Pakistan's Tax Collection Gap: A Whopping Rs5.8 Trillion Annually

Pakistan is grappling with a significant tax evasion issue, with a staggering annual tax compliance gap of around Rs5.8 trillion, equivalent to 6.9 percent of the GDP. This revelation comes as a major concern for the government and policymakers, highlighting the urgent need for reforms to address the rampant tax evasion plaguing the country.

According to recent presentations given to Prime Minister Shehbaz Sharif and the Special Investment Facilitation Council (SIFC), various sectors contribute to this alarming tax evasion scenario. The evasion on account of petroleum, oil, and lubricants (POL) products alone is estimated to be a staggering Rs996 billion, primarily attributed to smuggling activities across borders.

Among the sectors contributing significantly to tax evasion are the retail sector, estimated at Rs888 billion, the transport sector at Rs562 billion, independent power producers (IPPs) at Rs498 billion, and real estate at Rs148 billion annually. Additionally, a substantial amount of tax evasion, estimated at Rs1.607 trillion annually, falls under the category of 'others,' highlighting the widespread nature of the issue.

Sales tax evasion accounts for the highest share, with estimates suggesting it could reach up to Rs2.9 trillion annually. The customs gap is also significant, standing at around Rs600 billion annually, attributed to under-invoicing and smuggling activities.

The International Monetary Fund (IMF) has conducted a Diagnostic Report, indicating that while policy-level tax gaps are not excessively high, they could potentially reach a maximum of 12.9 percent of the GDP if left unchecked.

The presentation also sheds light on the disparity between total revenues and expenditures, revealing a significant gap of 7.6 percent of GDP. This deficit, often financed through domestic and external borrowing, exacerbates the country's debt burden, posing further economic challenges.

To address this pressing issue, the government is contemplating various reforms, including restructuring the Federal Board of Revenue (FBR), enhancing collaboration with entities like Nadra and PRAL, implementing digital invoicing systems, and introducing modern governance structures. Additionally, initiatives such as the Tajir Dost Retailers Scheme and documentation laws are being considered to improve tax compliance and revenue generation.

In conclusion, tackling tax evasion is imperative for Pakistan's economic stability and growth. Implementing effective reforms and strengthening enforcement mechanisms are essential steps towards achieving fiscal discipline and fostering sustainable development in the country.