The Institute of Chartered Accountants of Pakistan (ICAP) has set its sights on improving tax compliance in Pakistan by proposing stricter measures against stop-filers. These are individuals and entities who file income tax returns with zero income reported (NIL) to gain temporary tax benefits and then disappear from the system.
Exploiting the System: The Problem of Stop-Filers
ICAP’s concerns lie with individuals, Associations of Persons (AOPs), and companies that strategically file NIL returns. Their aim is to:
- Gain active taxpayer status
- Avoid additional withholding taxes
This practice undermines the integrity of the tax system and creates loopholes for potential tax evasion.
ICAP’s Proposed Solutions:
- Identifying Abuses: ICAP recommends that the Federal Board of Revenue (FBR) conduct a thorough review of tax returns, particularly those claiming the maximum Rs. 20,000 deduction in withholding taxes within a year. This scrutiny aims to identify potential stop-filers who are exploiting the system.
- Disincentivizing Exit: ICAP highlights the issue of temporary filers who enter the tax net to claim benefits and then exit, evading their tax obligations. To address this, they propose:
- Reversing benefits enjoyed by those who become stop-filers.
- Implementing penalties for individuals and entities who exit the tax net after claiming benefits.
- Stricter Exit Procedures: ICAP suggests making the process of exiting the tax net more rigorous. This aims to discourage individuals and businesses from strategically entering and leaving the system to avoid paying taxes.
The Road Ahead: A More Robust Tax Environment
ICAP’s recommendations, if implemented, are expected to:
- Reduce the number of stop-filers in Pakistan.
- Discourage tax evasion and strengthen the overall tax system.
- Ensure a fairer distribution of tax burdens across all taxpayers.
By supporting the FBR in creating a more compliant tax environment, ICAP’s proposals contribute to Pakistan’s economic stability and growth through a more just and efficient tax system.
