As part of the present government's reform agenda, the Federal Board of Revenue (FBR) is working in many areas to improve its performance. There is a substantial tax gap in Pakistan. Tax gap analysis thus needs to be undertaken to assess the tax potential accurately.
The sources said that Pakistan has a lot of potential to increase tax revenues without new taxes or raising tax rates. The tax gap i.e. the gap between the potential of the country's economy to generate tax revenue and the actual tax revenues collected has to be narrowed.
An IMF study of Pakistan's tax system estimates that the country could increase up to 22.3 percent of GDP in taxes. The estimate suggests that Pakistan has a tax gap close to 10 percent of GDP (based on the tax to GDP ratio achieved in FY 2017/18). It also indicates that Pakistan is currently collecting 71.5 percent of the taxes that are due to be paid under the existing legislation. The tax gap is primarily related to the large informal economy and low levels of taxpayer compliance. Narrowing the tax gap therefore, requires policies to incentivise economic actors to enter the formal economy and measures to increase taxpayers' compliance.
A tax gap analysis estimates an economy's potential tax revenue based on the existing tax system assuming the maximum level of taxpayer compliance attainable under existing constraints, notably the size of the economy's informal sector. The tax gap analysis enables governments to isolate the impact of economic trends on tax revenue from specific tax policy changes and tax administration measures. As a result, an up-to-date tax gap analysis enables the government to achieve two main objectives: i) prepare realistic revenue projections reflecting actual economic conditions for the budget (ii) design tax policy and tax administration measures with a high level of confidence about the expected impact on revenue and the economy.
According to sources, the World Bank has extensive experience of conducting tax gap analysis on the request of governments across the world. These analyses are prepared on a well defined methodology based on extensive macroeconomic and microeconomic data including review of anonymized taxpayer returns to identify compliance gaps.
The FBR has requested World Bank to conduct tax gap analysis through international experts. For this purpose, the taxpayers' data would be required by the World Bank. The sources further said that there is a general restriction on disclosure of information relating to taxpayers contained in returns, statements, accounts etc under section 216 of the Income Tax Ordinance, 2001 and section 56B of the Sales Tax Act, 1990. Section 216 also lists exceptions to this restriction. The newly inserted sub-section (6A) of section 216 allows provision of anonymized data to any person for data analysis. The data to be provided to the World Bank was possible through authorization with the approval of federal government, which would be anonymized to protect taxpayer's identity.