The IRS has defined the concepts of a gross tax gap and a net tax gap. The IRS defines the gross tax gap as the difference between the aggregate tax liability imposed by law for a given tax year and the amount of tax that taxpayers pay voluntarily and on time for that year. Net tax gap as the amount of the gross tax gap that remains unpaid after all enforced and other late payments are made for the tax year.
Reasons for Tax Gap in Pakistan
The tax gap analysis revealed that there are a several factors contributing to the high tax gap in Pakistan. The structural problems, such as narrow tax base due to exemptions, but tax evasion and distrust of public institutions, and administrative weaknesses all also take a toll on tax collection. Recent reviews of tax returns reveal that even compliant taxpayers do not provide essential information in the returns. Due to these discrepancies in returns, a number of opportunities for underreporting income or claiming lower rates and liabilities are generated.
There is approximately a tax gap of 58 percent or Rs 1,855.254 billion in the overall economy of Pakistan, pointing towards implementation of substantial changes in tax policy including broadening the tax base, reducing distortions and phasing out exemptions for bridging the huge gap.
Federal Board of Revenue (FBR) has reportedly analysed data that has led to the conclusion that there needs to be an analysis of the tax gap that exists due to the illegal economy that comprises more than 60 percent of the documented economy. FBR is not only responsible for massive loss to the exchequer due to corruption and leakage as revealed by the former Finance Minister Shaukat Tarin, but has also exhibited a penchant for going for the easiest option possible to generate revenue. Thus FBR focus has not been on enhancing documentation and withdrawing exemptions on the income of the rich and influential but on levying taxes that are easy to collect notably...