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Tax targets versus tax gap—I

“…the FBR’s revenue target has been increased to Rs 9,415 billion, requiring a 31% increase over collection of Rs 7,180 billion in the recently concluded financial year… The task seems to be onerous and mammoth, as in the last eight years, the FBR’s revenue has, on average, grown at a pace of around 14% per year. Although the current growth targets are very close to those achieved in 2021-22 (29%), yet the underlying assumptions about GDP growth, inflation, LSM and import growth are quite adverse as compared to that year”—Achieving enhanced revenue targets, Dr. Hamid Ateeq Sarwar, former Member Tax Policy, Federal Board of Revenue (FBR).

An outstanding officer of FBR, presently working with an international donor agency, in his above quoted brilliant analysis of underperformance of the apex revenue authority, while suggesting different ways and means to achieve what he called “enhanced targets”, has not made an effort to determine the actual potential of tax revenues, which is not less than Rs 16 trillion, at federal level alone vis-à-vis prevalent monstrous tax gap.

The problem with our tax managers is that they always analyze the target assigned on the basis of existing taxpayers, who file returns and statements, but conveniently ignore the overwhelming majority having taxable incomes and/or supply taxable goods, but are either not registered with FBR or commit open defiance even after withholding of taxes at source.

In the Tax Gap Report 2022 available on its website, FBR claims that its in-house researchers (sic!) adopted “the top-down and bottom-up approaches to estimate the tax gap”. The Report says: “The topdown approach relies on the National Accounts Data and Supply-use Tables and is used to estimate the Sales Tax gap. The bottom-up approach relies on the microsimulations and is used to estimate the Income Tax and Customs Duty gap”.

The methodology adopted in the Report to determine tax gap is faulty and flawed. The Report does not take into account the huge informal economy relying on official figures, which are admittedly not trustworthy. A detailed analysis of the same will be made in a separate article. This one is restricted to highlighting the real tax potential/gap. The Report says that it “measures the compliance gap and does not account for tax expenditure”. The term “compliance gap” itself is questionable. FBR has failed to tap the real tax potential by analysing simple data of unique mobile users.

It is pertinent to mention that according to Pakistan Economic Survey (2022-23), labour force increased from 65.5 million in FY 2017-18 to 71.76 million in FY 2020-21 and the number of employed persons increased from 61.71 million to 67.25 million during the same period. According to information provided by Pakistan Telecommunication Authority (PTA) on its website, total cellular subscribers as on May 31, 2023 were 192 million (81.03% mobile teledensity).

Out of the total mobile subscribers, 124 million were broadband subscribers (54.43% mobile broadband penetration), 3 million fixed telephony subscribers (1.09% fixed teledensity) and 127 million broadband subscribers (53.65% broadband penetration). Not less than 120 million unique mobile users (many having multiple SIMs) were thus paying advance/adjustable income tax of 15% (earlier it was 12.5%) from July 1, 2022.

The number was not less than 110 million as on June 30, 2022 and about 105 million at the close of June 2021. It means that FBR could have found at least 20 million taxable persons from this database alone—all were paying advance/adjustable income tax. The number of individual tax filers on FBR’s Active Taxpayers Lists (ATL) is even less than 4% of unique mobile users paying advance income tax under section 236 of the Income Tax Ordinance, 2001. These facts/data prove beyond any doubt that presently, the entire taxable population and even those having no income or income below taxable limit are paying advance/adjustable income tax at source as mobile users.

In case all unique mobile users paying advance tax file income tax returns, there would be refunds payable to at least 90 million individuals having no income or income below taxable limit though cost to claim would be much higher than their withheld tax—sadly, FBR does not acknowledge them as “taxpayers” and is not even ready to pay refunds to existing income tax filers.

Huzaima Bukhari, Dr Ikramul Haq and Abdul Rauf Shakoori, "Tax targets versus tax gap—I," Business recorder. 2023-07-14.
Keywords: Economics , Growth targets , GDP growth , Inflation rate , Income Tax , Tax returns , Tax Ordinance , Tax revenues , Tax filers , FBR , ATL

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