Blatant tax evasion

 

The fiscal deficit of Pakistan is about Rs1.3 trillion. Although tax collectors resort to increasing the tax rates of existing taxpayers, but tax avenues worth Rs600 billion are not touched, as the evaders represent the elite.

When the tax collectors facilitate the influential by not confronting them, despite availability of evidence, they expect these elites to look the other way when they indulge in large scale corruption. Low tax revenues are not only due to exemptions granted to special groups, but also due to the reluctance of tax collectors to invoke law that might hurt the interests of highly influential segments of society.
Documenting traders and taxing agriculture would not generate enough revenues to significantly increase the tax-to-GDP ratio. The state would have to take action in protected spheres that only serve the rich and super rich among businessmen, politicians and bureaucrats. Take, for instance, the reluctance of the authorities to demand details of the income of resident Pakistanis from countries with which we have signed double taxation treaties. In order to avoid double taxation, Pakistan has signed double taxation treaties with countries like Dubai, Abu Dhabi, United Kingdom and the United States. Under this treaty, the signatory countries do not tax the income of each others’ nationals if they reside in their home country. It is assumed that these residents file their tax returns in their home country of even the income earned in the other country. This way each country avoids double taxation of citizens.
It is a well known fact that many Pakistani citizens while living in Pakistan earn substantial income from their investments outside the country. Legally, they are bound to declare their income while filing income tax returns and pay the income tax accordingly. Dubai, UK, and United States are the three main countries where resident Pakistanis have invested heavily in real estate, and business ventures. However, very few declare the income thus earned. The tax authorities remain silent and do not probe the possible tax evasion that could easily be verified by requesting the signatory country to provide the details of income a Pakistani citizen earned in that country while residing in Pakistan.
These countries would readily furnish the information, as the documentation in these countries is efficient and they do not collect any tax from that income due to the double taxation treaty with Pakistan. The most plausible reason to avoid asking the required information, probably, is that this would involve politicians from all sides of political divide and also because many big businessmen tend to pay no taxes on their foreign income. A conservative estimate of a respected economist of the country is that this measure alone would add Rs70 billion yearly to the state revenues.
A separate story of loot can be witnessed in the power sector, where the IPPs have been exempted over their life time on the profits they generate. The section Industrial Zones have been exempted from income tax for ten years, but for IPPs it goes up to 27 years. If we take the case of HUBCO, the first IPP of the country, it is earning tax free Rs30 billion annually. In the past 20 years, it has earned around Rs600 billion — almost five times its total investment in the project. Now, since the government has allowed income tax free income it cannot interfere in this earning. According to tax experts, the government can levy corporate asset tax on the entire corporate sector. It can levy an annual corporate asset tax of 2 percent on the entire corporate sector and simultaneously reduce the corporate income tax by 2 percent. This way it will collect Rs70 billion tax from the exempted sectors without increasing the final tax liability of non-exempted sectors of economy.
There are some exemptions that may look small in nature as the net revenue gains would be nominal, but have great symbolic importance. The ruling elite and some high army posts and judges are exempt from income tax. This is against the principle of equity and fairness. When we say that all incomes should be taxed uniformly, then we cannot exempt any individual on the basis of his post. Another glaring example in this regard is that of top bureaucrats. The government a few years back announced that the house rent and maintenance and car entitlement should be monetized. Each high ranking government servant gets a monetary benefit of Rs150,000-200,000 per month. Yet, the car entitlement is still availed by many, in addition to the monetization benefit. Now this huge additional annual income of Rs1.8-2.4 million is taxed at a “special rate” of 5 percent only. This is unacceptable and amounts to cheating the average taxpayers who are taxed heavily, even on the house rent and car allowance they get.
Under-invoicing is another scourge that is not only eating away revenues worth billions of rupees, but also taking millions of job abroad as products imported at a low value save not only import duty but sales tax that is usually even higher than import duty.
It is interesting to note that bulk of the under-invoiced items come in consignments that are imported by telephonic transfer of money without opening a formal letter of credit through banks. This is a valuable avenue for both the importers and the customs staff that has to connive with them to clear the goods. The consignment of the under-invoiced goods is imported at the customs post where the officials of the importer’s liking are posted.  He presents his papers for clearance during the duty hours of his contact. He prepares a computerized invoice and the list of the contents as he likes them to be cleared. He may write down the actual price but reduce the contents. For instance he may declare the actual price of, say, artificial leather, but tinker with quantity in a big way. This can be done easily as the clearing officer is in complete collusion with him.
It is worth noting in this regard that it has been made mandatory that the list of items present in the consignment also be enclosed in the imported container. However, for almost all the TT based consignments, this list is not enclosed for fear of the remotest chance that the consignment might be opened by a person not in contact with the importer. The penalty for absence of a goods list in consignments ranges from Rs5,000-500,000. An analysis of all TT-based imports would reveal that in almost all cases, a fine of Rs5,000-7,000 was imposed — meaning that the list of goods was absent. Why the highest penalty was not imposed on importers that have been cheating for so many years is not a puzzle. The bulk of under-invoicing is done through wrong declarations.
The planners, as a first step, should make it mandatory that all imports should be conducted through letters of credit, so that the trail of goods imported is fully documented. Penalty for a missing import item list in the consignment should be fixed and increased without any discretion of the clearing officer. Now that the technology is available, the CCVT footage of all containers opened and cleared should be available for review by higher officers or at the request of any citizen who must be made to bear the cost of this review.
Under-invoicing is also conducted, even in consignments imported against letters of credit, but in this case the actual price is under-invoiced instead of a wrong declaration. Import Tariff Price evaluation was introduced in Pakistan in the mid-90’s to eliminate under-invoicing, through technology. The rates of all raw materials and metals are available daily on some reliable websites that are archived in the Pakistan Customs’ data base. When consignments of these raw materials are presented for clearance, the officials compare the prices from their data bases on the date when the letter of credit was opened. In case of lower prices they load the duties and sales tax on the price available in their record. However, for finished goods there is no transparent evaluation system where Customs evaluators use their discretion instead of using technology.