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Govt declares ‘war on cash’ to rein in tax evasion
• Aurangzeb says short-term pain to continue for most citizens
• Insists corporations now benefiting from macroeconomic improvements
• Deadline for submission of returns ‘may be extended’; FBR chief denies any such plan
ISLAMABAD: Finance Minister Muhammad Aurangzeb on Sunday announced the government’s “war on cash” as part of a strategy to tap into over Rs9.3 trillion money in circulation and maximise revenue potential.
Speaking at a press conference, Mr Aurangzeb stressed that the “short-term pain” of recent policy measures would remain in place for most citizens, even as top corporations begin to benefit from nascent macroeconomic improvements.
At the conference, the finance minister was assisted by Federal Board of Revenue (FBR) Chairman Rashid Mehmood Langrial, who tried to bust the “myth” around the much-talked-about Rs2.7tr taxes held up in litigation. Instead, he built up the narrative around a potential “Rs7.1tr tax gap” that has to be tapped through technology and massive auditing.
However, both Mr Aurangzeb and Mr Langrial conceded that tax return forms were too complex to be handled by any taxpayer without the help of accounting and legal experts and was one of the challenges to be addressed in the next budget.
The FBR chief said the deadline for submission of tax returns would not be extended beyond Sept 30. There were, however, strong reports that an extension would be allowed for a few days after the expiry of the last date.
The finance minister said non-filers and under-filers were evading taxes of around Rs1.3tr at the individual level. “We must declare war on cash if we aspire to join the G20,” he said, stressing that it could only be possible when transactions are documented.
He claimed that Pakistan’s economy was potentially valued at more than $700 billion — double the current estimate of $325bn — leading to over Rs7tr in annual tax evasion. “We will ensure this documentation as we go forward,” he said.
He said these tax evaders would not be able to purchase vehicles and properties, invest in mutual funds, open bank accounts, withdraw cash, and even face problems in handling deposits.
A digital system will monitor all transactions, cross-referencing them against declared income, with spending caps imposed on non-compliant individuals.
Lifestyle data Mr Aurangzeb added that in order to protect citizens from harassment by tax authorities, there will be an interface ensuring that declared incomes and sources are transparent. “This lifestyle data is already available, but we will now use it properly to boost the tax-to-GDP ratio,” he said.
He said that as of Sept 29, tax filings had more than doubled to 3.2 million compared to 1.6m the previous year, with over 723,000 new filers compared to 300,000 last year. “This proves that we are walking the talk,” he said.
Out of 300,000 manufacturers, only 14pc were registered for GST, while only 25pc of 300,000 wholesalers were registered, he said. To address this, the government plans to register these businesses and implement a “Know Your Customer” (KYC) scheme similar to the banking sector, ensuring manufacturers only supply to registered wholesalers.
“We will use data and get algorithms connected to the tax-to-GDP ratio,” he said, adding that non-registrations would lead to blocked utilities, attaching properties and sealing premises.
He said digital checkpoints were being set up on sea routes to combat smuggling, which costs the country over Rs750bn annually.
On top of that, about 2,000 chartered accounts were being hired to improve the audit capacity of the revenue sector so that under-filing was identified and handled in a professional manner instead of harassment.
At the same time, incentives for tax collectors would be improved to avoid their indulgence in corruption and accountability processes would also be strengthened so that no punitive action was taken against a taxpayer without giving an opportunity to defend without ensuring fairness.
‘Defining moment’
Mr Aurangzeb said the task ahead was now to ensure permanence to macroeconomic stability and push through structural reforms that all past governments had been talking about but without any tangible effort and progress.
“We have to now change the DNA of our economy to export-led growth from import-led growth” that created crises in the past while pushing economic growth beyond 4pc.
“We immediately run short of dollars and face a balance-of-payment crisis and have to go back to the IMF as we cross 4pc GDP growth rate,” he said.
This will lay the foundation on which to build the country with the support of the IMF programme to implement structural reforms that have been delayed for far too long. “It’s our defining moment and this will determine the direction of where we go” with the help of local brains and foreign expertise in pushing the tax-to-GDP ratio to double digits and joining the respectable position in the G20.
The minister said the recent 450 basis point reduction in the central bank’s policy rate due to falling inflation was now enabling the industry and corporations to borrow at effectively negative Karachi Interbank Offered Rate (Kibor) — practically 15-16pc interest rate against 17.5pc policy rate.
In response to this fiscal improvement, the government has rejected recent domestic borrowing offers in the form of treasury bills and bonds (T-bills and PIBs), sending a clear message to the financial sector.
“The government is no longer a desperate borrower. If we borrow, it will be on our terms, and the banking sector must now lend to the private sector,” he said.
He said the four provinces had given an undertaking as part of the IMF requirement for a “whole of government approach” instead of just the federal government for a National Fiscal Pact under which the provinces would improve their tax contribution, introduce uniform tax rates in all provinces, bring legislation for a tax on agriculture sector and takeover expenditures promised under the 18th Amendment.
Speaking on the occasion, the FBR chief said the Rs7.1tr revenue gap for this year includes Rs3.4tr in GST, Rs2tr in income tax, and over Rs700bn in smuggling losses.
He revealed that despite the withdrawal of exemptions, inclusion of additional items and an increase in GST rate from 16pc to 18pc, total collections on account GST remained unchanged at Rs3.1tr in 2008, 2016 and 2024.
“This points to massive tax evasion, corruption and perhaps a combination of both” because some penalties could legitimise all unfair practices,“ he said.
Talking about the Rs2.7tr worth of tax cases, Mr Langrial said that about Rs2.1tr worth of pending cases were of procedural nature filed by tax officials against decisions of appellate forums and recovery of the remaining was lower given the success rate of FBR cases.
Published in Dawn, September 30th, 2024
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