According to conservative estimates, the real tax potential of undeclared wealth in Pakistan ranges from Rs 700 to 1,000 billion.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Oct 16 - 22, 2006

Revenue collection during the first quarter (Q1) of the current fiscal (July-September 2006) has surpassed the target of Rs. 176.2 billion for the period. According to figures released by the Central Board of Revenue (CBR), the collection made during the first three months stands above Rs. 187 billion against Rs 152 billion during the same period of last year, which is higher by about 24 percent.

Tax-wise breakup shows that the collection on account of direct taxes was Rs. 66.32 billion against Rs. 48.18 billion of last year, depicting an increase of 37.6 percent. Indirect taxes collection amounted to Rs.121.06 billion against Rs. 103.87 billion, showing an improvement of 16.6 percent. Sales tax collection has reached Rs. 75.60 billion against Rs. 62.98 billion, indicating a growth of 20 percent. Of this, sales tax collection at import stage was Rs. 44.80 billion against Rs. 39.02 billion, showing a growth of 14.8 percent, and sales tax collection on domestic consumption was Rs. 30.80 billion, showing a rise of 28.2 percent. The collection on account of federal excise duty (FED) totaled Rs. 16.48 billion against Rs. 12.23 billion, showing an increase of 34.6 percent.

Against gains in all these taxes, the CBR Customs Wing has shown poor performance, as collection on account of customs duty was Rs. 28.9 billion against Rs. 28.6 billion, reflecting a nominal increase of 1.2 percent. At the same time, the overall payment of customs rebate to exporters also declined as compared to the payments made last year. The board paid Rs. 19.83 billion as refund and rebate to exporters during the first quarter of 2006-07 against Rs. 18.20 billion last fiscal year, reflecting an increase of Rs. 1.63 billion.

Of this, sales tax refund totaled Rs. 11.18 billion against Rs. 7.57 billion; direct taxes refund Rs. 4 billion against Rs. 5.2 billion and payment of customs duty rebate stood at Rs. 4.67 billion in the first three months of current financial year against Rs. 5.28 billion of last fiscal, showing a shortfall of Rs. 0.61 billion.

Revenue collection during the financial year (July 2005 to June 2006) also surpassed the target of Rs 690 billion by about 21 billion, touching the all time high collection of Rs. 711 billion. Talking at a PTV programme, the CBR chief boasted that more than 100 percent growth has been registered in revenue collection from the year 1999 to 2006. He attributed this rise to persistent policies, good governance, sustained GDP growth and reforms in CBR. Replying to a question, he, however, admitted that presently over one third of the economy was actually paying the taxes. Contribution from agriculture sector was meager 30 percent as compared to services sector which is contributing up to 50 percent to GDP growth. Agreeing that revenue collection could be doubled, CBR Chairman said extraneous efforts were underway to further increase the state revenues. He also admitted that the tax to GDP ratio has declined from 10.4 percent to about 105 percent during the year 2000 to 2006.

With the budget deficit mounting to 4.2 percent of the GDP, the issue of broadening the tax base has acquired urgency. For the first time since 1996-97, primary budget deficit has resurfaced. The tax potential of an economy growing at seven percent per annum has not been fully realized. A proper tax culture cannot be created without developing an equitable tax system, which is not the case at present. When the policy is to focus on taxing incomes and consumption, the imbalance between indirect taxes at 69.4 percent and direct taxes at 30.6 percent of the total tax revenue needs to be gradually removed. More so, as some levies like the withholding tax, capital value tax and taxes on bank service charges, though included in the category of direct taxes, are in reality indirect taxes. This situation can be saved by reducing an abnormally high sales tax rate by half since it has increased at a tremendous pace from 17.6 percent in 1990-91 to 62.5 percent of indirect taxes last year. The burden on the consumer needs to be substantially reduced.

According to independent economist and analyst, the biggest issue is the tax evasion and growing size of black economy. As per a conservative estimate Rs. 600 billion were being generated every year in Pakistan by parallel economy. Furthermore, the black money generated through smuggling of goods and narcotics ranges between Rs. 300 billion and Rs. 500 billion, respectively. This makes a whopping amount of Rs. 1,000 billion. When the presence of black money is so apparent, why its criminal accumulation and generation are not revealed and the offenders punished, is a question which has been baffling honest citizens. They ask whether it is on account of lack of political will, rampant corruption, collusion of tax dodgers and the tax administrators, the political system, the effectiveness or defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties? Those who plundered the wealth of the nation were set free to have a good time in "exile" and those who abused powers are being invited to come again for ruling and looting whatever is left.

Dr. Aqdas Ali Kazmi, ex-Joint Chief Economist, Planning Commission of Pakistan, has stated in his research paper that 70% part of the economy consists of 36% pure black economy, 18% exempted economy, 9% illegal economy, 4.5% unrecorded economy and 2.5% informal economy (unreported economy). His study says that the problem in the low resource mobilization is the rigid system of taxation, and the emphasis of the government is on increasing revenue but ignoring the details of long term policy measures.

According to conservative estimates, the real tax potential of undeclared wealth in Pakistan ranges between Rs 700 to 1,000 billion. However, the successive governments have utterly failed to persuade the Pakistani people to pay taxes due on them.

In a move that indicates lack of confidence in its own tax recovery machinery, the Central Board of Revenue has decided to hire private investigation agencies to recover customs duty arrears from the defaulting importers/exporters. According to a Recorder report, this decision has been taken in the wake of CBR's finding that the defaulting importers/exporters in many cases are not traceable at the addresses provided by them to the authorities. The action follows the formation of a high-powered task force headed by additional collectors/deputy collectors at each customs collectorate for the recovery of sales tax arrears. CBR authorities believe that the owners of defaulting units may be engaged in business in new areas that fall in the jurisdiction of collectorates where they have not defaulted on duties/taxes.