Tax leakage

Sales tax evasion causes Rs7 trillion in tax leakage, undermining services and burdening honest taxpayers.

Sales tax evasion is a significant issue that continues to plague our economy, resulting in substantial tax leakage that undermines the country's financial stability. Finance Minister Muhammad Aurangzeb recently pointed out that sales tax evasion alone accounts for nearly 50 per cent of the estimated Rs7 trillion tax leakage, highlighting the magnitude of the problem.

The impact of sales tax evasion is far-reaching, affecting the government's ability to fund essential services and infrastructure development. It places an unfair burden on honest taxpayers, particularly those in the salaried and manufacturing sectors, who bear the brunt of taxation while others shirk their responsibilities. This imbalance not only hampers economic growth but also erodes trust in the tax system, perpetuating a culture of non-compliance.

Sales tax evasion is attributed to various factors, but the primary contributors are still failure to register and shady accounting by companies. It should be noted that these practices not only deprive the government of vital revenue, but also distort market competition, giving non-compliant businesses an unfair advantage over law-abiding enterprises. Furthermore, the issuance of fake invoices and failure to report tax obligations demonstrate a blatant disregard for ethical and legal responsibilities, undermining the integrity of businesses and the trust placed in them.

While changing an entrenched culture is never easy, the government could start by going for enhanced enforcement and oversight mechanisms, coupled with greater scrutiny of high-risk sectors such as steel, cement, battery, beverages and textiles. Additionally, measures to promote voluntary compliance, such as providing incentives for registration and timely tax payments, can help broaden the tax base and reduce evasion. But the biggest push would be if the government actually begins to aggressively enforce laws against non-compliance, which can include jail time. It is pointless to keep handing out carrots without the threat of a stick.