Lost revenues: ‘Tax evasion costs exchequer Rs1.27tr’

ISLAMABAD: For every Rs100 collected by the Federal Board of Revenue in taxes, it misses another Rs79 due to tax evasion, said Salman Siddiqui, chairman of the FBR, while testifying before the Senate Committee on Finance and Revenue on Wednesday.

The FBR estimates that the total revenue lost by the government as a result of tax evasion comes out to Rs1.27 trillion for the fiscal year ending June 30, 2011. This number is higher than the World Bank’s most recent estimate of Rs796 billion and is equal to 8 per cent of the GDP, nearly equal to the worst case scenario for the projected fiscal deficit for the current year.

With numbers as astounding as this, a wide-ranging crackdown against tax evaders seems to be on the cards. The FBR detailed its plan to begin prosecuting evasion.

“The FBR has credible evidence against 708,600 tax evaders and a campaign against them will start from Friday”, said Siddiqui. The number represents people who have  taxpayer identification numbers, known as NTNs, but have not filed their tax returns.

According to the plan, the FBR will give tax evaders a 30 day deadline to submit the details of their income and spending.

If the evaders do not submit declarations voluntarily, tax authorities will issue a provisional tax notice with a two-month deadline to respond, following which the recovery effort will start.

The FBR plans to prosecute tax evaders using indirect estimates of their income and lifestyle. The ownership of movable and immovable property, foreign visits and accounts in foreign banks will be used as evidence against suspected tax evaders.

Siddiqui, however, was somewhat cautious about
an aggressive campaign against tax evaders, fearing a negative impact on the economy. According to the FBR, over 70 per cent of all taxes evaded are corporate income taxes.

The Securities and Exchanges Commission of Pakistan has registered over 59,000 companies but only a little over 20,000 file their income tax returns with the FBR.

The Senate committee’s response suggested a degree of scepticism about the ability of the FBR to conduct an effective crackdown against tax evasion.

“My fear is that when the recovery campaign will be at its peak, the chairman of the FBR and his team will be transferred and that will be fault of the politicians,” said Senator Haroon Akhtar of the Pakistan Muslim League-Quaid.

Other senators went even further, suggesting complicity between FBR officials and tax evaders.

“Tax evasion is not possible without the connivance of the FBR and the bleak scenario reflects that its efficiency is zero”, said Senator Ahmed Ali of the Muttahida Qaumi Movement, the chairman of the committee.

Siddiqui acknowledged that corruption within the department was a problem and pointed out that until some of the senior members of his team were not removed from their posts, the FBR would not be able to effectively prosecute evaders.

He was also candid about the FBR’s inability to meet its revenue targets for the current fiscal year, describing the collection of Rs1,667 billion as “out of the question.” He put the more realistic figure at Rs1,586 billion, without any new measures to increase revenues.

The FBR also unveiled new tax proposals that the government wants to implement starting in March or April, provided it can get enough support in Parliament. The measures, which include an additional increase in the flood tax, are meant to cope with the revenue shortfall and may generate as much Rs36 billion in revenues.

The government wants to levy a flood surcharge of 15 per cent, which is five per cent higher than the previously announced rate. The flood surcharge is a temporary increase in withholding taxes and the advance income taxes as a means of helping the government deal with the impact of the 2010 floods.

Published in The Express Tribune, February 24^th, 2011.