Challenges before Tax Commission HUZAIMA BUKHARI AND DR IKRAMUL HAQ The government, in order to fulfil budget 2014 promise, notified a 20-member Tax Commission on September 25, 2014. The Commission has been asked to review and rationalise direct and indirect taxes, customs tariff, structure of Federal Board of Revenue (FBR), evaluate possibility of creation of border security force and ponder on any other issue it deems fit. For this huge agenda, the Commission is required to complete the task within 120 days. This shows how naïve our Finance Minister and his team at FBR are. They think reforms are one-time exercise whereas it is a continuous process. Like civilisations, tax systems evolve over the period of time. In todays world tax reforms mean good tax administration, which we totally lack. The exercise relating to tax reforms cannot be a time-bound affair and does not mean merely making changes in tax codes or administration. Reforms can be successful only if simultaneous analysis is made of the whole system, that is, tax structure, tax administration, state of economy, taxpayers attitude, revenue needs of the country and so many other allied aspects. Successful reforms in Indonesia, Jamaica, and Malawi were carried out in three to four years time and these involved substantial preparation and transition arrangements including extensive consultations with all parties affected by tax reform. In Pakistan, the six-year-long (2006-2012) World Bank-funded Tax Administration Reform Programme (TARP) failed to achieve anything meaningful, rather it has multiplied the problems of tax machinery as well as taxpayers. Tax reform programmes and strategy involve continuity in key decision-makers and major educational campaigns concurrent with the introduction of tax reform proposals to familiarise taxpayers with the new requirements. The Royal Commission on Taxation in Canada (the Carter Commission) and the Musgrave Commission in Columbia are said to have done the finest work in applied public finance because of their comprehensive analysis, rational approach and recommendations which could not have been possible, if a short time frame had been prescribed, as our Finance Minister has done. Pakistan needs a new tax agency at national level, capable of generating sufficient resources for the government and helping the country in paying off its ever increasing debt burden. Taxation, a potent instrument to shape and influence the socio-economic policies of a country, has not received due attention in Pakistan. A rational tax policy penalises those who hold assets idly or indulge in luxury consumption. In social democracy, the most important objective of taxation is to provide economic justice, which relates to distribution of tax burden and benefits of public expenditure. Taxation of the rich for the benefit of the poor is at the core of social democracy. It encompasses, besides redistribution of wealth, such questions as treatment of weaker sections of society eg women and children, minorities, the disabled and unemployed. All these elements are missing in our polity and tax policy. The Tax Reform Commission, if was to work just for 120 days, should have had a one point agenda: how to make FBR an efficient, performing and delivering organisation. Presently, with a staff comprising thousands of persons, FBR managed to get only 840,000 income tax returns in 2013 and with less than 100,000 sales tax registered persons around 20,000 sales tax payment filers! Our tax-to-GDP ratio is below 10% for the last many years, which is one of the lowest in the world. Tax legislation is no longer considered as a mere device to raise revenue to meet the cost of governing a community. In democratic dispensation, it is employed to attain economic policy objectives. The tax system is a mix of fiscal and economic policy. The economic policy element of fiscal statutes ensures redistribution of wealth, equality and resource mobilisation for social sector development to achieve the goal of an egalitarian society. Unfortunately in Pakistan, successive rulers, both military and civilian, used taxes as a tool to extort from the masses as much as possible for their own comforts and luxuries. By resorting to repressive tax laws, they made the rich, richer and the poor, poorer. Tax reforms (sic) by FBR under TARP lacked the perspective of using tax legislation as a tool of attaining economic policy objectives of making Pakistan a self-reliant country, free of domestic and foreign debt shackles. Reframing tax codes alone is an exercise in futility! There exists misconception in the minds of our policy makers that by merely reframing tax laws the entire tax system would be reformed automatically. This misconception in the past led to disastrous results. The government of Musharraf promulgated a new income tax law, operative from July 1, 2002. After 12 years, there is a consensus in all circles-official and professional-that the new law, aimed at simplifying income tax enactment, has been a total failure in achieving the much desired goal of inducing foreign direct investment and rapid industrial growth. It has failed on all accounts. It is neither a fair, practical, harmonious code, nor does it contain any meaningful incentives for accelerating the process of investment and development. Our financial managers are caught up in a dilemma. On the one hand there is a mounting pressure to reduce fiscal deficit through improved collections and on the other, they are not ready to abolish innumerable tax exemptions and concessions available to the rich and mighty. They have no will to plug revenue leakages. According to FBRs own admission, prevalent tax gap is 79%. There is no will to end tax-free perks and perquisites available to the ruling elites. Tax machinery is under tremendous pressure to collect more and more revenue from the manufacturing sector that is already facing recession. FBR is extorting money from the already trampled taxpayers by creating inflated demands, collecting advance tax much before actually due, intentionally withholding refunds and keeping cases undecided where creation of refunds is inevitable-hierarchy in FBR and Ministry of Finance is obviously aware of these tactics. In all democratic countries, special committees are formed by elected parliaments for conducting tax reform exercises. Here in Pakistan we are doing it through bureaucratic structures, which are outdated, inefficient, incompetent and corrupt. This is calling the troublemakers to do trouble-shooting, reminding us of great Urdu poet Mir Taqi Mir who aptly described such situations in the following couplet: -- Mir kya saada hain, beemar huay jis ke subub -- Usi attar kay londay say dawa laity hain (What a simple soul is Mir who seeks cure from the protégé of the healer responsible for his illness) Pakistans tragedy is that things are always being done by people who are not competent-even eligible-for that job. Tax reforms are assigned to tax baboos [bureaucrats], who have proven track records of inefficiency, incompetence and corrupt practices. FBR has a bad habit of first announcing plans and then doing homework whereas it should be the other way around. On the one hand they want full automation and on the other they have thousands of employees, majority of whom do not even know the fundamentals of Information Technology (IT). It is quite strange that they want to achieve something, for which they have not even prepared themselves. The skill gaps in terms of human resource have not yet been identified and there are talks of highly sophisticated automated systems. The overwhelming majority of workforce of FBR is incompetent, inefficient, disgruntled, dissatisfied, and indifferent. They severely lack basic etiquettes towards taxpayers. Their mindset needs a total change, which is more to do with behavioural transformation. FBR has yet not identified skill gaps in its present workforce, not initiated anything in terms of improving human resource management and shifted its entire focus on IT development. The catchword for them is automation which is not the sole solution for creating a corruption-free efficient, result-oriented, yet taxpayer-friendly tax apparatus. Though IMF, the World Bank and other donors gave loads of money to Pakistan for automation, yet nothing has changed. In fact, FBRs stalwarts and bosses in the Ministry of Finance transferred bulk of it to their hand-picked consultants who ended up delivering nothing. There cannot be two opinions about the need for major IT and human resource improvements in FBR as well as effective audit operations but first of all a transparent tax policy and development-oriented tax reform agenda should be made public. Tax reforms without a rational tax policy are meaningless for achieving the goal of a functional, efficient and integrated tax administration. If FBR wants to improve its efficiency, administrative reforms should be done pragmatically. FBR should be made an autonomous body on the pattern of Mauritius Revenue Authority (see details at mru.gov.mu). Instead of improving capacity to detect tax evaders through Tax Intelligence System, FBR is imposing more and more tax obligations on organisations and individuals in the form of irrational withholding tax provisions. Everyone knows that fault does not lie with tax laws but with the people who are responsible for enforcing them. What is the guarantee that tax officials will perform their duties honestly even when all existing tax laws are replaced with new ones or with a fully automated system? The experimentation in tax administration and laws without sound research, homework and pragmatic approach is going to further destroy the existing system. FBR under TARP replaced 757 income tax circles, working under 139 ranges, 32 zones and five regions, into functional divisions without proper homework and the result (rather mess) is before our eyes. Now they have reverted back to single-tier system as far as Commissioners are concerned. Their decision to shift from four-layered administrative control to two-tier functional unit has miserably failed. This process of doing away with the traditional circle management to functional units has proved counterproductive. This shift was, in fact, restricted only to change of nomenclature having only cosmetic value. The Commission must recommend restoration of old system with new modern facilities. For any meaningful transformation, there is a need for professionalism, which cannot be achieved with the existing lot. The lower staff and officers hardly know their job not to talk of professional knowledge in the field of audit, taxpayers assistance and facilitation, enforcement, legal, IT and human resource management. FBR keeps on making tall claims about plugging all the loose ends in tax reforms but so far has miserably failed in all areas. It would have been better if Commission on Tax Reforms was to work under the direct control of House Committees on Finance as ultimately the legislators have to adopt the recommendations after consulting all stakeholders. FBR officials input in such processes cannot be understated as they are the people who have to implement the laws and policies. However, it should also be kept in mind that they are responsible for the present chaotic situation as they have become de facto legislators and policy makers. They are just administrators and should not be given the task of legislation. Bureaucrats presently dominate the Supervisory Council in Finance Division that is meant to monitor and look after FBR reforms. This is where the fault lies. Unless these tax administrators are made accountable before public representatives and independent appellate/judicial set-up, meaningful tax reforms cannot be implemented. Politicians must have the courage to achieve a sensible balance between income, capital and consumption taxes. And they must also have the courage to spend, not on ill-designed social programmes introduced more to collect votes than social returns, but on important investments in creating human capital (eg education, training and health), and necessary public infrastructure to increase the productivity of the economy. It is by no means an easy task in Pakistan but things are improving as the public is becoming increasingly critical of tax laxity of politicians. They are now better informed about the impacts of undisciplined public finance. Independent observers are providing tax data and survey showing how the rich and mighty are thriving on their money. The newly-formed Tax Commission should study costs and benefits of various approaches to taxation that have been adopted in successful models, and reinvented over many years; the members should give frank advice on reforms and best practices, and help the government reach consensus on tax policy. They should also explore new challenges, such as the taxation of e-commerce, and the problems of harmful tax competition and transfer pricing within large corporations. Excessive and unbalanced taxation prevent individuals and businesses from taking full advantage of the opportunities of the new knowledge-based economies. Taxpayers (including businesses) should share the burden of protecting those who are vulnerable as a result of change, either through well-designed social protection measures or retraining, not through excessively rigid job protection measures and inflexible labour regimes that penalise productivity. That is why a fair and transparent tax system is so essential for maximising economic growth. In a nutshell, the main goal of tax reforms should be aligned to economic policy that is how to unshackle the constituent elements of economic growth by letting market forces play their respective roles. The Tax Reforms Commission must stress the government to transfer the benefits of economic growth to enhance social well-being and cohesion through transparent and well-designed taxation. If this paradigm could be made to work in Pakistan, then people will reap the real benefits of paying taxes. In Pakistan, the poor are subjected to heavy and cruel taxation to finance the luxuries of Riasti Ashrafiya-militro-judicial-civil complex and public office holders who enjoy free perquisites, benefits, including purchase at throwaway prices of expensive State-owned plots at prime locations. The way they waste and plunder the taxpayers money is no secret. The country is surviving on bailouts from IMF due to perpetual failure of the ruling elite to tax the rich and mighty that matter in the Land of Pure. Revenues worth trillions of rupees have been sacrificed by governments-civil and military alike-since 1977 extending unprecedented exemptions and concessions to the privileged classes. Gradually, the governments abolished all progressive taxes eg Estate Duty, Gift Tax, Capital Gain Tax etc. The historic decision of taxing agricultural income, passed by the Federal Parliament in the shape of Finance Act, 1977, was thwarted by the military regime of Ziaul Haq. Through this law, the Parliament amended the definition of agricultural income as obtaining in section 2(1) of the then Income Tax Act, 1922 to tax big absentee landlords. This was a revolutionary step to impose tax on agricultural income at federal level for the first time in the history of Pakistan, but ruthlessly foiled by a military dictator. During Zias rule of 11 years and that of General Musharraf for nearly 9 years, absentee land owners (including mighty generals who received State lands as gallantry awards or otherwise!) did not pay a single penny as agricultural income tax or wealth tax. Taxation of agricultural income, at present, is the sole prerogative of provincial governments under the 1973 Constitution of Pakistan. All the four provinces have laws to this effect, but total collection in 2013-2014 was less than Rs 2 billion (share of agriculture in GDP was about 22%). No one has calculated how much tax loss Pakistan has suffered perpetually since 1977 on account of non-taxation of agricultural income alone as suggested under Finance Act, 1977. If we add total loss of revenue through various exemptions, non-taxation of benefits given to State Oligarchy (Riasti Ashrafiya) and through Statutory Regulatory Orders (SROs) issued during the last four decades, the amount comes to over Rs 100 trillion-this explains how unprecedented concessions to the rich has made the State poorer rendering every citizen of this country to enormous indebtedness. We would not have required any borrowing at all, if tax losses were historically not incurred. How the governments were abusing taxpayers money can be judged from the decision of Supreme Court on April 17, 2013 suspending the March 14, 2013 notification issued by Interior Ministry granting former interior minister Rehman Malik and his predecessors lifetime perks and privileges. Hearing the notice case suo motu regarding unlimited perks and privileges granted to two former prime ministers, all former interior ministers, Sindh chief minister and other senior officials by the outgoing government, the five-judge bench of apex court sought a response from relevant authorities in this regard. In 2012-13, FBR posted shortfall of Rs 444 billion and for 2013-14 Rs 200 billion. Very few people know that while these shortfalls were taking place, FBR withdrew the biggest revenue spinner-1% withholding tax on manufacturing - resulting in a revenue loss of Rs 18 billion, made drastic cut of federal excise duty on sugar to 0.5% aimed at benefiting the influential sugar industry owners, causing a loss of Rs 8 billion to the national exchequer and allowed. 50% cut on sales tax for steel melters, causing revenue loss of nearly Rs 4 billion. In the budget for fiscal year 2013-14, the Federal Board of Revenue (FBR) was assigned target of Rs 2475 billion-nearly 25% increase over the collection made for 2012-13. It was reduced twice but in the end, FBR collected only Rs 2266 billion. FBR has perpetually missed targets for the last many years-the last time it exceeded target was in the fiscal year 2007-2008. Adding insult to injury, despite the dismal performance, FBR stalwarts received bonuses. This was shocking to say the least, especially as the country had been going through its worst economic crisis. It is incomprehensible why FBR staff is given double basic salary-they are government employees and should be entitled to normal emoluments like all other public servants. Finance Minister Ishaq Dar and the National Assembly is least pushed to take officers of FBR to task. They help the rulers in concealing their real incomes and in return get free hand (immunity from accountability) as well as double salary and generous bonuses-considering that 90% tax collection comes through withholding or voluntary payments with returns, while revenue targets are missed in billions every year. FBR, according to all indicators, symbolises an institution wrought with corruption, inefficiency, sleaze and wastefulness. The recurrent occurrences of mega scams-fake refunds, flying invoices, under invoicing, excessive payments of export rebates, just to mention a few-confirm the existence of a strong mafia-an unholy alliance between corrupt tax officials and unscrupulous societal elements-that is depriving the nation of billions of rupees and criminally shifting the incidence of taxes onto the poor. The overwhelming majority of FBRs staff is incompetent, inefficient, disgruntled, and dissatisfied-it lacks courteous manners, especially with respect to taxpayers. The mindset of tax officials needs a total metamorphosis, making it less suspicious and more friendly towards taxpayers but highly stringent with tax evaders. At present their attitude is that of disdain towards regular taxpayers and extremely amenable with the defaulters. FBR has yet not identified skill gaps in its present workforce, not initiated anything in terms of improving human resource management and shifting its entire focus on IT development. At operational level, the challenge is creating a corruption-free, efficient, result-oriented, tax apparatus. There is an urgent need of IT and human resource improvements in FBR coupled with a transparent tax policy and development-oriented tax reform agenda. Instead of improving capacity to detect tax evaders through Tax Intelligence System, FBR is imposing more and more tax obligations on organisations and individuals in the form of irrational withholding tax provisions. Everyone knows that fault does not lie with the tax laws but with the people who are implementing them. We need pragmatic reforms for which successful model of Mauritius Revenue Authority can be studied, debated and adapted after making necessary changes to suit our peculiar conditions. At enforcement level, the biggest challenge is how to bridge the tax gap-collection by FBR is much below the actual tax potential. Issues of documentation and tax compliance are lingering on for years even after completion of a costly $100 million World Bank funded Tax Administration Reforms Programme (TARP). The only way to check massive evasion in customs, income tax and sales tax is implementing an integrated Tax Intelligence System, which is capable of recording, storing and cross-matching all inflows and outflows. All in-bound and out-bound containers should be scanned/x-rayed to check evasion of customs duties and taxes payable at source. However, no reform agenda can succeed unless FBR is insulated from outside political pressures. It should be made National Tax Agency, run by an independent Board of Directors selected by National Finance Commission and/or Council of Common Interests. It would facilitate taxpayers to approach one agency only and data sharing for all taxes would help in increasing revenues for the federation as well as the federating units. (The writers, partners in law firm, HUZAIMA & IKRAM, are Adjunct Faculty at Lahore University of Management Sciences) brecorder/pages/article/1233335/2014-10-17/challenges-before-tax-commission.html
Posted on: Fri, 17 Oct 2014 03:51:58 +0000