These figures have been shown in a latest data analysis prepared by Shafqat Mahmood, Collector of Sales Tax, Lahore, for bringing black economy into the documented regime through enforcement and compliance. The sales tax analysis has been prepared for the international donor agencies and FBR to give realistic picture about the un-documented economy and failure of some reform initiatives in tax administration. An action plan has also been provided for 2009-10.
According to data, except exporters who intended to obtain sales tax refund, all remaining are non-filers of sales tax returns. The withholding of income tax as final discharge of tax liability is also helping the shadow economy. The empirical study is not available about Vat-able GDP out of tax base, whereas Rs 106 billion sales were made to un-registered units.
The GDP imports and returns comparison shows 51 percent of imports went to same sector. Other data feeding sources even included Afghan transit trade and smuggling.
The GST behaviour of business community is evident from the fact that out of total sales tax collection in 2008-09, only 0.2 percent units are paying less than Rs 0.1 million with 27.50 percent share in overall turnover. The figures showed non-compliance within the entire supply chain of the businesses and trade. The same trend has been observed in other sales tax figures pertaining to past years.
It is unbelievable that the department has no information about the commodities, sectors or manufacturing activities of 23,426 sales tax registered persons having share of Rs 602 billion in total turnover in 2008-09. The sales tax registration is done as per Harmonised Commodity code allocated for each item or commodity. However, units have declared wrong HS codes to obtain ST registration by showing different business activities. These HS codes determine commodity and sector of the sales tax registered persons.
However, the FBR has allocated miscellaneous HS codes ie (9999) to 23,426 persons as their commodity or business activity is not known to the department. It is a general practice that the industrial Standard International Classification Codes assigned to web filers codes declared are accepted by the department, but such codes suffer errors. The importance of HS codes could be judged from the fact that the calculation of effective rate input/output ratio, value-addition depends upon correct codes. These codes are basic resources for further evaluations, determination of effective rate, input output ratio and value addition.
Without fixing codes, sector-wise benchmarking is not possible for sector analysis and accurate information about the sales tax registered persons. The implications of declaring wrong HS codes for sales tax registration purposes could be judged from a few examples. A unit declared HS code 329000 for showing 'other manufacturing activities', whereas actual code (231000) showed glass manufacturing activity.
A unit declared HS code 329000 showing 'other manufacturing activities', but accurate code (309100) showed 'motorcycle manufacturing as major activity'. By using wrong codes, a unit obtained sales tax registration for retail sale of pharmaceutical and medical goods instead of actual activity of wholesale of household goods. Shafqat's analysis on tax gap showed some new discoveries useful for the tax administration and improving compliance level. For example, a comprehensive analysis concluded a tax gap of Rs 328 billion, or 72 percent, on sales tax side during 2008-09.
The study suggested out of box solution like 5 percent extra input tax credits to manufacturers making all sales to registered persons and 10 percent extra input tax credits to retailers working in the net. The small and medium enterprises with flexible definitions may make payment on without filing returns.
The analysis on recovery and audit also showed basic problems in the entire system. The database needs to be corrected before selecting persons for audit. Presently, system selected sales tax persons who are otherwise very compliant taxpayers. At the same time, no electronic trail is available from audit to legal provisions for recovery of detected amount. Simultaneously, the composite criterion needs revisit, as common risk factors need to be identified for all domestic taxes and stress tested before implementation.
Analysing FBR IT approach, the study showed that Board's aggressive IT policy helped in implementation of Web filing in record period. A system ie 'STMS+' has been implemented for checking stop filers and generating notices. The work is being done for reconciliation of data declared in return with the banks data. The IT systems like STARR, One-STARR and SMART being used for refund process. However, no empirical data is available for evaluation through value-addition made by these programs. The CREST, a risk based system, has not been fully utilised for sales tax purposes. It seems that the zeal and speed some time overtakes the quality of IT.
The analysis suggested an integrated IT application for refunds and input tax adjustment minimising requirement for documents of taxpayer. There is a need to focus on non taxpayers, which would make compliance easy. Present territorial jurisdiction apparently is not suited to check the behaviour of sectors in other LTUs/RTOs. For checking measure input tax credit, Enforcement Module needs to be piloted on sectoral basis for telecommunication, POL, sugar, cement and automobile to keep an eye on flaw of raw material at supply stage till finished product is being manufactured.
The income tax assessment should be made on real income tax instead of withholding tax as final tax liability. Field formations be established in accordance with revenue yield/potential lesser and leaner enforcement for compliant tax payers. All changes in status of tax payers should be transmitted to central registration office (CRO) on real time basis.
Collector ST Lahore raised a question whether establishment of Large Taxpayer Unit (LTUs) and Regional Tax Offices (RTOs), introduction of Human Resource Management (HRM), IT systems, members from private sector, alignment of National Tax Numbers (NTNs) and ST-registration numbers, web filing, automated applications for different procedures and monetary incentives for FBR employees for hard work has actually helped for the enhancement of Tax to GDP ratio? analysis added.