datasets.
Currently, FBR has devised a mechanism using data from the entire population, thus ensuring that it is not biased but factual. Information of large expenses such as travel, bank accounts and utility bills, is properly documented and can be easily accessed by the FBR. This ensures genuine information and statistics, upon which various regressions have been run to formulate the final criteria and to identify potential taxpayers.
Utilising actual figures of large expenses will discourage people from giving wrong information in their income tax returns and misstating their assets.
Q. On the one hand, the FBR is trying to bring more people into the tax net and increase tax-to-GDP ratio, while on the other it is taking steps which will increase tax non-compliance, for example, the abolition of the condition of national tax number (NTN) for purchasing new cars. How would you explain this? AAH. This scheme will in no way promote tax non-compliance. Care has been taken to reduce the chances of appeals against tax payments. Using NTN as the only source of identifying taxpayers did not prove fruitful in the past.
Currently there are about 3.5m registered NTN holders; however, only 0.7m people pay their taxes. Eventually, FBR might revert to using the NTN but at the moment the database is not complete. Certain NTN registrations are not linked with any CNIC, thus making it difficult to identify the defaulters.
Using the CNIC, instead of NTN is easier because CNIC is directly linked with a large pool of other information, which is not only good for identifying taxpayers, but also helps to keep a record of those who comply with the scheme. This does not negatively affect the tax net, but rather provides FBR with a clearer picture of the situation at hand, concerning each individual taxpayer.