The government is set to make a significant change in the tax administration system by withdrawing the powers of the National Database and Registration Authority (NADRA) related to determining the income and tax liability of unregistered individuals and non-filers. This move aims to enhance the tax base and improve the effectiveness of tax collection. In this article, we will delve into the details of this proposed change and its potential implications.
1. The Budget Proposal for Withdrawal of NADRA’s Powers
1.1 Strong Thinking Emerges among Budget Makers
Senior officials in the Ministry of Finance have revealed that there is a strong inclination among the budget makers to strip the National Database and Registration Authority of its powers granted under section 175B of the Income Tax Ordinance. This particular section empowers NADRA to assess and recover income tax from non-filers. The decision to withdraw these powers is currently being discussed and is likely to be incorporated in the upcoming Finance Bill of 2023.
1.2 Lack of Desired Results from NADRA’s Tax Net Expansion
Despite the authority’s efforts to expand the tax net, it has not been able to achieve the desired outcomes. Recognizing this, the government is considering an alternative approach to broaden the tax base and improve compliance.
2. Introducing a New Provision: Realtime National Integrated Database
2.1 Abolition of Section 175B and the Role of FBR
To replace the authority’s powers under section 175B, the Federal Board of Revenue (FBR) will propose its abolition through the Finance Bill of 2023. This removal will pave the way for a new provision, namely section 175C, which will establish a Realtime National Integrated database. The control of this database could be entrusted to either the State Bank of Pakistan (SBP) or the FBR.
2.2 Leveraging AI and Data Analysis
The Realtime National Integrated database will serve as a platform for analyzing various data, including banking transactions, through the use of artificial intelligence (AI). By aligning this data with tax declarations, the system will identify non-compliant taxpayers and nudge them to revise their returns. If individuals fail to revise their incomes accurately or file correct returns, the information will be made available to the FBR for further action.
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3. Scope of NADRA’s Powers and Collaborations with FBR
Under section 175B of the Income Tax Ordinance, the National Database and Registration Authority possesses the following powers and collaborations:
3.1 Proposals for Broadening the Tax Base
NADRA can submit proposals and relevant information to the FBR with the objective of expanding the tax base. This includes identifying income, receipts, assets, properties, liabilities, expenditures, or transactions that have escaped assessment or have been under-assessed, misdeclared, or misclassified.
3.2 Determining Values and Memorandum of Understanding
The authority can determine the value of assets or transactions that differ from the values notified by the FBR or district authorities. Additionally, NADRA has the ability to enter into a memorandum of understanding with the FBR for secure exchange and utilization of individuals’ information.
4. Utilization of NADRA’s Information by the FBR
The FBR is authorized to utilize any information communicated to it by the National Database and Registration Authority. The FBR can then forward this information to the relevant income tax authority, which holds jurisdiction over the subject matter. The purpose of utilizing this information is to enforce the provisions outlined in the Income Tax Ordinance.
5. Indicative Income and Tax Liability Determination
NADRA has the capability to compute indicative income and tax liability using modern devices, mathematical or statistical modeling, or AI. The Board will notify individuals about their indicative income and tax liability. Individuals will have the option to pay the determined amount based on prescribed terms, conditions, installments, discounts, reprieves pertaining to penalties, default surcharges, and time limits set by the Board.
6. Data Utilization Post Withdrawal of Powers
The withdrawal of NADRA’s powers related to income tax assessment and recovery does not imply that the FBR will cease to utilize the data available with the authority. The data will continue to serve as a valuable resource for the FBR in its tax administration and enforcement efforts.
Conclusion
The government’s decision to withdraw NADRA’s powers in determining the income and tax liability of unregistered individuals and non-filers marks a significant shift in the tax administration system. By introducing a Realtime National Integrated database and leveraging AI capabilities, the aim is to enhance the tax base and encourage compliance. The proposed changes, if implemented, are expected to shape a more effective and streamlined tax collection process in the future.
