Pakistan’s potential tax gap stands at Rs3,000 billion on an annual basis mainly in the shape of tax exemptions for powerful lobbies, massive tax evasions, and the inability of the machinery to collect due taxes.
On the directives of Prime Minister Shehbaz Sharif on eve of the budget-making exercise for 2022-23, the Federal Board of Revenue (FBR) has been assigned to conduct the first-ever formal study to assess the ‘tax gap’ keeping in view jurisdictions of the federal government under 1973 Constitution for the imposition of taxes. Under the existing constitutional arrangements, the GST on goods is the domain of the federal government while the GST on services is the jurisdiction of the provinces. The income tax on agriculture is the domain of the provinces.
Chairman Asim Ahmad said that the FBR conducted a study after hiring a consultant and so far found that out of the total size of economy to the tune of Rs67 trillion, the federal government levied a sales tax of Rs32 trillion and then calculated income tax, customs duty and federal excise duty potential. “We have found that the total tax potential under jurisdiction of the federal government stands at Rs9,000 billion out of which the FBR collected Rs6,000 billion so the tax gap was assessed at Rs3,000 billion on a per annum basis,” the chairman shared the outcome of tax analysis gap while addressing a Summer Camp 2022 arranged by Pakistan Tax Bar Association Friday night.
He said that there was a tax gap of Rs3,000 billion out of which Rs1,800 billion was a policy gap, as it occurred mainly because of tax exemptions/incentives provided by the FBR to different sectors.
“There is a remaining compliance gap of Rs1,200 billion,” he said. The chairman said that if the FBR abolished all kinds of tax exemptions and ensure full compliance the tax to GDP ratio could touch 14 percent with a maximum collection of Rs9,000 billion on an annual basis.
He said that the tax to GDP ratio was the lowest in the country but if full tax potential was collected to the tune of Rs9,000 billion even then tax to GDP did not cross 14 percent mark.
He said that there were legal issues and cited example of agriculture which contributes 22 percent to the GDP but its collection was less than one percent because it is not jurisdiction of the federal government to collect tax on agriculture sector. He said that tax rates were also on the lower side as maximum limit of corporate tax stood at 29 percent while salaried individual paid 35 percent. He said that the corporate sector was paying after adjusting all its expenses while salaried person was paying tax on gross amounts so distortions created in our taxation system.
He said that the FBR focused on direct taxes as the FBR took taxation measures of Rs600 billion in the budget 2022-23 and after excluding relief measures the net taxation measures were aimed at fetching Rs545 billion.
“Out of total taxation measures of Rs545 billion, 80 percent tax measures have been taken on the direct taxes side,” he said and added that there would be a shift after year 2006 when the direct taxes would be the major revenue spinner compared to indirect taxes. It is now going to happen after 16 years as the contribution of direct taxes will be on the higher side than indirect taxes.
The reliance had shifted to indirect taxes because its collection was easy but now effort was made to bring in a shift, he added. He said that the IMF wanted to impose tax on pension under Personal Income Tax (PIT) reforms as it was agreed with the fund to bring it in tax net in 2019 but the FBR arranged workshops to save pensions from income tax……
He said that there were five million registered persons who did not bother to file returns……..
https://www.thenews.com.pk/print/976029-tax-gap-stands-at-rs3-000bn-fbr-chief
