Ways of TAX Avoidance in Pakistan

1. Tax Amnesty Abuse

The business man who owes govt. taxes with penalties and interest may go in litigation hanging the case
for many years. If the decision is against them from regional commissioner FBR (case first goes to DC
income tax, if the party is not satisfied with DC’s decision then they make appeal to commissioner), then
they make appeal to FBR Head Quarters Islamabad. With some extreme political pressure FBR
authorities are forced to take decision in the favor of the business person. Moreover, they can’t keep
prolonging a case because there is a pile of matters to deal with. Due to this govt. ask the business
person to pay defined amount in exchange for forgiveness of a tax liability as well as freedom from legal
prosecution.

Solution: For efficiency a separate department in FBR should be constituted that deals with these
hearings. Political and constitutional reforms are needed to make their interferences in departments as
less as possible. A committee should be constituted in the high court and Supreme Court of Pakistan
comprising of highly reputable Ex-Chief Justices who should report to PM directly without any third
party interference.

2. Fake Charity Schemes

People may show some of their wealth deposited to a charity scheme (welfare programs), while in
reality they may have made an agreement with the charity organization to keep some percentage of the
deposited money and return the rest as a direct cash (so as not to show any sort of transactional
records). Just for security the person would get a cheque from the organization.

Solution: FBR officers can pin-point those charity schemes and launch an audit of their assets and cash
flows every 3 months or so. FBR should always keep an eye on these low-profile organizations because
this is where corrupt businessman usually lands.

3. E-filing fraud

Misstatements in a company’s financial statements. This is usually done by misstatements of assets,

cash flows, liabilities, expenses, revenues and cash dividends. The main fraud is done in expenses and
revenues if the system of the business is not computerized. Otherwise, the major frauds are committed
with the internal control systems where the organization’s accounting team makes such tax formulas
that saves them some tax money.

Second is the misstatements in a company’s manufacturing statements to reduce sales tax.

Solution: Extensive specialized local and foreign trainings should be made mandatory for the audit
teams to undergo in order to enhance their skills.
4. Making Black Money by showing loss in Business

FBR officials need to launch full investigations in such matters where businesses show major losses.

5. Barter Trade

Wealth accumulated from the offshore non-recorded trade of goods and services (e.g. prostitution). For
example NCP cars, trade of falcons, eagles, stolen foreign currency, goods, etc.

Barter trading is helped by Custom Units and Constabulary Police (FC), border military police and anti-
smuggling units. There should be strict rotation policy for the staff of these units.

6. Cross-Border Identity Theft

Big examples are:

 Cross border transactions of Black Money to offshore accounts registered under someone else’s
name.
 Offshore investments running under someone else identity.

7. Money Laundering

Smuggling of dollars from open market is hurting our economy. Online money laundering as in the case
of Hamza Shehbaz caught by the working agents of FIA in the bank (employees of the bank).

Open market: banks other than SBP. Their dollars are part of our foreign exchange reserves. They take
dollars from SBP to do business and thus increase our reserves.

Solution to 5,6,7: People usually involved in this are politicians, business tycoons and elite classes.
Therefore, IB and ISI need to be very active in these matters. They should fully trace the chains up to the
real culprit involved. Intelligence should play a vital role in eliminating smuggling networks at the
country’s borders as those are the entry and exit points. There is no use in screening or monitoring the
markets without having strict control at the borders. Sanctions should be imposed on the culprits by the
High Courts (or Supreme Court if necessary) under which there should be imposition of very high taxes
on their already running businesses. Increased check and balance needs to be imposed under trade
reforms and cross-border transactions online or otherwise.

8. Other off-the-books incomes (e.g. insider trading)

Insider Trading is mainly of food commodities (agricultural crops like wheat, rice, sugar cane and other
food commodities like oil, flour, etc.). The owners of the manufacturing factories who refine these
products, private parties (MNA/MPA), the distributors and the wholesalers/retailers are mainly involved
in this. Private parties take these products from factories and distributors. By stocking these products
causes shortage in market, that are then sold at black-rate in the market. This reduces around 10 to 15
percent of government’s tax income. Factories also save their sales tax by stocking.
Solution: The food department and IPWM need to implement strict check and balance on the weights
and measures. Secondly, the system needs to be computerized such that the weights and measures data
cannot be manipulated. Making sure that the right figures of the weight and measures are being
entered and that is in accordance with the estimated production/distribution. There needs to be layers
of verification up to the highest authority in case of any changes to data or wrong data entry (which
deviates from the estimated production/distribution).

Moreover, to maintain a check and balance on the quantity of production in the factories, again an IT
based solution is required. The machines should start running once the computer is running. The system
can only run once the food/field supervisor from food or IPWM department logins with his card into the
system. There should be smart meters attached to the factory machines that should show the weight of
materials being refined/produced and the number of units the machinery has run. In case of any
alteration to the meter, an electronic signal should be send that shuts down the computer system. So to
restart the system, would require a higher authority person from the relevant department to come and
re-login with his card to start the system again. Under normal operation, the system would restart if it
has been logged-out by the field supervisor’s card. The meters readings would display on a form
interface on the computer in real time which will be submitted to the relevant department after filling
all required information by the field supervisor. This way no alterations can be made to the figures and
the correct figures of the amount of production would be sent to the government. This would simply
discourage factories from stocking because they can longer fool the authorities with incorrect data.

9. Bribed FBR officials and the Tax Return Fraud

Figures manipulation of income taxes and issuing of fake income tax receipts is done by bribed FBR
officials to make some money as stated by the former FBR chairman Shappar Zaidy who said that IT is
the only solution of this. Your tax return file is thus bogus.

10. Wholesale/retailer Market Mafia

Majority of the market is running their business undocumented. They are not giving tax from their
profits. FBR had decided to categorize them into small, medium, and large businesses and thus impose a
monthly reasonable tax on them. However there was a severe backlash from the trade unions.
Whenever FBR tries to bring them into tax net there is always a backlash.

Solution: If the govt. manages to apply this, then make sure there is no direct communication between
the tax payer and the tax collector.

11. Unreported Cash Payments, Fake receipts, Hidden income, Bogus Receipts (Dummy Documents)
or Ghost Business

This is where business persons show some percent of their business documented while majority of their
business runs off-the-records. This is usually done by small scale to small-medium sized businesses (for
example Car Rent business). Statistically, the govt. knows their estimated incomes so they should
categorize such businesses and impose fixed taxes on their incomes which they would be bound to pay
whether someone is starting a new business or there is a current one running.

With bogus businesses also comes the issue of unreported cash payments or fake receipts which
definitely affects sales tax in their favour.

12. Manipulation of Property tax by the bribed officials

Manipulation of data and issuance of fake property tax receipts is another common issue. Task forces
should be formed to take surveys of the areas and enlist tax per unit for each land area. Update the
software with the collected data as well as tax data for the vehicles, machineries, etc. So whenever an
excise official tries to enter wrong (or manipulated) data, the software would give a warning and will
automatically send a notification to the higher authorities. Moreover there shouldn’t be direct
communication between tax collector and the tax payer. This is only possible through IT, e.g. online
payment of tax should be made mandatory.

FBR
It deals with taxes on the profit earned from your business and your total income. For example, tax
applied on your cash or gold stored in your bank account. So FBR deals with income tax and as well as
sales tax. Note that sales tax applies on the sale (a tax on the receipts from sales) and supply of goods
and on the goods imported (i.e. custom duty) into Pakistan.

Excise and Taxation

Excise deals with taxes on your properties like house, shops, farmhouse, vehicles, machineries, etc. So
excise deals with property tax.

Customs
They clear federal excise duty with FBR.