The figure of net collection (Rs.292 billion) in the first five months is not impressive enough to being jubilant against the target of Rs.835 billion for the current fiscal.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Dec 11 - 17, 2006

The government has announced that the federal tax collection for July November 2006 has shown a growth of 17.5 percent over the deposits of same period last year. The net collection during the period totaled Rs. 292.4 billion against Rs. 248.8 billion last year.

CBR claims that it has achieved the collection target as the direct taxes have shown an increase of 39 percent by collecting Rs. 96.5 billion against Rs.69.5 billion. The sales tax collection has reached Rs. 123.7 billion against Rs.10.1 billion last year, indicating a growth of 12.4 percent. However, the growth in revenue collection at sales tax import stage has been 6.1 percent, the domestic sales tax collection has increased by 21.8 percent.

The tax receipts on account of excise duties has recorded an increase of 12.7 percent. The collection has reached Rs. 23.7 billion against Rs.21 billion in the corresponding period last year. Finally, revenue from customs duties has increased by 0.6 percent only over the corresponding period of last year. The tax collection has been Rs.48.5 billion against Rs.48.2 billion last year.

The figure of net collection (Rs.292 billion) in the first 5 months are not impressive enough to being jubilant against the target of Rs.835 billion for the current fiscal. It is commonly believed and even admitted publicly by the CBR Chairman himself that the net revenue collection is much lower than its potential as is also confirmed by lowest tax GDP ratio in the region due to large scale tax evasion and growing black economy made possible through smuggling, corruption and administration of tax department.

What is more worrisome is the fact that instead of any improvement, the tax GDP ratio in Pakistan has fallen to 9 percent in 2005 (from 12 percent in 2001), which was the lowest level, recorded so far. The average in the South Asian region is 18 percent.

In a study conducted within the organization itself, the Central Board of Revenue (CBR) has identified eight major reasons including tax evasion due to administrative weaknesses and excessive tax exemptions responsible for low tax to GDP ratio.

Official sources told PAGE that the main reasons for low tax GDP ratio are mismatch between sectoral shares in tax and GDP ratio; narrow tax base; poor compliance by tax payers; too many exemptions, presence of large underground economy and informal sectoral leakage and evasion due to administrative weakness and limited efficiency gains; too much centralization and adverse taxpayer's perception that the collected amount is not spent on basic needs.

Sources said that basically the enhancement in tax GDP ratio is a policy issue and determination of the parameters of the composition of GDP and identification of gaps. It was agreed that the tax models of Turkey and Korea should be studied for enhancing the tax to GDP ratio as these countries have achieved double-digit growth in this regard.

Addressing the 10th Income Tax National Conference in Islamabad last month Chairman CBR Abdullah Yusuf had appealed to the Income Tax commissioners to utilize all their energies and professional skills for enhancing the tax to GDP ratio and broadening the tax base. He said that tax officers must move forward to achieve the objectives of increasing tax to GDP ratio. He also asked for expanding tax net which at present was not at the desired level.

Updating the conference on reforms programme, the Secretary General, Revenue Division informed the conference that all 13 regional tax offices (RTOs) and one more LTU were to be put in place by the end of current financial year. He was confident while saying that the overall revenue collection target of Rs. 835billion will not only be achieved but also surpassed. He asked the officials to make additional efforts to fully tap the revenue potential in various sectors.

Pakistan has been facing perpetual crisis of resources for its developmental policies, crisis to meet trade deficit, crisis on account of fiscal deficit and balance of payment, and what not. One of the factors responsible for the present situation is the great speed with which black money is generated. The Central Board of Revenue is directly responsible for this as its mafia like operations has helped people avoid tax on incomes by paying them "due share". Through the infamous system of SROs, the CBR's top official provide "legal" ways and means to the mighty sections of society for amassing colossal wealth that is now threatening the very survival of our state. This black money in the hands of corrupt politicians, bureaucrats and terrorist has played havoc with the entire human community across borders.

A conservative estimate is that Rs.600 billion is generated every year in Pakistan by parallel economy. Adding to this, the black money generated through smuggling in goods and narcotics trade accounts between Rs.300 billion and R.s.500 billion. This makes a whooping Rs.1000 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, or rampant corruption, or collusion of tax dodgers and the tax administrators at defrauding the revenue, or the political system or the ineffectiveness and defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties?

It is not possible to determine the precise amount of revenue loss and size of black money or informal economy in Pakistan. Revenue loss estimated by World Bank because of smuggling alone in 2004-05 amounted to 5.08 billion dollars. In 2003 quantum of tax evaded was estimated at over Rs. 450 billion. Another report estimates revenue loss, because of distorted tax regulations and administrations, at Rs. 40-45 billion in 1989-90 and Rs.104 billion in 1995-96. Apart from direct monetary costs of corruption, other significant costs, such as loss of government credibility, spread of injustice, distortions in resource allocation and loss of foreign and local investment, are destroying the very fibre of civil society in Pakistan.

The Central Board of Revenue has admitted that improper implementation of self-assessment scheme (SAS) and a number of amnesty schemes launched during the last many years have played a key role in narrowing income tax base.

A CBR working paper of the Third Technical Conference of the Association of Tax Authorities of Islamic Countries (ATAIC) reveals that a number of amnesty schemes resulted in low income tax yield. The CBR has underlined various amnesty schemes including special national fund scheme 1985; foreign exchange bearer certificate scheme 1085-89; US dollar bearer certificate scheme 1991; foreign currency account scheme 1992; foreign currency bearer scheme 1997 and tax amnesty scheme 2001.

According to the paper, about 12.5 million people living in Pakistan are earning taxable income, therefore, the estimated income tax return filers should be around 7-7.5 million as against 1.7 million at present. Exempted sector of economy i.e. agriculture is contributing 25 percent to the GDP. Hence, a safe estimate of the "return filers" to be 7.0 to 7.5 million i.e. 5 percent of the total population and 20 percent of the earning population.

The paper questioned that why our country has such a narrow tax base comprising about 1.7 million taxpayers with a population of 160 million.

To enforce compliance in the case of existing NTN holders and taxpayers, there is a need for enforcement of existing legal provisions in letter and spirit; prosecution of at least 5 top tax evaders each year; use of huge bulk of available information to discover potential taxpayers and distinguish between the facilitation and unbridled freedom.

The analysis of problem of low yield of income tax shows that there are policy impediments in the growth of income tax; administrative defects and shortcomings; tax evasion and lack of proper documentation of the economy has made collection of tax difficult and costly.

Large sectors of the economy have been kept outside the scope of income tax by way of exemptions and exclusions. It encompasses exemption on agricultural income; exemption to people living in Fata, Northern Areas and Provincially Administered Tribal Areas; tax holidays, tax credits, initial depreciation allowance available to industrial sectors; exemption to welfare trusts and foundations and exemption to pensions and allowances.

Improperly implemented Self Assessment Scheme (SAS); the real philosophy behind Self Assessment Scheme as a cost effective tax collection procedure has been adversely affected by defective policies regarding processing of self assessment return, blanket immunity from audit, haphazard, random selection of cases for audit and stereo type desk audit. There is no proper investigation mechanism whereas absence of deterrence has affected revenue generation adversely.

The CBR paper disclosed the reasons behind administration failures as lack of proper information system, facilities and resources, too much stress on achieving revenue targets; shyness from physical audit and desk bound assessments without any investigation; lack of training and skill of the workforce; bad working environment; outdated procedures and processes; lack of functional division of work; over centralization of the work and poor human resources management.

It is heartening to note that CBR is fully aware of the problems of tax evasion, growing black economy and the causes of ridiculous low level of ratio. The question then arises why it does not act to remove the known causes of revenue loss and what are the factors stopping it from moving against such miscreants.