FBR tax gap analysis finds black sector almost equal in size to formal economy

[Naveed Yaseen]

RECORDER REPORT
ISLAMABAD (October 19 2008): The Federal Board of Revenue (FBR) had conducted a tax gap analysis of potential sectors, which identified sectors claiming huge input tax adjustments, and detected that the size of black economy is almost equal to the size of formal sector in the country.

Sources told Business Recorder on Saturday that the architect of 'Computerised Risk-Based Evaluation of Sales Tax' ('Crest') system, Shafqat Mehmud, gave a fact-oriented display of the tax gap prevalent in different parts of world.

The tax gap analysis identified existing situation, remedy measures and proposed systems needed to control evasion for improving compliance. The findings of the tax gap analysis showed that the size of black economy seemed to be almost of the same size as of formal sector.

Some of the other interesting findings of the tax gap analysis confirmed that huge input tax adjustments were claimed, but verifications were not done in the field formations. In the collectors of sales tax conference, the FBR had decided to conduct risk-based audit of those sectors where maximum gap in potential vis-à-vis actual sales tax payment exists and a system would be implanted to effectively check and verify the input tax adjustments.

Sharing his presentation during the recent collectors of sales tax conference, Shafqat, who is also collector of sales tax, informed the collectors that huge gap existed at national level as well as in different sectors. This was evident from the data verified through the tax gap analysis.

Sources said that the FBR seemed to be serious about its genuine role for improving tax collection. This was apparent from the mode prevalent in recent sales tax collectors conference. It was rather a bold initiative by Abdul Wadood Khan to share and implement the finding of CREST study on tax gap analysis.

It is learnt that the major issue which was discussed in the conference was the tax gap analysis and strategy for plugging the leakage. Instead of conducting highly notional exercise, CREST architect gave a comparison of tax gaps in sectors within the country and the situation prevailing in other tax administrations.

The developer of CREST quoted different kinds of data which confirmed existence of huge gap both at national level and in different sectors. He displayed best international techniques and practices used to estimate the gap on the basis of consumption-cum-expenditure size of shadow economy.

He further pointed out that the goods which are imported are not entirely adjusted in the formal economy and, instead, find their way in shadow economy. It was estimated that the size of shadow economy was almost the same size as the formal sector.

During the presentation, the FBR Chairman gave due consideration to such analysis and wondered how such apparent gap was going unabated. He desired that CREST, which has developed the risk-based analysis of different sectors, should be employed for plugging the leakages.

Tax authorities issued instructions to the Sales Tax Wing to formulate a standing operating procedure (SOP) for the transparent implication of CREST-based scrutiny and checking the record of major defaulters. Member, Sales Tax, on this occasion made it clear that the system shall be discrete and audit would be risk-based, selected by the system. He said that data would be shared with compliant sectors to keep all stakeholders on board.

He said those sectors would be selected for risk-based audit in the first phase where there were apparently maximum gap. In the conference, it was noted with concern that so far nothing had been done to verify the input tax adjustment which amounted to half a trillion rupees in 2007-08.

The Member, Sales Tax, through another presentation by CREST team member Rukhsana Yasmin, told the conference that software for the verification of refund and input tax adjustment, which was ready in stand-alone condition, would be made operational with the launching of CREST. The Chairman, commending for the efforts of CREST team, said that the best reward of any team was appreciation by top management.

Sources said that the Member, Sales Tax, had taken a bold initiative during the conference for conducting on line diagnosis of sector claiming huge input tax, which would help in bridging the gap between the due tax and the tax being collected.

It was estimated that if sales tax management can put check on free-for-all adjustment, the effective tax rate would rise to 4.77 percent and this would help the kitty to collect more than a hundred billion rupees.

This would be phenomenal, if happens, as previously tax increase was made by levying more taxes which actually resulted in narrowing the tax base. FBR members and collectors were unanimous that the holding of the issue-base conference was a good idea, which helped in understanding the core issues on the indirect taxes side, sources added.

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