The Federal Board of Revenue’s mandate is to implement tax laws while promoting voluntary tax compliance.
However, the amount of evaded tax potential in different sectors of the economy is estimated at around 70 per cent, and the country is losing taxes reckoned at Rs1,000 billion annually on this account. However, the FBR does not appear to be serious enough in combating tax evasion.
Some foreign countries have agreed to the sharing of financial information between their tax authorities to arrest tax evasion.
But in the case of Pakistan, the FBR appears least bothered about collecting information of tax evaders, as was witnessed in its failure to effectively act on the information on income and assets declared by parliamentarians in their nomination papers for the May elections, which had been forwarded to it by the Election Commission of Pakistan (ECP) for verification. Details of these nomination papers were available on the ECP’s website. This should have enabled the FBR to initiate legal action in cases involving glaring discrepancies and suspected tax evasion.
And this is just one instance that reflects the country’s tax culture, where people of clout and those at the helm of affairs easily browbeat the system in pursuit of their narrow interests.
Similarly, there are groups like rich farmers, who are not effectively taxed by the provinces. Certain lobbies have also managed to avail tax exemptions.
This distorted tax policy has resulted in the accumulation of black money. According to the FBR, millions of dollars of undeclared money of Pakistani nationals are lying in Swiss bank accounts.
But surprisingly, the FBR is helpless from recovering this money, despite the fact that Pakistan is entitled under Switzerland’s Return of Illicit Assets Act 2010, and even under the Avoidance of Double Taxation Treaty, which makes it obligatory on Switzerland to provide information regarding Pakistanis who are maintaining accounts in Swiss banks.
The Commission on Smuggling of Arms and Ammunition, while tracing the causes of major sources of black money within the tax regime, has reported that the estimated loss of taxes due to understating value of imports only is around Rs75.9 billion. It has also reported that the estimated value of smuggled items ranges around $5-$10 billion per annum; and this estimate is on the lower side.
The commission expressed dissatisfaction over the FBR’s half a dozen organisations in controlling tax evasion through imports and smuggling. It has made recommendations to improve the working of these support organisations of the FBR, and has also identified main sources of black economy. The FBR needs to seriously consider these to combat tax evasion.
Meanwhile, the government has been losing billions of rupees to tax evasion because government functionaries are ineffective in firmly dealing with tax evaders. The government, instead of undertaking unpopular tax reforms, is continuously begging/borrowing money from international donors to run its affairs.
The government’s inability to collect the required tax revenue to meet its expenditures has resulted in a whopping increase of over Rs1 trillion in total outstanding internal and external debt of the country, which overburdens less than one per cent of the population; i.e. the existing taxpayers. How long will these honest taxpayers continue to bear the burden of ever-increasing expenditure of the government?
The government has expressed its commitment on several public occasions to expand the tax base and bring the untaxed or under-taxed sectors like agriculture, retail and property into the tax net. But little has been done so far.
On the contrary, the government has withdrawn, through SROs, several measures that were approved by the parliament in the Finance Act 2013 with a view to documenting the economy and broadening the tax base.
These include waiving the condition of submission of CNIC/NTNs and addresses of unregistered retailers; reducing the penalty for non-filing of returns; abolishing mandatory filing of wealth statements, and restraining tax officials from accessing bank accounts of existing taxpayers. This would promote further tax evasion and discourage the documentation of the economy.
The director general for intelligence and investigation, Inland Revenue, claims that it has unearthed important information about untaxed assets and investments, which has been passed on to the field formations for processing. But the field formations failed to recover the taxes. Hence, it has requested the FBR to give it legal power to process such cases on its own, rather than remaining dependent on the field formations. This is uncalled for, and it would be more appropriate to take disciplinary action against the field officials who do not comply with the relevant laws.
It is time for the government to treat all classes of taxpayers fairly and equitably, irrespective of the sector they are in or the source of their income and their status in the society.
Unpopular tax reforms are needed to achieve documentation, which would generate tax revenue and thus minimise our reliance on foreign donors.