The tax gap
Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
?In a recent disclosure, the Chairman Federal Board of Revenue (FBR) admitted that tax gap of Pakistan is Rs. 3000 billion. According to a Press report [Tax gap stand at Rs.3000bn: FBR Chief, The News, July 23, 2022], he said that this gap “is on annual basis and exists mainly in the shape of tax exemptions for powerful lobbies, massive tax evasions, and the inability of the machinery to collect due taxes”. The FBR Chairman was speaking at the Summer Camp of Lahore Tax Bar on July 22, 2022.
Quite strangely, it was not brought to the knowledge of public what to speak of taking input from the stakeholders and local tax experts that some study/analysis was undertaken to determine tax gap on the basis of recent facts and figures and size of burgeoning parallel economy. The grand alliance government of Pakistan Democratic Movement (PDM) assumed power on April 9, 2022. It has been criticizing its predecessors for violating the principles of transparency, but itself violated all norms of good governance by commissioning such a vital study without any public knowledge. Even the Lahore Tax Bar where FBR Chairman made this revelation did not agitate the issue. There was no reporting of the matter in the media till the above cited report was published that revealed the following:
“We have found that the total tax potential under jurisdiction of the federal government stands at Rs9,000 billion out of which the FBR collected Rs6,000 billion so the tax gap was assessed at Rs3,000 billion on a per annum basis,” the chairman shared the outcome of tax analysis gap while addressing a Summer Camp 2022 arranged by Pakistan Tax Bar Association Friday night”.?????
Chairman FBR further revealed that this tax gap analysis was conducted by hiring a consultant “on the directives of Prime Minister Shehbaz Sharif on eve of the budget-making exercise for 2022-23”. It is strange that according to Chairman FBR his organisation was assigned “to conduct the first-ever formal study to assess the ‘tax gap’ keeping in view jurisdictions of the federal government under 1973 Constitution for the imposition of taxes” [under the existing constitutional arrangements, the general sales tax (GST) on goods is the domain of the federal government while GST on services is in the jurisdiction of the provinces. Income tax on agriculture is in the domain of the provinces]. He has completely forgotten that in these columns, as elaborated below, FBR’s tax gap study with the help of World Bank was cited many a times. It is also pertinent to mention that the actual tax potential of Pakistan is determined at Rs. 13.4 trillion against his claim of Rs. 9 trillion only and tax gap is over Rs. 7 trillion and not Rs, 3 trillion!
The above confirms beyond any doubt that before assigning the study to the Chairman FBR, the Prime Minister of Pakistan did not bother to consult his office where he has special initiative unit, Ministry of Finance and local experts that’s fully aware of it and could apprise him of the real tax gap prevailing in Pakistan. What makes the situation more painful is the fact that the Chairman FBR, a seasoned and experienced officer having second stint at this post, could not recollect the failed tax reforms experiments under international lenders and donors and reports published on tax gap many years back.??????
In How to bridge huge tax gaps? Business Recorder, April 15, 2011, Bridging the tax gap—I, Business Recorder, October 5, 2018 and Bridging the tax gap—II, Business Recorder, October 7, 2018, the earlier studies on tax gaps were cited. In Tapping the real tax potential [Business Recorder, March 24, 2017], the following was mentioned:
?“Tax gap of a country is measured by the amount of tax that remains uncollected due to non-compliance with tax laws A study, ‘Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology’, jointly undertaken by the Federal Board of Revenue (FBR) and Andrew Young School of Policy Studies at Georgia State University, provides details of tax gaps by type of tax and describes the methodologies and data used for such estimates”.
?“Pakistan’s tax revenue remains very low relative to comparator developing countries and the tax effort expected for the country’s level of development. This reflects narrow tax bases, overgenerous tax concessions and exemptions, weak and fragmented revenue administrations………..”—Unlocking Pakistan's revenue potential by Ms. Serhan Cevik, Country Report 16/2 (January 2016), IMF’.
?The federal budget for fiscal year 2023 was presented on June 10, 2022 and all the above material was already available. Printed articles and papers by IMF and the World Bank were ignored by the Prime Minster, once known as Khadim-e-Aala (Chief Servant), by FBR as well as by the Federal Finance Minister, Miftah Ismail. It is worth mentioning that the fact of tax gap study was not made public. It was also not revealed how a consultant was hired in deviation of established rules of open bidding by the Ministry of Finance or FBR. The International Monetary Fund (IMF) having close eye on the budget making process for revival of stalled programme also did not take cognizance of the matter. Our worthy Finance Minister held inconclusive negotiations with IMF in Doha, Qatar, from May 18-25, 2020. He also failed to mention that FBR was doing a “first-ever” (sic) formal study to assess the ‘tax gap’. If real potential is Rs. 9 trillion as conceded by the Chairman FBR then why the target for the current fiscal year of FBR is fixed at only Rs. 7.470 trillion? Why the government is forced to borrow more money when taxes to the extent of Rs. 12 trillion can be collected. The Chairman FBR ignored the following facts that testify to the incontrovertible evidence that our tax potential is much higher than Rs. 9 trillion.????
In Tax reforms: Agenda for Self-Sustainability, Management Accountant, Volume 31.2 [pp 36-38], March-April 2022], it was once again shown with facts and figures by one of us that the real tax potential, at the level of FBR alone is Rs. 12.4 trillion, if not more. Its working is available in Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME Institute, Islamabad, December 2020] that was shockingly ignored by FBR in its latest tax gap analysis for which fee was paid to a consultant. Neither the analysis is yet made public nor is the fee paid to the consultant hired disclosed.
It is high time that FBR should make the tax gap analysis public on its website as required under Article 19A of the Constitution of Islamic Republic of Pakistan. The public, especially taxpayers, have every right to know as to how this assignment was commissioned without seeking the best possible talent through open pubic bidding. Secondly how earlier studies and the recent article by one of us were ignored showing that 21 million potential individual taxpayers were not filing income tax returns and that collection in their case alone could be around Rs. 6400 billion.
At present, out of total registered companies, 53,900 are not filing income tax returns. Assuming average tax of Rs. 5 million per company, tax potential comes to Rs. 269.5 billion. Collection of income tax by FBR in fiscal year 2021-22 was Rs. 2278 billion (companies, individuals, firms and association of persons). On this basis total income tax potential alone would not be less than Rs. 8400 billion. Sales tax collection in fiscal year 2021-2022 is Rs. 2525 billion, whereas actual potential is not less than Rs. 3500 billion, as per own admission of FBR. Similarly, the potential of Customs Duty is Rs. 1500 billion as FBR collected Rs. 1000 billion in financial year 2021-22. The potential of Federal Excise Duty is Rs. 350 billion, if not more, as FBR collected Rs.322 billion in the FY 2021-22.
In view of above, even under the prevailing system and rates, total tax potential at FBR level comes to Rs. 13.65 trillion [Income Tax: Rs. 8.3 trillion; Sales Tax: Rs. 3.5 trillion; Customs Duty: Rs. 1500 billion and FED Rs. 350 billion] and if we withdraw all exemptions/concessions and waivers as pointed out by FBR chairman a further amount of Rs. 1.5 trillion can be collected.
According to a Press report during Doha parleys between Pakistan and the IMF, there was “disagreement on the next year’s revenue collection target. The IMF demanded to fix it at Rs. 7.25 trillion while FBR showed different scenarios ranging from Rs. 6.8 trillion to Rs. 7 trillion”. It is strange that neither IMF nor FBR bothered to determine the real tax potential as discussed above. Fixation of tax target at Rs. 7.470 trillion is highly low. It should have been Rs, 12 trillion, if not more, in the light of above studies and facts. The onus is now on FBR to post its tax gap analysis on website so that further comments can be made.????
Originally published by Business Recorder at:
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Ms. Huzaima Bukhari, MA, LLB, Advocate High Court, Visiting Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram and Huzaima Ikram & Ijaz, leading law firms of Pakistan. From 1984 to 2003, she was associated with Civil Services of Pakistan. Since 1989, she has been teaching tax laws at various institutions including government-run training institutes in Lahore. She specialises in the areas of international tax laws, ML/CFT related laws, corporate and commercial laws. She is review editor for many publications of Amsterdam-based International Bureau of Fiscal Documentation (IBFD) and contributes regularly to their journals.
She has coauthored with Dr. Ikramul Haq many books that include ?Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
She regularly writes columns/articles/papers for Pakistani newspapers and international journals. She has contributed over 1700 articles and research papers on issues of public finance, taxation, economy and on various social issues in various journals, magazines and newspapers at home and abroad.
?Twitter:?@Huzaimabukhari
__________________________________________________________________________Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation.?He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, ?Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax.
He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.
?Twitter: DrIkramulHaq
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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer.
His notable publications are: Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.
His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .
?Twitter: Adbul Rauf Shakoori
The recent publication, coauthored by these writes, is Pakistan Tackling FATF: Challenges & Solutions, available at:?https://www.amazon.com/dp/B08RXH8W46?and ?https://aacp.com.pk/