The Federal Board of Revenue (FBR) is likely to introduce legal changes in tax laws for effective enforcement and return filing by the non-compliant taxpayers in the 2009-10 budget. Sources told Business Recorder on Saturday that the non-filing rate among the taxpayers was very high, reflecting non-compliance in Pakistan.
According to a FBR report, In Lahore, almost 50 percent of income taxpayers do not file their returns. A considerable number of sales taxpayers have never filed sales tax returns. Even in the Large Taxpayer Unit (LTU), Islamabad, around 10 percent of the taxpayers are not filing or are filing late.
It is necessary to take a series of measures to change this situation. These measures include reviewing some aspects of the legal framework, the enforcement procedures and the management of the enforcement functions of the tax machinery. The sources said that there were also legal issues for enforcement of return filing, which needed to be clarified in some particular situations.
For example, non-salary earner taxpayers, whose income is exclusively taxed at the source as a "final tax" should not be required to file return. On the other hand, withholding tax agents, with no withholding of tax in a given month, should be required to file return.
Another legal concern is the automatic application of penalties by the IT system. There is some resistance in the FBR to the automatic application of penalties, which is the best practice. These issues should be resolved and, if necessary, the legislation or the relevant order should be modified.
About enforcement procedures, the FBR should review the taxpayer register with a view to ensuring that the taxpayers' tax obligations are correctly indicated. It is also necessary to identify taxpayers, who are inactive - the ones who have not filed or paid for a long time.
These taxpayers should only be dealt with through the "White List" scheme. As far as return processing is concern, it is critical that all returns are timely processed and uploaded to the return database (for example five days for sales tax and two months for income tax).
Expanding the e-filing system would facilitate the filing enforcement significantly. It will also be necessary to review the FBR workflow systems to produce intimations for multiple periods and taxes (integration) and to follow up on the relevant cases. Once the data is prepared, the taxpayers should be selected for enforcement action and compliance.
The FBR should give priority to those with higher potential tax due and those with greater probability of recovery. The tax should be calculated based on previous returns, or sales made by the taxpayer (invoices informed by their clients). The taxpayer history of compliance (filing until recent months) or other indication of activities such as imports, exports, or clients' invoices should determine the probability of recovery, the sources added.
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