ISLAMABAD: The huge sales tax gap of Rs 550 billion largely falls in food, beverages, tobacco, textile, wholesale and retail trade sectors.
According to the tax gap analysis issued by the Federal Board of Revenue (FBR) for 2022, the estimated sales tax gap is Rs 519 billion which is 24 percent of the tax collectable under the current sales tax regime.
The figure of Rs 519 billion has been worked out by the FBR on the basis of the “Consumption Approach-National Accounts Data.”
On the other hand, based on the “Value Added Approach-Supply Data,” the tax gap has been estimated at Rs 542 billion. However, the tax gap is around Rs 550 billion taking into account of the Consumption Approach-Supply Data. The methodology adopted by the FBR for calculating the sales tax gap revealed that the FBR has adopted the top-down approach to estimate sales tax gap.
As a baseline methodology, the FBR considered National Accounts data for 2020-21 for calculation of sales tax gap. In this approach, the FBR initially determined the sales tax base by taking into account those sectors of the GDP that come within the ambit of sales tax collectable by the FBR. By applying 17 percent sales tax on selected sectors’ GDP, first we calculate the gross tax collectable.
The FBR subtracted the tax expenditure from the gross tax collectable to calculate tax collectable under the current sales tax regime. Next, gross tax collection is subtracted from tax collectable to calculate tax gap.
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According to the constitutional scheme of taxation, the sales tax on goods comes within the ambit of the Federation while sales tax on services is within the ambit of the provinces. Therefore, the following sectors have been included to calculate the tax base for FBR related Sales Tax: Mining and Quarrying; manufacturing sector; electricity, gas and water supply and wholesale and retail trade sector.
The data does not capture the underground economy. Since official underground economy estimates are not available, therefore, in this report we do not account for the underground economy for the tax gap calculations. The FBR has also excluded the agriculture sector as it is largely exempt from the sales tax.
The economic activity in this sector largely comprises construction related services that fall within the provincial domain, therefore, we have excluded this sector from sales tax gap calculations. Since sales tax on services is within provincial domain almost all the services sectors are excluded from the sales tax gap calculations, the FBR report said.
For robustness check, the FBR has used the supply-use table which is a detailed input-output model of Pakistan’s economy to estimate the potential sales tax. This supply-use table provides information on final consumption as well as production and use of goods and services in the economy.
It includes detailed information on gross value added, the use of intermediate inputs, value of import and exports, value of government and private sector investment expenditures for each of the 35 sectors. The most recent supply-use table was available for the FY 2020 which has been used to estimate the sales tax gap. In this approach, the FBR has directly calculated sales tax gap.
Considering the same sectors, we apply FBR’s statutory rates for 2020-21 to calculate the potential sales tax gap.
Considering the same sectors, the FBR has used consumption approach to estimate the compliance gap. In this approach, by applying 17 percent sales tax on final consumption, first we calculate the gross tax gap which includes both tax expenditure and tax gap. Next, we subtract the tax expenditure from the gross tax gap to calculate tax gap under the current sales tax regime, the FBR added.
Copyright Business Recorder, 2023