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Whopping tax gap

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ACCORDING to a presentation given to Prime Minister Shehbaz Sharif and the Special Investment Facilitation Council (SIFC), the tax-evasion was estimated to be around Rs5.8 trillion or 6.9% of the GDP on an annual basis on the basis of fiscal year data of 2022-23. The retail sector evasion has been estimated at Rs888 billion, transport sector Rs562 billion, independent power producers (IPPs) Rs498 billion, smuggled-prone items Rs355 billion, exports Rs342 billion and real estate Rs148 billion on an annual basis. In the category of ‘others’, the evasion is estimated at Rs1.607 trillion annually. The highest tax-evasion exists in the Sales Tax, and as per some estimates, it could go up to Rs2.9 trillion on an annual basis. The customs gap is estimated at around Rs0.6 trillion (Rs600 billion) on an annual basis, including under-invoicing and smuggling.

The data is an eye-opener as it highlights huge leakages in tax collection but regrettably instead of focusing attention on plugging these leakages the successive governments adopted the easiest path of burdening the existing honest tax-payers and hiking electricity and gas tariffs every now and then. In fact, these estimates do not include staggering losses caused in the energy sector due to free for all thefts and defaults which is a mockery of the claims about enforcement of the writ of the State. The data is a confirmation that the economic and financial woes of the country can be addressed satisfactorily if genuine and verifiable measures are taken to turn tax evasion into tax compliance. It is somewhat satisfying that several initiatives are being mulled/implemented to improve tax collection but their effectiveness is dependent upon the nature of implementation and the commitment of the authorities concerned to enforce them across the board. These include restructuring the FBR through the Federal Policy Board, separation of Tax Policy Office, joint valuations, separation of Customs and Inland Revenues, collaboration with NADRA, PRAL restructuring, digital invoicing, SWAPS, Tajir Dost Retailers Scheme, documentation law and modern governance structure and oversight boards. In fact, the losses on account of smuggling can be reduced to negligible level given proper monitoring and accountability of the law enforcing agencies assigned the task of curb smuggling on land and sea routes. Similarly, the government is starting registration of the retailers from next month and the tax collection is expected to start from the new financial year and, therefore, it would become clear how effective this measure proves in the next few months. As the identified leakages have the potential to reduce crippling reliance of the country on external resources, we hope the SIFC would encourage preparation of a comprehensive action plan for each of the identified sectors and implement it with full might of the state.

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