Corporate tax evasion in Pakistan

Published: May 15, 2019
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Abid Rehman is a PhD Fellow in Economics and Visiting Faculty Member at the National University of Sciences and Technology in Islamabad
Sundas Amin is final year’s student of Economics and Finance at National University of Modern Languages in Islamabad

Abid Rehman is a PhD Fellow in Economics and Visiting Faculty Member at the National University of Sciences and Technology in Islamabad Sundas Amin is final year’s student of Economics and Finance at National University of Modern Languages in Islamabad

Pakistan can generate handsome tax revenues from the corporate sector. But unfortunately, corporations do not pay taxes according to their taxable liabilities. One of the reasons behind tax evasion is high corporate tax rates in Pakistan. According to a December 2015 World Bank report, Pakistan’s corporate income tax rate — tax on profits — is the third highest in the world. Corporate tax rate of Pakistan is currently 31% which is quite high as compared to other Asian countries like Indonesia, Malaysia, Bangladesh and Thailand which are 25%, 24%, 25% and 20% respectively.

According to the State Bank of Pakistan (SBP), the country’s tax-to-GDP ratio has remained in the range of 8.5% to 9.5% over the last 10 years. The FBR has claimed that it has 1.2 million people in the tax net who regularly file returns, and the total number of corporate taxpayers who file returns stands at 30,875 as compared to the 81,493 companies registered with the Securities and Exchange Commission of Pakistan (SECP). First reason is: corporate ventures engage in misrepresentation of income statements to evade higher tax payments. Moreover, in TY2014 and TY2015, the big taxpayers — including 7,720 companies and 14,103 Associations of Persons (AoPs) — had filed income tax returns and paid Rs10.415 billion and Rs11.697bn, respectively. But the same did not file returns in TY2016.

Another reason behind tax evasion is that the FBR has failed to ensure that all the firms filed their returns. Due to weak tax system, only 15,759 companies, or 19.4%, paid income tax in TY2016, meaning that 80.6% or 65,734 of the companies registered with the SECP were non-tax compliant. FBR authorities did not keenly scrutinise the status of those filers who showed nil income in their returns. This depicts the poor enforcement on the part of the tax machinery. Pakistan’s administration system has flaws that cannot acutely analyse income statements due to which revenue from tax collection remains low. In order to increase the tax revenue from the cooperate sector, implementing few steps might prove to be helpful.

Firstly, tax evasion in corporate sector of Pakistan can be reduced by decreasing corporate tax rates. This would be step in the right direction for encouraging corporatisation. However, simultaneous reduction in tax rates for businesses to a lower rate of mere 15% nullifies such efforts; hence the rate applied should be substantial enough to benefit a corporate entity.

Secondly, an ideal tax system is based on the principle of accurate information. The reported income by a firm must be accurate but unfortunately corporates do not provide accurate information on their taxable income. Due to weak tax administration system in Pakistan, tax authorities cannot efficiently check income statements. In the presence of such information barriers, taxmen must run third-party information trails by studying transactions patterns of a corporation to check if it has reported its income appropriately and is not evading taxes. Employers, banks, and pension funds are third-party institutions that report such information. The intensity of tax evasion gets decreased in those countries where the share of third-party’s verified income goes up.

Lastly, the government must focus on more effective and stringent measures for decreasing tax evasion in Pakistan. In Pakistan, promotion of electronic payment system can be an efficient alternative. For an economy like Pakistan, its case is quite substantial. By settling the purchase in cash and through non-registration of a purchase, tax evasion increases at a higher pace. A purchase can’t go un-registered by both seller and buyer, if electronic payment system is being promoted in Pakistan. Mostly electronic payment system comprises use of debit or credit card or an online purchase. Smart alternatives to cash payments will certainly help the government improve its revenue collection of taxes.

Published in The Express Tribune, May 15th, 2019.

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