Now that the IMF has put restrictions on the $3 billion odd remaining two tranches to Pakistan, it is high time the decision makers started working on ways to generate more tax revenues by increasing and deepening the tax base.
Alarm bells have been ringing at the taxmens offices for a while now. FBR Chairman Salman Siddique himself pointed out that out of a population of 180 million; only about 2.5 million are registered tax payers.
He had also acknowledged that the tax gap - which is the difference between those legally under obligation to pay taxes and those that are actually complying with this regulation - is 70-80 percent.
The real problem is that a large majority is unwilling to pay taxes and it is hard for FBR to reign in these people without adequate support from other law enforcement agencies. "There is no political will of provincial governments to collect it," Jehangir Tareen told BR Research earlier this year, adding that the arthi or the middleman also pays zero tax.
The key reason for that is the lack of benefits/public goods provided by the government: "When individuals witness the services being offered, they are more likely to pay their dues in the future," remarked Zafar Iqbal, a partner at Azimuddin Law Associates, a tax law firm in Karachi.
Experts acknowledge that discontentment over the governments ability to channel revenues towards the provision of amenities and development is limited. It is perplexing that many tax evaders contribute generously to charities and humanitarian efforts.
In a plan that envisages the nabbing of 2.3 million tax evaders; the FBR has highlighted 700,000 individuals who frequently travel abroad and spend heavily, but are not paying taxes.
It appears that the way forward has to incorporate the improvement of tax collection mechanisms. The taxman must use a carrot and stick approach, but the bait and the baton must both be effective in identifying and targeting evaders.
Efforts have been made by the authorities to encourage commercial and industrial consumers of electricity with annual billing above one million rupees to file their returns of income, but the desired results haven been achieved as yet.
Another tool proposed by the FBR to identify and track down the eligible taxpayers is the NTN. Federal Board of Revenue Chairman, Salman Siddique, recently stated that the computerised national identity card numbers (CNICs) would become national tax numbers (NTNs) of the existing and new taxpayers from December 31, 2011.
The Federal Board of Revenue (FBR) has also decided to utilize credit card data to crackdown on tax evasion by large retail stores, who tend to hide sales charged on credit cards. The FBR is eyeing utility bills to evaluate the actual sales of hotels and restaurants.
On paper, these proposed measures sound feasible in controlling the issue of tax evasion. However, they will be futile if proper implementation is not ensured. The role of the FBR is to formulate proposals but the government has to play an effective role by simplifying tax laws.
Legislators also have to be reigned in for their tax dues. Although their contributions will not plug the tax gap single-handedly; increased collections from them would send a strong message to others.
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