Tackling the Challenge of Tax Compliance

Being relatively less distortionary, direct taxes tend to accelerate economic growth, provided the tax base is broad enough to ensure equitable sharing of tax burden by the economic agents. Voluntary tax compliance (VTC) is considered more efficient and cost-effective method of revenue collection through direct taxes. This could be an immediate explanation why the tax authorities in the modern economies always strive to promote VTC. Toeing the lines of such tax jurisdictions, Pakistan adopted the Universal Self-Assessment Scheme (USAS) for all taxable persons from the tax year 2003. Pursuant to Section 120(1) of the Income Tax Ordinance, 2001 (hereinafter ITO), a complete return of income wherein the taxable person has declared taxable income and the amount of due tax, when filed under Section 114 of the ITO, will be accepted without any alteration by the tax authorities. To strengthen the right to self-assessment of the taxable persons, the return of income so filed is deemed as an assessment order for the purpose of all provisions of the ITO.

Fundamentally, the USAS was adopted to promote VTC regarding voluntary filing and voluntary payment of due taxes by enhancing mutual confidence between the taxable persons and the tax authorities, relieving the taxable persons from the procedural tangles of the official tax assessment system, reducing tax litigation and utilizing the tax administration in more constructive manner to unearth cases of tax evasion and tax fraud, to improve tax policy and to enhance overall efficiency of the tax system.

For a decade, the tax authorities pursued the USAS vehemently, but viewing the discouraging results of the USAS in terms of tax return filers and voluntary tax payments, the Federal Board of Revenue (FBR) espoused the policy, effective from tax year 2013, of introducing higher withholding tax rates for non-filers on wide spectrum of transactions, with an aim of increasing the cost of doing business for noncompliant taxable persons. Primarily, by using differential tax rates for filers and non-filers, the tax authorities intend to compel non-filers to file tax returns and to operate within the tax net.

Besides introducing changes to tax policy to overcome the challenge of tax compliance, the FBR has formally implemented certain measures for the sake of taxpayers’ facilitation. Pursuant to Section 206A of the ITO, the FBR issues Advanced Ruling (AR) to nonresident persons on the issues that could arise in determining their tax liabilities at a later stage. The detailed procedure for obtaining an AR is provided under Rules 231A and 231B of the Income Tax Rules, 2002 (hereinafter ITR). The application form and related annexes, statements and documents are prescribed in Rule 231B of the ITR.

The FBR has implemented a mechanism of advance ruling in order to facilitate nonresident taxable persons. The purpose is to avoid time-consuming and expensive legal disputes, to facilitate nonresidents in income tax planning in advance, to provide clarity to the local partners of the nonresidents about their liabilities under the tax laws and to bring certainty in determination of the tax liability.

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The FBR has also constituted committees consisting of leading tax consultants, chartered accountants and retired tax officials of the FBR for resolving tax disputes between the taxpayers and the tax authorities. The taxable persons can seek resolution of tax disputes via alternate dispute resolution (ADR), instead of the conventional method of appealing through the appellate authorities, tribunals and courts of law. The principal aim of the ADR is to reduce the costs of appeal to taxpayers and to expedite the resolution of tax disputes.

The FBR has issued guide concerning e-payment of taxes and duties directly from the commercial bank accounts to government accounts through Alternative Delivery Channels (ADCs); such as, internet banking websites, automated teller machines (ATMs), mobile banking and call center facilities. Specific benefits of e-payment of taxes and duties through the ADCs include easier, modern and user-friendly method for tax payments; efficient and fast tax collection; reduced, and even no incidences, of errors and delays; decrease in the workload on the bank staff; scheduling of payments to be credited to government accounts on any future date; and provision of electronic payment documents in hard copy and electronic copy for subsequent utilization.

In September 2017, the FBR launched Taxpayer Outreach Programme which is targeted at broadening the tax base and increasing VTC among Pakistani citizens, especially those in the informal sector. The programme involves the activities, including reaching out to large public and private sector organizations and companies, including their employees; announcements through electronic and print media; arranging workshops and seminars aimed at facilitating taxpayers in paying taxes and obeying tax laws; disseminating tax information through social media; and other publicity activities to convince taxable persons to file tax returns.

Last but not least, the FBR has launched the knowledge base portal for the guidance and facilitation of the taxpayers. The portal provides instant guidance on all issues concerning federal taxes and duties. It also enables the users to search for the required material like on any other search engine such as Google.

Despite changes in tax policy and facilitation of taxpayers, trend in the filing of returns has not been encouraging so far. In 2016-17, the tax return filers were 1.39 million as compared to 1.52 million in 2012-13.

Moreover, relative share of voluntary payments (VP) in income tax collection was 29 percent in 2015-16 compared to 33 percent in 2012-13. On the other side, share of withholding tax regime in overall income tax collection has increased to 70 percent in 2015-16 from 59 percent in 2012-13.