THE arrest of four persons linked to a sales tax fraud underlines the rampant corruption in the Federal Bureau of Revenue and legal loopholes offering incentives to the crooked. It exposes ineffectiveness of the efforts of successive governments to reform the corrupt tax administration and a defective tax policy. Tax frauds are not new to this country. Nor are they uncommon. In 2005, for example, the government ended up refunding Rs60bn in sales tax claims against the collection of Rs50bn. The official response was strange. It exempted major industries from the sales tax rather than bringing the swindlers to justice and correcting the system's inadequacies.

Tax frauds of such magnitude are not possible without the connivance of a corrupt official machinery and lacunas in tax laws. This was also highlighted in a recent report of the federal tax ombudsman investigating pilferage of containers entering Pakistan under the transit trade pact with Afghanistan. The ombudsman's report pointed out that the pilferage had caused a whopping loss of Rs37bn to the exchequer in four years. It said this magnitude of fraud was not possible without the help of customs officials and lack of checks. If the past is anything to go by, all those involved in causing losses of billions of rupees to the exchequer, and their abetters in the FBR, will escape punishment for their crime. There does not appear to be any precedent where a person or official involved in tax fraud has done time in jail. Little wonder then that the tax gap — simply put, the difference between tax owed and tax paid on time — has increased to 79 per cent in Pakistan against nine per cent in the UK and 22 per cent in the US. According to the World Bank's Pakistan Tax Policy Report 2009, the amount of tax evaded in 2007-08 stood at Rs796bn

Tax pilferage — evasion and avoidance — is common across the world. But it is the extent of pilferage that is shaking the very foundations of Pakistan's fiscal policy at the cost of the common people. The effects of tax pilferage can be far-reaching for government revenues as well as society because it leads to growth in the black economy and speculative investments. Incentives to pay taxes honestly lose their lustre. The government is also forced to impose more taxes, mostly indirect levies burdening the poor and the fixed-income segments of society, to raise revenues. It is, therefore, imperative to curb tax pilferage. That will not be possible unless tax administration and policy are revamped and tax fraud is treated as a very serious crime.