Effectively checking underground economy: World Bank lauds FBR for steps taken through TARP

The World Bank (WB) has acknowledged the steps taken by the Federal Board of Revenue (FBR) to effectively check underground/cash economy in Pakistan under the Tax Administration Reform Project (TARP). Sources told Business Recorder here on Monday that the WB report has highlighted measures taken by the FBR for checking black economy. According to the report, important measures were also implemented under TARP to control the underground/cash economy.
In particular, the requirement of payment through cheques for amounts above Rs 50,000 to qualify for sales tax input credit was introduced. Also, the withholding system was expanded and now sales to large taxpayers are subject to a two percent withholding tax collected by the large taxpayers. These measures are complemented by the recent law disallowing tax input credit in the sales tax (adjustments) and deductions (expenses) in the income tax resulting from purchases from non-active taxpayer.
The report said that the TARP's achievements included improvement in taxpayer registration, control of stop-filing, control of tax arrears, audit, refund, and taxpayer services. The project has also assessed how the tax administration legal framework affected TARP progress, and how TARP achievements may help in reducing the underground/cash economy.
The TARP has been successful in improving the FBR taxpayer registration system. A single taxpayer registration number has been introduced and will be the only number to be applied to register taxpayers in all taxes. Also, the FBR has been successful in identifying and flagging inactive taxpayers as "dormant" taxpayers, which is crucial for improving control of non-filers. FBR has also started cleaning up the economic activity code assigned to each taxpayer, which is critical for producing tax statistics by economic sectors and for performing risk analysis. The number of registered and active taxpayers has increased sustainably in the last 3 years - from July 2008 to July 2011 the number of active taxpayers grew from 3.139 million to 3.766 million taxpayers (almost 25 percent), the report said.
At the same time, the electronic filing has also been improved consistently. Now all sales taxpayers and the companies are required to e-file their annual income tax returns. More recently, the e-filing requirement has been extended to withholding statements. The e-filing improves considerably the quality on the return data: most of the common errors made by taxpayers are eliminated, data -entry costs were reduced and information on e-filed returns is immediately available for enforcement actions.
The control of non-filers has significantly benefited from the introduction of e-filing, particularly for sales tax. It has also benefited from enforcement measures with a focus on identifying inactive taxpayers and notifying non-filers (e-notification) in a massive way. A landmark in enforcement measures is introduction of the active taxpayers list (ATL), which includes taxpayers that are active, ie regularly submit their tax returns. The ATL was successfully implemented for sales tax and now is being extended to income tax. The FBR now has the ability to disallow sales tax input credit (adjustment) originated from taxpayers (suppliers) who are not on the ATL. Similarly, the FBR can disallow deductions claimed as expenses in the income tax paid to suppliers that are not included in the ATL.
To increase effectiveness of non-filers control, the FBR's Enforcement Wing is prioritising non-filers control actions according to the size of the revenue at risk. ST non-filing has been brought down considerably (less than 2 percent in LTUs) and around 11 percent in RTOs. The non-filing of companies in the income tax has also been reduced and is now in the range of 10 percent in LTUs and 16.5 percent in RTOs. The same has happened with withholding tax for companies. Although the non-filing rate has been brought down to 37.7 percent; it is still too high.
However, there is still enough room for improvements in non-compliance control, particularly in withholding taxes and income tax advanced payments. The non-filing rates are very high in the RTOs and even in LTUs (Islamabad and Lahore) for the period July 2010 thru June 2011, the report added. The legal framework for tax administration has improved considerably, even though it is still inadequate. An extensive harmonisation has been made between the sales tax and income tax legislations. The penalties have been harmonised in the sales tax and income tax legislations. The main penalties harmonised were for the following faults: do not register, do not inform changes in registration, do not file a return, do not pay the full amount of the tax due in the return, repeating erroneous calculation in the return, issuing tax invoices without being registered/authorised, issuing invoices without complying with invoices regulation, do not issue invoices for a taxable transaction, do not maintain records required under the sales tax act, under report tax, do not withhold tax when required, do not withhold tax, late payment of withheld taxes when required, do not present statements or other information required by FBR, do, not produce records to the FBR, and do not pay the tax resulting from an audit assessment. The tax acts have also been harmonised with regard to the application of the ATL.
Also, legislations have been improved by bringing up to the FBR Board critical enforcements powers. Now the FBR Board has the powers to select taxpayers for auditing, to send e-notifications, to apply penalties, etc. The FBR Board also can delegate these powers down to the relevant commissioners, the WB report added.