Pakistan’s tax gap reaches alarming Rs7 trillion

The Federal Board of Revenue (FBR) has revealed a staggering tax gap of Rs7 trillion in the previous fiscal year (FY24), a significant increase from Rs1.289 trillion in FY22. This alarming rise highlights the urgent need to boost tax compliance to meet International Monetary Fund (IMF) targets.

The FBR’s latest report reveals a worrying trend, with the sales tax gap widening from Rs519 billion in 2022 to Rs3.2 trillion in FY24. This is primarily due to tax evasion in key sectors, low collection rates, fake invoices, capacity constraints among tax officials, and corruption.

To address this issue, the FBR has planned a comprehensive reform package to be implemented over the next three to four years. The package includes the introduction of digital invoicing for all manufacturers, desk audits of tax returns, performance-based bonuses, and a documentation prize scheme to encourage compliance.

The most significant reform will be mandatory digital invoicing for all manufacturers, which will be implemented within the next four to five months. Tax officials will also receive training to better understand value chains and sector experts will be appointed to strengthen oversight.

The FBR also plans to implement a ‘citizen monitor’ scheme, rewarding purchasers who produce non-digital receipts from shopkeepers. Currently, point-of-sale (POS) systems are installed in 33,000 outlets, and the number will be expanded to 60,000 as part of the reforms. The revival of the POS purchaser award system is also under consideration.

The income tax gap has also widened significantly to Rs2 trillion in FY24, up from Rs730 billion. Individuals and Associations of Persons (AoPs) alone accounted for Rs1.3 trillion of this gap, with collections from these groups totaling Rs500 billion in FY24.

Under the planned reforms, the FBR will engage between 2,000 to 4,000 Chartered Accountants (CAs) or ACCA auditors for a year to conduct desk audits of over half of all tax returns. The newly developed software will evaluate tax returns for irregularities and cross-check them against other databases.

The FBR will also focus on creating performance-based incentives for tax officers, enhancing their managerial skills, and developing sector-specific expertise. Major sectors targeted for improved tax collection include textiles, tobacco, sugar, and cement.

The FBR plans to enhance its IT infrastructure and recruit competent staff for the Pakistan Revenue Automation Limited over the coming months. The reforms will be presented to the prime minister next week for approval.

Web Desk Karachi