FBR finds $3.8 billion gap in VAT collection

Shahnawaz AkhterWeb Editor

15th Jun, 2021. 03:12 pm

KARACHI: Pakistan through effective policy measures can enhance value-added tax (VAT) collection by around $3.8 billion/annum, according to a report issued by the Federal Board of Revenue (FBR) on Tuesday.

The value-added tax is an important component of sale tax, which is imposed on every value addition in supply chain. The existing sales tax collection is around $26.1 billion. The VAT collection is around $22.3 billion. The authorities have detected a gap of around $3.8 billion, which is 23 per cent of the total VAT collection.

The gap is the difference between the potential VAT collection under a benchmark or standard regime of VAT (where there are no exemptions, lower rates or special treatment of any type of consumption or sector / class of taxpayers), and the potential VAT collection under the current regime, which includes any special treatment of consumption or sector / class of taxpayers.

“The VAT policy gap estimates the revenue foregone due to the current policy of the government,” the FBR said.

Efficient tax collection is considered to be a cornerstone of a good tax system. However, because of the non-compliance and other VAT foregone, this efficiency may not be achieved; therefore, it creates a gap between potential VAT and actually collected VAT.

The FBR makes sales tax collection for the fiscal year 2019/20 as a benchmark to determine the collection of VAT gap. Given the tax base, if the taxes remained unpaid, it would create problems for the already burdened taxpayers, which is unfair and would hurt the economy.

Further, these unpaid VAT would put a burden on the overall public finances, resulting in either curtailing the government expenditures or increase the debt burden. Both of which are detrimental for growth and development goals of the government.

Despite healthy revenue growth, especially by the revenue board for the period 2001/20 where average growth was 13.9 per cent, Pakistan’s overall revenue collection has been low, compared with the expenditure outlays.

One of the core reasons for these under or low payment in relation to the base is because of the tax expenditures. These are normally reported and governments throughout the world use tax expenditures as an alternative policy option to achieve social objectives and promote economic growth.

The tax expenditures as a percentage of the total tax collected (income, sales, federal excise duty and Customs duty) have been increasing over time. In the Tax Expenditure Report 2020, based on the data pertaining to the financial year 2018/19, it has increased to an estimated Rs1.150 trillion in which the tax expenditure for the sales tax amounted the highest at Rs518.8 billion (45 per cent of the total expenditure), and in Customs duty Rs253.1 billion (22 per cent). In FY 20/19, the FBR’s tax collection was Rs3.828 trillion. Overall, the tax expenditure-to-GDP ratio stands at around 3 per cent.

Understanding the scale and the scope of gap in VAT and evaluating the cost and benefits, an analysis is prerequisite for fiscal governance, especially for the high deficit countries such as Pakistan.
One of the suitable approaches to measure the VAT gap is top-down approach. In the present analysis only “VAT-GAP” model estimation is done using supply use tables.

The sales tax is currently the single largest tax revenue source for the FBR. In FY 2019/20, it amounted to Rs1.597 trillion, which is approximately 40 per cent of the total tax collected by the revenue board.
For the sales tax (domestic), the base is considered to be the Large Scale Manufacturing (LSM) and for the sales tax (imports) the base is imports. The assessment of VAT gap provides a tool to tax administrators, policymakers and relevant stakeholders, which can be roped through policy choices.


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