Tax collection a failed system in Pakistan

Trend of submitting lower sales figures, exaggerating expenses, claiming bankruptcies on the rise

ISLAMABAD: While the authorities regularly come out proudly with pieces of technology and rules to curb tax evasion, the amount of tax evasion and the number of evaders appear to be on the rise.

Moreover, no federal or provincial authority questions the effectiveness of newer steps being taken to prevent the trend.

In order to suppress the taxable amounts, three methods are largely being applied by the tax evaders at will: submitting figures of far lower sales, services and incomes than the actual; exaggerating the business expenses and claiming near-bankruptcies.



This is a trend that contaminates the entire public finance and economic apparatus of the country. The United States presidential (Democrat) candidate, Hillary Clinton gave a speech the other day to unveil past bankruptcies claimed by her Republican opponent Donald Trump. She appealed to the voters not to elect a person that brandishes a booming business while filing bankruptcies. She claimed that it was a matter of national importance and should be treated as such by the electorate. This trend, she emphasised, might undermine the entire economic progress the US has been able to accomplish.

Here in Pakistan, this trend is not deemed as undermining the national economy, and so, not worth an alarm and emergency correctives.

There rots a long list of those tax evaders who manipulated the loopholes in the tax-administration system and filed exaggerated business expenses and criminally less sales and incomes while declaring expansions in the existing business that are also declared as running in phenomenal losses.



The situation gets worse on two counts: this incremental list not winning the attention of the tax-administration, abetting the trend of such declarations by the tax staffs becoming the principal culture of tax practices.

Concealment of taxable amounts and assets is a curse any state can go down with.

Pakistan has already taken a path on which economic suicide is unavoidable; thanks to the culture of concealment, inland and offshore investments without money-trails, and recurrent money-whiteners dished out by the authorities to those who reinvest back home after bringing back the money stolen here through income-suppression and  corrupt practices.

Ever since the introduction of the sales tax, which is mistakenly propagated as the ‘GST’ these days - the CBR, now known as FBR, has been making amends to its basic structure, its applicable rates to the turnovers, and the method of its collection and monitoring.

Nothing has worked, however, and now the FBR has come out with a new method.

Its press release issued last week said, “Sales tax would now be deducted through automated system, applicable from July 1. The purpose of new method seems to plug the leaks in its collection and in the monitoring of allied taxes like the Federal Excise Duty, withholding tax and the tax on incomes.

The announcement further said that the FBR had developed software for automated verification of Sales Tax Registration Number (STRN) and deduction of applicable rates of sales tax from the vendors’ claims submitted at accounting offices. The authorities told The Express Tribune that once proven effective, the method would be extended to other areas of deduction too.

The system will be implemented across all accounting offices from the start of the financial year 2016-17 and is expected to significantly enhance the performance of accounting offices in their role as withholding tax agents for the government, and contribute substantively to the government’s sales tax collection, it said.



The system will link up with FBR database to determine status of vendor’s Sales Tax Registration and authenticity of Sales Tax Registration Number (STRN) as well as authenticity of allied master-data of the vendor in database of the accounting office. It would also calculate correct amount of sales tax to be withheld in line with the applicable rates as determined by the FBR.

Based on verifications along the above mentioned dimensions, the system will deduct full applicable rate of sales tax from claims of those vendors who do not have STRN, whose STRN does not get validated from FBR data base or who are blacklisted.

Ahead of the software implementation on  July 1, 2016, the FBR has already started contacting the government departments and ministries to instruct their concerned staff to ensure that purchases are made from registered vendors as well as ascertain that the vendors’ STRN and master-records with accounting offices are validated to avoid deduction of full applicable sales tax from respective vendors.

Now, if you read the FBR statement carefully and see the meaning of the announcement clearly, you come to know that 1) the government departments have, in the past, not been purchasing from vendors that have the official clearance for selling to the government departments; 2) the FBR has not been covering the authenticity of the venders (and other turnover makers), and tax evasion, turnover-monitoring and income concealment has been officially allowed.

In this culture, there are little checks to stop the culture of evasion and corrupt practices, and the money-trails of offshore investors as well as of those who reinvest the money taken out of the country can never be known.

Pakistan is abuzz with the loud claims that the offshore investors would be brought to the book. Where is the system to check the making and trailing of money out and back into the country?

The writer has worked with major newspapers and specialises in the analysis of public finance and geo-economics of terrorism

Published in The Express Tribune, July 11^th, 2016.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.