FBR plans digital invoicing, audits as tax gap hits Rs7bln – Business

ISLAMABAD: The country’s fiscal deficit widened to a whopping Rs 7 trillion in the previous fiscal year (FY24), up from Rs 1.289 trillion in FY22. This underscores the urgent need to improve tax compliance to meet IMF targets, Dawn has learnt from well-informed sources.

This significant increase, almost equal to the total collection of the Federal Board of Revenue (FBR) in 2023-24, highlights a worrying trend and calls for an immediate strategy to improve tax compliance and meet IMF benchmarks. The tax gap refers to the difference between what taxpayers owe and what they actually pay.

The FBR’s first tax gap report was prepared in 2022, with the second report following three years later, in September 2024. These reports provide crucial data to assess taxpayers’ compliance with federal tax obligations.

Official sources told Dawn on Saturday that the disturbing data has laid the foundation for a comprehensive reform plan, to be implemented over the next three to four years. The reforms include the introduction of digital invoicing, desk audits of tax returns, performance-based bonuses and a documentation award scheme to incentivise compliance.

New data provide the basis for reforms to be implemented over the next three to four years

“We will submit the reform package to the prime minister for approval next week,” an official source said.

The sales tax shortfall widened from Rs 519 billion in 2022 to Rs 3.2 trillion in FY 2024, mainly due to tax evasion in key sectors, low collection rates, false invoices, capacity constraints of tax officials and corruption.

To address this, the key reform — mandatory digital invoicing for all manufacturers — will be rolled out within the next four to five months. Tax officials will also be trained to better understand value chains, and sector experts will be appointed to strengthen oversight.

The FBR also plans to implement a “citizen monitor” scheme, under which buyers who present non-digital receipts from retailers will be rewarded. Currently, 33,000 point of sale (POS) systems have been installed and the number will be expanded to 60,000 as part of the reforms, with a strong focus on improving compliance at existing outlets. The revival of the POS system for buyer rewards, which was discontinued a few years ago, is also under consideration.

Low compliance also widened the income tax gap significantly, from Rs730 billion in FY24 to Rs2 trillion. Individuals and associations of persons (AoPs) alone accounted for Rs1.3 trillion of this gap, with collections from these groups totalling Rs500 billion in FY24.

Under the planned reforms, the FBR will deploy between 2,000 and 4,000 Chartered Accountants (CAs) or ACCA auditors for a year to conduct desk checks on more than half of all tax returns. At the same time, newly developed software will evaluate tax returns for irregularities and cross-check them with other databases.

Currently, there is no formal structure to assess tax returns and tax authorities do not have the capacity to carry out these assessments. The FBR has only 500 auditors, many of whom do not have professional expertise.

The tax gap in customs duties has also increased, from Rs40 billion to Rs300 billion in FY24. Similarly, the cost of smuggling to revenue loss was estimated at Rs700 billion. The FBR will seek parliamentary approval for further changes once the prime minister approves the reforms.

The reforms will focus on creating performance-based incentives for tax officials, improving their management skills and developing sector-specific expertise. Key sectors targeted for improved tax collection include textiles, tobacco, sugar and cement.

The FBR also plans to improve its IT infrastructure and recruit competent personnel for Pakistan Revenue Automation Limited in the coming months.

Published in Dawn, September 15, 2024