The business community in Sindh and Punjab is perturbed at the flurry of notices received from the tax department in the last two months. In certain instances, the department has re-opened cases of tax returns filed over the past five years. Taxpayers have been advised to make prompt payment to avoid tax evasion penalties.

Ahmed Waqar Chairman Federal Board of Revenue confirmed that to improve recovery the FBR has started the exercise of selective audit to” bridge the gap between the tax potential and its realisation.”

These notices, it has been confirmed, are a part of the official effort to meet an ambitious revenue target of Rs1.3 trillion for the financial year 2009. Indicators so far, have not been too encouraging.

The latest numbers reported last week put collection for the first seven month of the current fiscal at Rs628.221 billion against the target of Rs673 billion for the period. The FBR attributes the shortfall to the lower value of imports because of falling international prices.

“A weak, ad hoc and quick fix strategy of resource mobilisation could backfire. It could result in heavy economic cost by worsening the challenging investment climate” a tax expert said.

Like rest of the world, Pakistan is struggling with a drooping growth graph. While other nations are high on tax cuts and direct bailouts for industry, its budgetary compulsions require greater mobilisation of resources to bring fiscal deficit to manageable limits.

There are no two views that tax to-GDP-ratio at 10 per cent is abysmally low and needs to be improved. Still in the current economic scenario the projected revenue target is a tough call with the best of strategies. The government’s move to mobilise additional revenue from registered tax payers seems to be flawed.

The FBR might not only miss the target but scare local investors in the process, impacting prospects of an early economic turnaround.

For better compliance and greater resource mobilisation, structural flaws of the tax regime will have to be addressed. Disproportional burden on the salaried class and the corporate sector must be rationalised by bringing all taxable incomes under tax net.

Besides the government needs to improve delivery of services to earn the credibility of tax payers.

“I provide for my own security, bore wells for water, keep generator or UPS for electricity and pay for health and education. Citizens have to fend for themselves because of the government’s failure to provide basic facilities. So why should they pay taxes? Let the government improve governance and earn the public goodwill and you will see better tax compliance”, said a leading businessman of Punjab frustrated with both the federal as well as the provincial governments.

“Under donors’ pressure, the government has opted for a tested and failed strategy of depending on lopsided tax regime to achieve the best possible results”, said another Karachi business tycoon.

“They are not just nabbing barons who have skills and resources to deal with spiteful officers but small chaps like myself. The dues that they calculated against me were way beyond my means. The criteria they used to arrive at the fabulous amount was ridiculous. For example they included travelling cost among many other heads to arrive at the net worth of my business. Most of my travelling is sponsored. Still it took a lot of persuasion and some settlement cost before reconciliation was finalised”, a fashion designer told Dawn privately.

“It ruined my days on end and what did the government get? Bad name”, the young man questioned and answered in a bitter tone.

“A deterrent is a prerequisite for the self-assessment scheme to deliver. No one pay taxes happily anywhere. They pay only when there is fear of being caught. In Pakistan, income tax collection dropped when assesses were given a free hand. So we had to strengthen audit to induce people to pay taxes honestly”, Ahmed Waqar FBR charman said, defending the move.

“If the universal self- assessment scheme failed to yield desired results, there was need for review. Mere activation of tax audit in the current investment environment may add a few more million but the economic cost may prove to be too high”, said an economist familiar with public finance issues.

“Instead of making an attempt to streamline the tax regime and broaden its base to make it fair and efficient, the federal board of revenue has launched a witch-hunt to harass taxpayers for paying more, ignoring those who successfully evaded the tax net altogether”, said an income tax expert working overtime to reconcile accounts of his client’s companies.

The salaried class pay taxes at source. Besides, their tax paying capacity because of their fixed incomes, is limited. The resource rich corporate Pakistan, on the other hand, is the goose that lays golden eggs for the taxmen. These two segment provide more than 90 per cent of the direct taxes.

“The tax department seems to have set their greedy eyes on the high net worth local businessmen. A sizable number of local corporate entities in Sindh and Punjab have received innumerable notices from the FBR and Income Tax department challenging their tax contributions”, a leading figure of business community in Karachi said.

“The outstanding amounts of tax dues in certain cases, are astonishingly high-- about five to six times the payment made. It is calculated hurriedly by ‘babus’ to extract maximum from business houses. My staff is burning midnight lamp to reconcile accounts by pointing anomalies in official calculations” said a leading exporter of Punjab.

Referring to a tax notice received by him, a businessman said the department’s calculation were too simplistic. All heads of expenses were listed and a column gave percentage of taxes to arrive at the grand total at the bottom without any regard to exemptions.

The chairman FBR said he is willing to settle all such cases where undue demands are made but would not allow people to abuse self assessment scheme. “We are working on the basis of data base accessible to the department. There are cases where people pay electricity bill of Rs1.5 million a year but when it comes to income tax, the amount does not cross the limit of some thousands”.

“It is my duty to improve tax compliance and I will try to meet the challenge to the best of my ability”, he added.

Ahmed Waqar said that the department is working on proposals to introduce a system to tax all taxable incomes irrespective of source and also a consumption tax on services.

A few experts and tax practitioners felt that Pakistan Peoples’ Party government lacks political will to broaden tax net as it fears resentment from its MNAs and MPAs, belonging mostly to rural gentry.

“The unfair and inefficient tax regime that did not allow the tax-to -GDP ratio to go beyond 10 per cent when the economy was at its best cannot mobilise more when there are visible signs downturn”, a tax practitioner commented.

In Pakistan, it is the salaried class and the manufacturing sector that contributes disproportionately high in the context of their comparative strength to the other sectors of the economy. Together they made up around 26 per cent of the economy but contribute over 90 per cent of total direct tax collection. This over dependence is not only unfair but it also impacts the economy adversely.

“The economy is also sagging but our economic wizards seem too preoccupied with stabilisation to worry for the wellbeing of the corporate sector or the growth that depends on its performance”, he added.

What keeps the government away from widening the tax base by bringing in the income tax net the biggest component of the GDP_ the services sector (also farm sector) that generates more revenue than agriculture and manufacturing put together? Your guess is as good as mine.