FBR plans digital invoicing, audits as tax gap reaches Rs7tr – Gazeta

ISLAMABAD: The country’s tax gap rose to a staggering Rs 7 trillion in the previous fiscal year (FY24), a sharp increase from Rs 1.289 trillion in FY22, Dawn has learnt from knowledgeable sources, underlining the urgent need to increase tax compliance to achieve IMF targets.

This significant increase, almost equal to the total amount of collections by the Federal Board of Revenue (FBR) in 2023-2024, highlights a disturbing trend and calls for an immediate strategy to increase tax compliance and meet IMF standards. The tax gap refers to the difference between what taxpayers owe and what they actually pay.

The first FBR Tax Gap Report was prepared in 2022, and the second report three years later, in September 2024. These reports provide key data for assessing taxpayers’ compliance with their federal tax obligations.

Official sources told Dawn on Saturday that the alarming figures laid the groundwork for a comprehensive reform plan to be implemented over the next three to four years. The reforms will include the introduction of digital invoicing, audits of tax returns, performance-based bonuses and a documentation reward scheme to encourage compliance.

The new data form the basis for reforms that will be implemented over the next three to four years.

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

The sales tax gap increased from Rs 519 billion in fiscal 2022 to Rs 3.2 trillion in fiscal 2024, mainly due to tax evasion in key sectors, low tax collection, fake invoicing, staff constraints among tax officials and corruption.

To address this, a key reform—mandatory digital invoicing for all manufacturers—will be implemented in the next four to five months. Similarly, tax officials will receive training to better understand value chains, and sector experts will be appointed to strengthen oversight.

The FBR also intends to implement a “citizen monitor” program, rewarding shoppers who submit non-digital receipts from shopkeepers. Currently, point-of-sale (POS) systems are installed in 33,000 outlets, and this number will be expanded to 60,000 as part of the reforms, with a special focus on improving compliance at existing outlets. It is also considering reviving the POS shopper rewards system, which was discontinued a few years ago.

Due to low compliance, the income tax gap also widened significantly to Rs 2 trillion in fiscal 2024, up from Rs 730 billion. Individuals and associations of persons (AoPs) alone accounted for Rs 1.3 trillion of this gap, with revenues from these groups totalling Rs 500 billion in fiscal 2024.

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

Currently, there is no formal structure for reviewing tax returns, and tax authorities do not have the capacity to conduct these reviews. The FBR has only 500 auditors, many of whom do not have professional knowledge.

The customs tax gap has also increased from Rs 40 billion to Rs 300 billion in fiscal year 2024. Similarly, the cost of smuggling in terms of revenue loss has been estimated at Rs 700 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, strengthening their managerial skills and developing sectoral expertise. The main sectors to improve tax collection are textiles, tobacco, sugar and cement.

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

Published in Dawn, September 15, 2024