However, an additional revenue of Rs110 billion can be mobilised if appropriate measures are taken to expand the tax base and check tax evasion as follows:
Short-term measures: Transfer pricing transactions in sectors like pharmaceutical, telecommunication, beverage, oil and gas etc, are resulting in national tax loss of billions of rupees. They have the potential to generate Rs50 billion, if corrective action is taken.
· Offering a one-time de-logging of litigation scheme for taxpayers to pay 20-30 per cent of tax arrears between February 2008 to June 2009; cases pending before appellate authorities and court should be deemed to have settled.
In 1998, a similar scheme introduced in India, ‘Kar Vivad Samadhan’, generated an extra revenue of Rs900 billion, while disposing huge backlog of cases. Such a scheme will not only generate immense revenue (not less than an estimated Rs20 billion if drafted and publicised properly) but will also help win the confidence of taxpayers and drastically reduce the workload in tribunals, high courts and the Supreme Court.
· Section 11(4) of Income Tax Ordinance, 2001 protects tax evaders while discouraging genuine taxpayers. This should be amended and on certain remittances, say exceeding Rs1 million ,(poor workers abroad send meagre amounts and that too by hundi or hawala) a tax deduction of five per cent should be imposed. Another potential amount of Rs20 billion is likely to be generated.
Long-term measures: A new audit initiative is needed to identify high-risk, high-income taxpayers, abusive schemes, promoter investigations, high-income non-filers, and unreported incomes. FBR needs to introduce Tax Intelligence System (TIS) to support the new audit initiative. Unreported income represents the largest component of the tax gap and the non-tackling of the issue has resulted in our being one of the lowest tax-to-GDP ratio countries in the world.
The FBR must develop a new tool, Unreported Income Discriminant Index Formula (UI DIF), for identifying returns with a high probability of unreported income. UI DIF will help identify returns at high risk for unreported income systematically. From the tax year 2009, all returns should receive a UI DIF score.
· Research programme: National Research Programme (NRP) is the need of the hour if FBR really wants to improve the examination selection process. It has never conducted research on the distribution of errors on returns. Without the information gathered through NRP, the FBR will never be able to develop the capacity to direct examinations and other compliance activities with accuracy and precision.
· Accountability: No effective mechanism has so far been evolved to check any unfair practices on the part of tax administrators. They are not made liable to punitive actions even after the final fact-finding authority adjudges their actions arbitrary, excessive and beyond their assigned powers. The Federal Tax Ombudsman should be given the statutory power of awarding damages in such cases.
· Taxpayers’ bill of rights: Taxpayers must be given adequate rights before the state justifies strict actions for enforcing tax obligations. For restoring the confidence of taxpayers, the state should promulgate Taxpayers’ Bill of Rights in the coming budget to:
* safeguard and strengthen the rights of taxpayers; ensure equality of treatment; guarantee privacy and confidentiality of their declaration; provide right to assistance by the state in tax matters; guarantee unfettered right of appeal through an independent tax appellate system, and provide facilities for independent review of disputes with tax authorities.
· Broadening the tax base: The total number of persons paying advance income tax with commercial electricity bills exceeding Rs100,000 per annum is two million and mobile users paying bills more than Rs100,000 per annum is nearly three million.
FBR’s mission to broaden the tax base must start by bringing all such persons on the tax roll as they must have income much more than taxable limit if expense on one single utility exceeds the minimum non-taxable threshold. These “taxpayers” are non-filers and need to be on the national tax roll. Their non-reporting testifies to the failure of the tax reform process so far pursued by the government. Out of the total registered companies, [foreign and local with SECP], only 20-30 per cent file income tax returns, which
exposes the efficacy of field
formations.
· Countering evasion: There is a massive sales tax evasion coupled with non-reporting of income. FBR needs to enhance sales tax collection and broaden the income tax base. People should be given tax benefits/incentives which will help expand tax base, improve documentation and enable better collection of taxes without hue and cry from any segment of the society.
A well-thought-out scheme is required that should not only check leakages in sales tax collection, but also encourage the people to file their income tax returns. The dual aim of expanding tax base and combating tax evasion should be achieved simultaneously.
At present, every person while making taxable supplies is required to charge sales tax at 16 per cent on the value of supply and is required to deposit the same in the treasury after adjusting input tax paid by him. It is common practice that due to corruption/mismanagement in sales tax administration and unwillingness on the part of people to obtain sales tax invoice, registered persons do not deposit full amount of sales tax recovered from the end users. By not depositing sales tax into government treasury, they are depriving the government of (a) sales tax which the end users pay to registered persons and (b) income tax which that registered person should pay on his income since that portion of sales is not recorded in their income tax affairs.
Since FBR has now developed an online mechanism of checking registration of persons, government can announce the following scheme:
— Anybody who pays sales tax in a financial year should be entitled to claim refund of 20 per cent of the amount paid. The procedure for claiming the refund should be simple i.e. he should send invoices to Sales Tax Department, which will authorise refund from a nearest branch of the National Bank, after verification of the invoice (by checking sellers’ registration number). In this way, FBR can develop a data base of sales of all registered persons and cross verify the same with the particulars declared in sales/income tax returns; or
— Any person who pays sales tax can claim credit of part of sales tax paid, say 20 per cent against his income tax liability by producing all sales tax invoices obtained by him throughout the year. Detailed mechanism can be devised to cater to the situation where income tax liability is less than amount of credit of sales tax.
In this scheme, people may choose not to claim full credit of sales tax paid by them since they could not justify the sources of their full expenses. To overcome this situation, the government can announce immunity for three years from scrutiny of their expenses declared through sales tax invoices. This scheme will encourage people to obtain a sales tax invoice for each transaction, which is presently not being insisted upon. If payer is given the above incentive, he will insist on a sales tax invoice and the government without expending any money or making extra efforts will be able to expand tax net.
Because of the unwise policies of the successive governments—military and civilian alike— the poor now pay 16 per cent sales tax on salt. A widow earning Rs100,000 (below taxable threshold) as profit from a bank pays Rs10,000 as full and final tax.
A property owner earning an income up to Rs150,000 pays nil tax and someone earning the twice the income of the poor widow [Rs200,000] pays the same tax! Rich property owners and beneficiaries of loan write-off are extended tax benefits while small fixed income earners are taxed even when earning otherwise non-taxable incomes. The government must remove these distortions.