Time for Plan B

The Federal Board of Revenue (FBR) has made headlines in recent days with its announcement of cracking down on tax evaders with threats of placing their names on the Exit Control List (ECL), freezing bank accounts, blocking mobile phone SIMs and blocking their Computerised National Identity Cards (CNIC), if they do not willfully pay their dues.
Weeks earlier, the proverbial carrot to go with this stick was also publicized in the form of two proposed measures; the Tax Registration Enforcement Initiative 2012 and the Investment Tax Scheme 2012. Although both sets of reforms were billed to be implemented from October 2012; their implementation is still pending a vote in Parliament.
FBR officials have conceded that at present only 1.4 million tax returns are filed in the country. Out of FBRs existing data base, only 40 percent of registered companies, 60 percent of salaried individuals, 28 percent of registered businessmen and one in four registered associations of persons, file their tax returns.
The same officials have repeatedly asserted that this multi-pronged approach will bring another 3.1 million entities and individuals into the tax net. The FBR needs to announce a reward scheme for its employees who collect tax from these 3.1million eligible taxpayers.
With ANP supportive and PML (Q) and MQM in opposition, passage of the bill without PML (N) support is not possible. Reliance on the caretaker cabinet for spearheading the drive against tax evaders is a risky proportion for multiple reasons. Firstly, it provides a pretext for more wide-based economic reforms under that setup; which would in turn elongate the period under the watchful eyes of caretakers.
Then, the lack of buy-in from the major political parties and representative bodies of traders, manufacturers and other business segments will be a recipe for street agitation as witnessed back in 2010, when the Government had attempted to introduce Reformed General Sales Tax (RGST).
As it stands today, neither of the amnesty schemes will be approved by the current Members of Parliament. That leaves both the FBR and the Ministry of Finance stuck between a rock and a hard place, as the revenue collection target of Rs2.38 trillion will also not be achieved in FY13. Not reaching the target is secondary. Expanding the tax base is of primary importance. Rewarding the tax hounds with certain percentage of the additional tax collected and plugging the leakages will close the tax gap to within sustainable level.
Recent steps such as the transfer of powers from Customs Collectorates to the Input Output Coefficient Organisation or the earlier wrapping up of the Pakistan Automated Container Clearing System software need to be expedited.
If past record is a guide, consultation with various trade bodies will result in enlargement and continuation of presumptive tax schemes. Unwinding the presumptive tax regime over a period of two to three years by way of giving an option - whereby those who opt for presumptive tax pay presumptive rate - and moving towards a regime based on filing of returns needs to be the way forward.
Refunds and under invoicing/mis-declaration need to be tackled effectively with third-party developed solutions. And lastly, tax audit is essential for universal self-assessment schemes.