FBR sees tax gap of Rs 1289 billion for 2022

ISLAMABAD: The Federal Board of Revenue (FBR) has worked out a total tax loophole of Rs 1,289 billion during 2022, which is 26 percent of the potential tax collection under the current tax regime.

According to the FBR’s first report on tax loophole analysis-2022 finalized on Monday, the sales tax loophole is Rs 519 billion, which is 24 percent of the potential tax collection under the current sales tax regime. The income tax gap is Rs 730 billion, which is 31 percent of the potential tax collection under the current income tax regime.

The customs duty gap is Rs 40 billion, which is 11% of the potential customs duty collectable. The tax gap is generally defined as the difference between what taxpayers should pay and what they actually pay.

While calculating the sales tax gap, the FBR has excluded the shadow economy for its tax gap calculations as official estimates of the shadow economy are not available.

The FBR has also excluded the agricultural sector as it is largely exempted from sales tax. Economic activity in the construction sector largely includes construction-related services that fall under the provincial sector. Therefore, FBR has excluded this sector from sales tax gap calculations. Since the sales tax on services falls under the provincial domain, almost all service sectors are excluded from the blank sales tax calculations.

To arrive at the accurate estimates of corporate income gap, FBR has covered sectors including Large Scale Manufacturing (LSM). Distribution of electricity and natural gas? Information and Communication Sectors Financial Intermediation and Insurance.

The FBR report said that the overall tax collection gap consists of the tax compliance gap and the tax expenditure gap. The compliance gap is generally the difference between the tax collected under the existing regime and the actual tax collected. This report only considers the tax compliance gap. Tax expenditure is the shortfall in tax revenue resulting from policy provisions relating to exemptions, rebates, reduced rates and other such provisions which provide relief to taxpayers.

Tax gap estimates show that the tax gap is about 26 percent of the potential tax collectable by FBR which represents 2.9 percent of GDP in FY 2020. The sales tax gap is estimated at about Rs 519 billion , which is 24 percent of the potential sales tax collectable.

The income tax gap is estimated at around Rs 730 billion, which is 31 percent of the total income tax collection. In the case of customs duty, the gap is Rs 40 billion which is 11 percent of the total customs duty recoverable. Due to data availability challenges, this report is based on data relating to different financial years. For sales tax, data pertaining to 2020 was used while for income tax and customs, data pertaining to 2019 was used. The rates of taxes and customs duties applicable correspond to the same year in which the data refer, the FBR report added .



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