Catch Me If You Can

The fiscal discipline of a country can, among other things, be gauged through its primary balance. International lenders have vehemently emphasized maintaining a positive balance, which can be achieved by improving tax collection, cutting unnecessary expenditures, maintaining fiscal discipline, and structural reforms. In his recent statement, the Prime Minister rightly emphasized that the country’s potential revenue was Rs. 24 trillion, whereas it only collected about Rs. 9 trillion. Indeed, the Prime Minister’s observation extends beyond the present situation, indicating a recurring issue in preceding years. On the other hand, the Ministry of Finance and FBR are naively emphasizing and banking on recovering Rs.2.7 trillion stuck up in courts. Efforts are also underway to bring non-tax return filers and untaxed sectors into the net along with structural reforms in FBR.

Studies conducted by respective organizations in the past have concluded that tax evasion is touching its peak, resulting in a soaring fiscal deficit and a lower tax-to-GDP ratio, currently about 9%. Other developing countries’ ratio ranges from 17% to 20%. The report of the task force on Reform of Tax Administration in its findings, as of April 14, 2001, titled “Reform of Tax Administration in Pakistan,” states that a relatively significant part of the revenue loss is due to corruption in the Tax Departments and the results suggest that out of an Rs.100 potential revenue, the government gets 38%. The taxpayers, collectors, and practitioners share the balance of 62%.

Late Dr. Mehboob-ul-Haq, the then finance minister, once stated that two black rupees backed each white rupee in the country. The applied economists believe that four black rupees now back each white rupee. In other words, the current officially declared GDP of the country at US$325 billion is, in fact, about US$ 1300 billion. Meanwhile, Pakistan is collecting federal taxes and duties at a declared GDP of US$ 325B instead of collecting it at the real GDP. In other words, the tax targets fixed in the budget for the year 2023-24, to the tune of about Rs. 9200 B, are just 38% of the total tax potential of Rs. 24000 B based on declared GDP. The remaining 62% (Rs.14800 B) will not be collected. However, the collection of the taxes and duties should have been at the actual and real GDP of US$ 1300 B and no less than 15% of it, which works out to US$ 195 B annually, taking care of all economic ailments of the country.

Tax evasion detection has become more technical, tedious, and complicated, mainly due to the connivance of taxpayers, tax collectors, and tax consultants. The experience of detecting evasion through Customs and Inland Revenue Intelligence Directorates has been futile as no officer posted in the intelligence agencies would go against their colleagues and instead cover their own connivance in evasion. This is also evident from the failure of the track and trace system developed by the FBR in 2019. Only tax specialists, economists, and insiders can develop systems that can identify, detect, and unearth tax evasion. The economic model for detecting tax evasion would, among other things, require input-output ratios and reverse costing to determine the actual profits and evaded amount of direct and indirect federal taxes and duties and by making them liable to pay the evaded federal taxes and duties.

During the last couple of years, many trade and industrial sectors have witnessed enormous and manifold price appreciation. Besides, the government has considerably reduced customs duty on imported inputs. Had adequate measures been taken to tax these sectors, substantial revenue could have been generated. However, all the appreciated value seems to have gone undetected and untaxed, causing a huge revenue loss of billions to the national exchequer. These sectors must be re-assessed as tax evasion is rampant and causing colossal revenue loss.

The government plans to charge more taxes from the salaried class, which will be easier as they will be collected at source. Tax collectors should focus more on the salaries and perks of private and corporate sector employees, as trade and industrial sectors with rampant evasion pay substantial salaries and perks out of the books.