ISLAMABAD: The country's tax revenue shortfall ballooned to a staggering Rs7 trillion in the last fiscal year (FY24), up from Rs1,289 billion in FY22, Dawn learned from sources, highlighting the urgent need to strengthen tax compliance to meet IMF targets.
This significant increase, almost equal to the Federal Board of Revenue's (FBR) total collection for fiscal year 2023-24, highlights a worrying trend and calls for immediate strategies to strengthen tax compliance and meet IMF benchmarks.The tax gap refers to the difference between the tax owed by taxpayers and the tax they actually pay.
The FBR’s first tax gap report was compiled in 2022, with the second following three years later in September 2024. These reports provide important data in assessing whether taxpayers are complying with their federal tax obligations.
Official sources on Saturday told Dawn that the alarming data has laid the groundwork for a comprehensive reform plan to be implemented over the next three to four years.The reforms include the introduction of e-invoicing, desk audits of tax returns, performance-based bonuses and a documentary award system to incentivise compliance.
New data lays the foundation for reforms to be implemented over the next three to four years
“We will submit the reform proposal to the prime minister for approval next week,” the official said.
The sales tax deficit has widened from Rs 519 billion in FY22 to Rs 3.2 trillion in FY24, mainly due to tax evasion in key sectors, low collection rates, fake invoices, incompetence of tax officials and corruption.
To address this, the most significant reform, making digital invoices mandatory for all manufacturers, will be implemented within the next four to five months. Similarly, tax officials will be trained to better understand the value chain and industry experts will be appointed to strengthen supervision.
The FBR will also implement a “citizen monitor” scheme which will reward buyers who present non-digital receipts from shopkeepers. Currently, 33,000 shops have POS systems and as part of the reforms, the number will be expanded to 60,000, with emphasis on improving compliance among existing shops. Reviving the POS buyer award scheme, which was discontinued a few years ago, is also being considered.
Poor compliance has also led to a significant increase in the income tax gap, which increased from Rs 730 billion to Rs 2 trillion in FY24. Individuals and Entities (AoPs) alone accounted for Rs 1.3 trillion of this gap, with collections from these groups totalling Rs 500 billion in FY24.
Under the planned reforms, the FBR will hire 2,000-4,000 chartered accountants (CAs) or ACCA auditors over the course of a year to conduct desk audits of more than half of all tax returns, while newly developed software will assess the returns for errors and cross-check them with other databases.
Currently, there is no formal mechanism for reviewing tax returns, and the tax authorities lack the capacity to carry out such reviews: the FBR has only 500 auditors, many of whom lack the technical expertise.
The shortfall in customs revenue has also increased from Rs40 billion to Rs300 billion in FY24. Similarly, tax revenue loss due to smuggling is estimated at Rs700 billion. Once the prime minister approves the reforms, the FBR will seek parliamentary approval for further changes.
The reforms will focus on creating performance-based incentives for tax officials, improving their management capacity, and developing sectoral expertise. Key sectors targeted for improved tax collection include textiles, tobacco, sugar, and cement.
The FBR also plans to strengthen its IT infrastructure and recruit qualified staff for Pakistan Revenue Automation Limited in the coming months.
Published in Dawn on September 15, 2024
