Taxing tasks
One area that needs urgent attention of the authorities is the underground economy
One area that needs urgent attention of the authorities is the underground economy. CREATIVE COMMONS
The Tax Reforms Commission’s (TRC) report finalised recently has not revealed anything new. Its recommendations, too, cannot be regarded as out-of- the-box solutions. Still, all of them are pertinent. Therefore, the need of the hour is for the government to immediately start implementing the proposals and at the same time, the provinces should start taxing farm incomes. Attempts should also be made to attack the informal economy scientifically.
Here is an apt quote from the TRC report that reflects the problem with our taxation system: “No one has calculated how much tax loss Pakistan has suffered perpetually since 1977 on account of non-taxation of agricultural income alone. If we add total loss of revenue through various exemptions, non-taxation of benefits given to State Oligarchy and through Statutory Regulatory Orders issued during the last four decades, the number comes to over Rs100 trillion — this explains how unprecedented concessions to the rich has made the State poorer rendering every citizen ... to enormous indebtedness.”
One area that needs urgent attention of the authorities is the underground economy. Various studies have concluded that the underground economy in Pakistan ranges between 30 and 50 per cent of GDP (valued at current market prices). The same studies applying the current tax-to-GDP ratio on computed estimates of the underground economy have estimated that tax evasion would range between Rs700 billion and Rs1,180 billion, which is thought to be quite absurd. So in order to arrive at a reasonable estimate of tax evasion, these studies excluded import-related taxes, which reduced the tax-to-GDP ratio substantially. Using this and similar assumptions, it was found to be safe to suggest that tax evasion may range between Rs300-500 billion. In view of the most conservative estimate of the underground economy, it is vital that the strategy to fight against the informal economy is developed on a national basis.
What also needs to be improved on a priority basis is the culture and management capacity of the Federal Board of Revenue (FBR) so that it can willingly support a reform programme, mitigating the unsettling effects of frequent, adhoc legal and administrative changes, which lead to increased corruption, insufficient knowledge of taxpayers on their tax obligations and decreased motivation to comply with tax demands. As the TRC report states, there is a need to strengthen the otherwise adversarial relationship between taxpayers and tax collectors. This can be done through enhancing taxpayers’ education and facilitation by a well-coordinated communications programme that promotes greater compliance and a user-friendly, supportive interface between the FBR and taxpayers incorporating best international practices, including transparency, fairness, simplicity and easy-to-comply-with document requirements.
Some of the other steps that have been recommended include the devising of measures to enhance the taxpayers’ cost of evasion, preventing tax dodgers from going underground, strengthening tax administration to increase the potential of discovering non-compliant taxpayers, and enhancing the penalties of activities carried out in the informal sector. Additionally, all income irrespective of source needs to be tapped and taxed. In this regard, taxpayers need to declare all assets, including bank accounts held by resident Pakistanis outside Pakistan as well as undisclosed income outside Pakistan. Declared assets can be regularised by payment of tax at a specified rate. It has been suggested that in case of non-declaration of assets outside Pakistan, the assets of equivalent value in Pakistan can be forfeited along with the imposition of other severe penalties. All this should be accompanied by discouraging the use of cash and all bearer instruments, promoting the use of banks and encouraging documentation. In addition, there is a massive need to simplify the tax form. It goes without saying that the government needs to start working on these recommendations forthwith if it is indeed serious about reforming our creaking tax machinery.
Published in The Express Tribune, February 15th, 2016.
Here is an apt quote from the TRC report that reflects the problem with our taxation system: “No one has calculated how much tax loss Pakistan has suffered perpetually since 1977 on account of non-taxation of agricultural income alone. If we add total loss of revenue through various exemptions, non-taxation of benefits given to State Oligarchy and through Statutory Regulatory Orders issued during the last four decades, the number comes to over Rs100 trillion — this explains how unprecedented concessions to the rich has made the State poorer rendering every citizen ... to enormous indebtedness.”
One area that needs urgent attention of the authorities is the underground economy. Various studies have concluded that the underground economy in Pakistan ranges between 30 and 50 per cent of GDP (valued at current market prices). The same studies applying the current tax-to-GDP ratio on computed estimates of the underground economy have estimated that tax evasion would range between Rs700 billion and Rs1,180 billion, which is thought to be quite absurd. So in order to arrive at a reasonable estimate of tax evasion, these studies excluded import-related taxes, which reduced the tax-to-GDP ratio substantially. Using this and similar assumptions, it was found to be safe to suggest that tax evasion may range between Rs300-500 billion. In view of the most conservative estimate of the underground economy, it is vital that the strategy to fight against the informal economy is developed on a national basis.
What also needs to be improved on a priority basis is the culture and management capacity of the Federal Board of Revenue (FBR) so that it can willingly support a reform programme, mitigating the unsettling effects of frequent, adhoc legal and administrative changes, which lead to increased corruption, insufficient knowledge of taxpayers on their tax obligations and decreased motivation to comply with tax demands. As the TRC report states, there is a need to strengthen the otherwise adversarial relationship between taxpayers and tax collectors. This can be done through enhancing taxpayers’ education and facilitation by a well-coordinated communications programme that promotes greater compliance and a user-friendly, supportive interface between the FBR and taxpayers incorporating best international practices, including transparency, fairness, simplicity and easy-to-comply-with document requirements.
Some of the other steps that have been recommended include the devising of measures to enhance the taxpayers’ cost of evasion, preventing tax dodgers from going underground, strengthening tax administration to increase the potential of discovering non-compliant taxpayers, and enhancing the penalties of activities carried out in the informal sector. Additionally, all income irrespective of source needs to be tapped and taxed. In this regard, taxpayers need to declare all assets, including bank accounts held by resident Pakistanis outside Pakistan as well as undisclosed income outside Pakistan. Declared assets can be regularised by payment of tax at a specified rate. It has been suggested that in case of non-declaration of assets outside Pakistan, the assets of equivalent value in Pakistan can be forfeited along with the imposition of other severe penalties. All this should be accompanied by discouraging the use of cash and all bearer instruments, promoting the use of banks and encouraging documentation. In addition, there is a massive need to simplify the tax form. It goes without saying that the government needs to start working on these recommendations forthwith if it is indeed serious about reforming our creaking tax machinery.
Published in The Express Tribune, February 15th, 2016.