KARACHI: Federal Minister for Finance and Revenue Muhammad Aurangzeb revealed on Thursday only 14 percent of companies in Pakistan were registered for sales tax, leading to an estimated loss of Rs3.4 trillion ($12.2 billion) due to tax evasion, highlighting significant compliance and revenue generation challenges in the country.
Pakistan’s narrow tax base and persistent issue of tax evasion have continuously contributed to insufficient revenue collection for the fragile national economy. This shortfall exacerbates the government’s reliance on running high fiscal deficits, often financed through domestic and international borrowing, which further increases the nation’s debt burden.
Last month, the authorities prepared a plan to revamp the Federal Board of Revenue’s (FBR) tax collection system, with the help of economic and technological experts, following a detailed analysis of tax collection patterns over the past 25 years.
The government has also decided to fully digitalize the tax system to prevent leakages, even as a large segment of the national economy remains undocumented.
“Only 14 percent of the companies are registered for sales tax,” the minister said in a televised news briefing in Islamabad. “I will not delve into the consequences of non-registration as I have already spoken about it earlier.”
In his media talk on the “war on tax fraud” alongside FBR Chairman Rashid Mahmood Langrial, he said the overall tax evasion in Pakistan amounted to approximately Rs7 trillion ($25 billion) of which income tax evasion was around Rs1.3 trillion ($4.6 billion).
Aurangzeb said tax fraud could be divided into many categories with the first and most important being the misreporting of turnover and input claims. He explained that companies involved in such malpractices claimed a high ratio of input tax so that tax payments could be “suppressed and mitigated.”
He highlighted the importance of being part of a tax regime which was “adaptable and fair” where all segments of society and classes play their role. He said data analytics were being used to “plug leakages” in tax collection to ease out the burden inflicted on lower classes.
Aurangzeb said it was imperative to raise the tax-to-GDP ratio to 13-13.5 percent so that Pakistan could become a sustainable country going in the right direction with strong remittances, exports, upgraded credit ratings and a decreased policy rate due to declining inflation that also brought the lending rates down.
He added that the country could not afford to have any kind of “leakage” in terms of tax collection anymore. He gave examples of businesses in different sectors and how they misrepresented data to evade taxes.
The finance minister said 19 businesses in the cement sector that represented 100 percent of total reported sales owed around Rs18 billion ($64.3 million) to the government. Similarly, he added that the shortfall in the beverages sector due to tax evasion amounted to Rs15 billion ($53.96 million) where 16 businesses represented almost 100 percent of the total sales.
Talking about the textile sector, the finance minister said 28 weaving businesses represented 80 percent of the total reported sales with tax evasion of up to Rs18 billion ($64.3 million).
Meanwhile, the FBR chairman said the businesses involved in tax evasion were the same ones whose owners would hold meetings with government officials and present plans on how to curb tax evasion.
“There is not a bigger fraud being conducted in this country than the input adjustment system,” he said.
“The real appeal today is to professional classes who work as chief financial officers or chief executive officers. They are not the beneficiaries of the fraud amounting to billions of rupees but their signatures are being used which is a criminal act that will have criminal consequences.”
Langrial said the FBR will take action against such people and arrest them after due legal process. He urged every company’s management to not sign the upcoming sales tax return due on October 15.
“There will be no forgiveness this time,” he said.