In a recent report, the International Monetary Fund has estimated a tax revenue gap of more than 11pc of the country’s gross domestic product, or Rs3.3tr.

Tax capacity is about 22.3pc whereas the tax-GDP ratio is 11.5pc. The difference between actual ratio and the potential is the gap.

The sizeable tax revenue gap is due to a narrow tax base, the extensive use of tax concessions and exemptions, weaknesses in revenue administration, low taxpayer compliance owing to informal economic activity and the under-reporting of formal income.

The tax amnesty scheme encourages people to evade taxes in the hope to whiten their black money through another tax amnesty in the future. Therefore, such schemes widen the tax gap

Obviously, the tax revenue gap rests on two components — the tax policy gap and the enforcement gap.

Concessions and exemptions are the major factors contributing to the tax policy gap which results in substantial revenue losses. During 2015-16, revenue losses incurred on these counts stood at Rs395bn.

Under the sales tax regime, concessions and exemptions on import and local supply were of Rs207bn, followed by Rs120bn and Rs67bn for customs duty and income tax, respectively.

Normally, the government announces incentives to boost growth-specific sectors of the economy.

For example, a concessionary sales tax regime was introduced for the five export-oriented sectors —including textiles (including jute), carpets, leather, sports and surgical instruments — to increase exports. Tax revenue of Rs163bn was sacrificed during the period 2013-14 to 2015-16.

Effective July 2016, the zero-rated sales tax regime was introduced for business concerns of these five sectors. However, exports rather than increasing are declining. For example, textile sector exports declined by 7.4pc during 2015-16 as compared to 2014-15.

Likewise, enormous tax concessions to independent power producers have resulted in revenue losses of Rs154bn during 2013-14 to 2015-16. And yet there is no end to the frequent power break-downs, both in rural and urban areas.

This shows the ineffectiveness of tax incentives in attaining the desired economic goals.

Similarly the tax amnesty schemes introduced from time to time frustrate the efforts of tax authorities to curb tax evasion. The tax amnesty violates the two golden principles of good taxation.

But recently the government introduced a tax amnesty scheme for the real estate sector. The purchasers of immoveable property will pay tax at the rate of 3pc on a differential amount between the value of that property determined by the Federal Board of Revenue and the value recorded by the deputy commissioner’s authority registering or attesting transfer of the property.

Such tax measures discourage those taxpayers who are paying due taxes honestly and are observing tax laws in letter and in spirit. At the same time, the tax amnesty scheme encourages people to evade taxes in the hopes to whiten their black money through another tax amnesty in future. Therefore, such schemes widen the tax gap.

The reasons for the enforcement gap are many including those reported by the IMF.

According to the IMF, the number of people registered for personal income tax (PIT) was over 3.6m in 2014, but it is still a very small figure compared to 56.5m people employed in the country. The number of tax return filers is also considerably low.

In order to improve revenue performance and to bridge the tax revenue gap, strengthening tax authorities is a must. A minimal use of exemptions is needed to provide a level playing field for all sectors of the economy.

It is difficult but necessary to tax the High Net worth Individuals (HNI) to narrow down the tax gap.

In addition, regular and effective examination of records could be a deterrent against tax evasion and under-reporting. At the same time, appropriatly relevant staff could improve recovery out of demand created from examination of records. The effective use of relevant information could help bridge the tax gap besides encouraging documentation.

Listening to public opinion and suggestions could improve mutual understanding and trust between taxpayers and tax officials, and this has to be addressed at each level of tax management.

The tax authorities are under immense pressure to achieve the revenue target of more than Rs3.6tr for the ongoing fiscal year. To realise the target, it is imperative to reduce the tax revenue gap.

Published in Dawn, Business & Finance weekly, December 12th, 2016