brecorder/pages/article/1201136/2014-07-11/imf-and-fbr.html IMF and FBR By: HUZAIMA BUKHARI AND DR IKRAMUL HAQ International Monetary Fund (IMF), in its Third Review under the 1Extended Arrangement for Pakistan, has noted significant shortfall in revenue measures from the original programme objectives. The IMF2 says that although the authorities have taken some steps to strengthen tax administration in order to improve the underperformance, the staff expects that tax revenues will be about 1/4 percent of GDP lower than envisaged. It says that moreover, revenues from 3G licenses were also lowered than projected, which reduced non-tax revenues by about 0.15 percent of GDP. As usual, the government assured the IMF to meet the shortfall by containing current spending to deliver savings of about 0.15 percent of GDP-mainly in non-energy subsidies and untargeted grants. The IMF shows concerns that the lower tax revenues entail lower transfers to the provinces, which will have to reduce provincial current and capital spending to comply with agreed targets and generate additional savings. It notes that Provincial understanding-which has been the norm in recent years-could fully cover the remaining fiscal shortfall to meet the year-end deficit target while providing room to avoid further reductions in the federal capital spending though the Federal Board of Revenue (FBR). In categorical terms, the IMF has declared that even though FBR started initiatives on the tax administration side to improve revenue collection, but concrete results remained meagre3. IMF suggests that building on the recent release of a registry of all taxpayers, more determined enforcement actions are needed to strengthen compliance. It further says decisive implementation will not only improve the fiscal stance but will improve the equity and legitimacy of the tax system, and create fiscal space for higher social spending and higher infrastructure investment-encouraging larger private investment by improving the business climate. Welcoming FBRs measures to broaden the tax base, IMF observes that it could have been more ambitious. The authorities plan to eliminate concessions and exemptions granted through SROs is a positive development. The SRO reduction or elimination, expected to yield 0.3 percent of GDP in additional revenue in fiscal year (2014-15), is a first step but should have gone further. The authorities have committed to a similar effort to cut additional SROs in fiscal year (2015-16) and fiscal year (2016-17) which will help move towards a modern tax base. Outside SROs, the fiscal year (2014-15) budget could have placed greater emphasis on other bold base broadening measures with a more decisive permanent impact on the revenue-to-GDP ratio, rather than on small tax measures of limited quality. According to IMF, in the next fiscal cycle, the government will need to press forward with additional steps to simplify the tax system, broaden the tax base (including beyond SRO elimination), and provide a level playing field for taxpayers. The IMF is genuinely worried about the performance of FBR. This is the sixth consecutive year it has missed the-many-times revised targets. The second revised target this year of Rs 2,275 billion-the original was Rs 2,475 billion that was later reduced to Rs 2,345 billion-was not met, yet Finance Minister applauded the efforts of FBR team! They will certainly get rewards and awards despite dismal performance. They should have collected Rs 6 trillion if not the real tax potential of Rs 8.5 trillion-Budget 2014-15; challenges before Chairman, Business Recorder, May 30, 2014. IMF in its review has specifically mentioned that FBR authorities have set up an Integrity and Performance Unit to encourage high achievers and prosecution of corruption. In addition, they set up a Fiscal Management Cell to handle intelligence and investigation of non-taxpayers. The question is what action has been taken against the rich and mighty non-filers-their number is not less than 20 million. It is admitted by IMF that fewer than 4,500 taxpayers took advantage of the authorities tax amnesty scheme introduced in November 2013. Collections related to the non-filers and non-registered pillars of the scheme are minimal (less than Rs 150 million). The pillars related to current filers, non-filers, and non-registered are no longer available. This testifies to the utter failure of FBR and even IMF has no option but to hide its incompetence and corruption as it has to get its money back. One of the chairmen under PPP regime, Ali Arshad Hakeem, in a meeting with the then Prime Minister on September 28, 2012, ensured achievement of target of Rs 2381 through two amnesty schemes yielding extra revenue of Rs 160-170 billion. Experts at that time expressed serious reservations about the success of such schemes and estimates given by the FBR in the presence of section 111(4) of the Income Tax ordinance 2001. The present government did not bother to study the issue and committed a grave mistake of giving amnesties/immunities. Even the IMF did not stop them for the blunders that miserably failed-Ruling elite letting down FBR, Business Recorder, May 9, 2014. Now IMF has revealed that Ministry of Finance and the Financial Management Unit (FMU) are working with FBR to include serious tax crimes in the Anti-Money Laundering Act of 2010 (AMLA). It says that the FBR authorities would submit amendments to the AMLA to Parliament by end-September 2014 (structural benchmark). In addition, by end-June 2014, the FMU should provide proper guidance to assist financial institutions and the FBR to detect abuse of the investment incentive scheme. IMF is naïve; it is perhaps not aware of present enforcement level of AMLA. All the tax evaders, having strong roots in political parties, launder untaxed funds and get benefit under section 111(4) of the Income Tax Ordinance, 2001 read with provisions of Protection of Economic Reforms Act 1992! In this situation, IMF is talking about including tax crimes as part of AMLA! Even if it is done, who cares and who will implement it. This confirms that IMF and other so-called experts on Pakistan sitting in Washington and elsewhere know so little or understand our laws and actual operations of money launderers vis-à-vis thriving parallel economy. FBR alone is blamed for revenue shortfalls but nobody realises that in the presence of section 111(4) of the Income Tax Ordinance, 2001 and Protection of Economic Reforms Act of 1992 (brainchild of Dar to dollarize Pakistans economy), how can it enforce tax compliance? The dilemma of FBR is also bewildering for the IMF and World Bank as in the past, $100 million were provided for Tax Reforms Administration Programme (TARP) but towards its end, tax-to-GDP ratio declined from 11% to 8.2% and tax gap increased from 75% to 150%. IMF, World Bank and many analysts have never bothered to examine the real issue that is undermining of tax enforcement by the politicians through obnoxious laws like section 111(4) of the Income Tax Ordinance, 2001, Protection of Economic Reforms Act of 19924 and innumerable SROs. With such lukewarm attitude and politically-controlled FBR, there is little hope that Pakistan will be able to achieve a desirable tax-to-GDP ratio of 15-20 percent in the next three years. FBR is showing helplessness in enforcing tax laws despite the claim that it possesses information of all the rich persons who spent millions but never filed tax declarations. FBRs failure can be measured from the fact that about 70% of legislators did not file tax returns and wealth statements for tax year 2011 and it did not bother, or more appropriately dared to, issue notices to them. The same position prevails for judges, military and civil high-ups! There are five million individuals having annual income of Rs 1.5 million, but they do not file tax returns. Total income tax due from them per year is Rs 1850 billion. The real tax potential of Pakistan is not less than Rs 8.5 trillion (see details in our article, Finance Act 2014: apathy continues, Business Recorder, June 27, 2014), but FBR is begging money from abroad and extend immunities and amnesties to tax evaders. Strangely, IMF is also not assessing and emphasising the real tax potential of Pakistan and accepting blindly the explanation of FBR contained in the Third Review as under: The initiative to incorporate 300 thousand new taxpayers into the income tax net is moving ahead. For this purpose, we continue to strengthen our database by collecting information from multiple sources including urban property transactions, motor vehicle procurement, and international travel. More than 80 thousand initial notices (u/s 114 of the Income Tax Ordinance 2001) have been issued-based on large potential fiscal liabilities and location to ensure the initiative is nation-wide-and more than 20 thousand second notices (u/s 122C of the law) which will be followed by a provisional assessment, collection procedures, and penal and prosecution proceedings. By end-September, we will issue 125,000 first notices (u/s 114) which will be followed by second notices (u/s 122C) to at least 75 percent of those who did not respond satisfactorily to their first notice within 60 days. The FBR will also issue a provisional tax assessment to 75 percent of those who did not respond satisfactorily within 60 days to the second notice. So far, over 6,300 individuals have registered and filed returns as a result of the initiative, and this number is expected to rise in the coming months. We published in mid-February a tax directory of all current parliamentarians at both the federal and provincial levels and the full directory of all taxpayers at end-April, in an effort to foster a culture of transparency and compliance. These efforts will be further assisted by increasing the number of tax audits to 5 percent of declarations (from 2.2 percent last year), which is already underway. We will also continue to seek technical assistance on tax administration from our international partners. It is nowhere mentioned in the IMF Third Review that FBR should improve its enforcement capacity through Tax Intelligence system. Capping budget deficit even at five percent would not be possible without substantial resource mobilisation and drastic cuts in non-productive expenses coupled with rapid industrial growth that will ultimately improve tax-to-GDP ratio. The real dilemma of FBR is that mighty segments of society do not pay personal income tax, courtesy permanent amnesty scheme available in the Income Tax Ordinance, 2001 in the form of section 111(4). Those who do not whiten their black money through fake remittances periodically avail loathsome amnesty schemes to decriminalise their untaxed wealth and incomes by just paying 1%-2%, which amounts to sneering at the honest taxpayers. One wonders why IMF has not taken note of it till today and if remains ignored even by other donors. People in Pakistan ask why they should file tax returns when their president, prime minister, ministers, governors and elected representatives do not. They quote the example of Nawaz and Zardari. Zardari, before his election on September 6, 2008 got $60 million unfrozen in Switzerland, but did not bother to tell the nation how much tax was paid on this colossal money and why it was lying abroad. Nawaz never told the nation how his sons and son-in-law (Ishaq Dars son) minted billions abroad and why they had companies registered in tax havens. President Mamnoon Hussain like his predecessor Asif Ali Zardari before taking the oath did not declare his assets and liabilities with evidence of payment of taxes where due. The same was true of all the leading politicians. We have written time and again in these columns that tax culture in Pakistan will never take roots unless tax and asset declarations of all the mighty segments of society-politicians, high-ranking military and civilian officials, judges and all public office holders-are made public. As a result of this consistent campaign, FBR did publish tax directories of elected members of parliaments and senate and all taxpayers who filed returns for tax year 2013. However, FBR till today has not published the names of non-filers who were liable to file tax returns but failed to do so, let alone take action against them under the law. There should be a public campaign that the absentee landlords, most of whom are members of parliaments, should reveal their assets vis-à-vis tax declarations. All the judges, high-ranking public servants, including serving and retired generals, should also be required under the law to make their assets and tax declarations public. Any person, who is a tax delinquent or has been beneficiary of any loan write-off, should be debarred from contesting elections. All kinds of exemptions and concessions provided under various tax codes should be withdrawn, especially section 111(4) of the Income Tax Ordinance, 2001. The tendency to squeeze more and more from the existing taxpayers and giving a free hand to non-filers has eroded the tax system to an extent where voluntary compliance and tax enforcement have lost their relevance. The present tax system imposes greater and undue incidence on the poor and middle-class people (eg 17% GST takes larger portion of low-income groups compared to high income groups). The rich and mighty are not paying agricultural income tax and income tax on their non-agricultural income. Most of them are landowners-cum-industrialists-cum-politicians and are engaged in massive tax evasion-cases of cartelization in various industries are now admitted even by the Finance Minister. Adding insult to injury, the tax collected from the citizens is wasted on unprecedented privileges and perquisites meant for the elites-indomitable military complex, civil bureaucracy, higher judiciary, landed aristocracy and its cronies, industrialist-turned politicians and unscrupulous businessmen. Pakistan can raise tax-to-GDP ratio to 20% if heavy tax is imposed on absentee landlords, speculative dealers in real estate (this would also help in promoting construction industry as prices of land come down) and asset-forfeiture legislation is passed for untaxed assets. It is the need of the hour that FBR should be replaced with National Tax Authority (NTA), insulated from all kinds of political, financial and administrative pressures- Need for National Tax Commission, Business Recorder, April 25, 2014. The appointments of Chairman and members of proposed NTA should be through a public hearing by Select Committee of both the Houses of Parliament and not on the whims and dictates of the ruling political party headquarters. All kinds of loopholes in tax laws should be plugged by proper legislation. The SRO culture should be abolished immediately. No executive authority should have powers to amend tax laws. Through public debates and democratic processes, the Parliament should devise a rational and workable tax policy after taking inputs from all the stakeholders and experts in the field. There should be zero tolerance in respect of enforcement of tax obligations across the board without any fear or favour. Tax collected should be spent for the welfare of the masses and not for the luxuries of the mighty segments of society. The rich should be taxed for the benefit of the poor. At the moment, we are doing just the opposite. This issue, and rightly so, is of no concern to IMF. They want their money back with interest-it is legitimate as we went to them for funds. The real fault lies with our rulers who do not want fundamental reforms that can eventually lead to self-reliance-generation of sufficient funds for all our needs. They want foreign money as they get hefty kickbacks from projects funded through it. Taxing the rich is not part of their political agenda as they represent them and get elected through money power. The ruling elites, military hierarchy, bureaucrats, judges also get their due share from national treasury, so they are to protect the exploitative system. The real losers in the present set up are the poor and the less privileged. Unless the tax system is made favourable to the have-nots, it will create more and more miseries for them and making the powerful more powerful through amassing wealth that is primarily produced by the property-less tillers and industrial workers. The question is what the system is giving to them. Those sitting in the Parliaments must ponder about it-after all they are elected by these hapless and economically-deprived segments of society. (The writers, tax lawyers and partners in law firm, HUZAIMA & IKRAM (members Taxand: taxand), are members of Adjunct Faculty of Lahore University of Management Sciences (LUMS) They can be contacted at info@huzaimaikram) 1 A 36 month, SDR 4,393 million (425 percent of quota) Extended Arrangement under the Extended Fund Facility was approved by the Executive Board of IMF on September 4, 2013 and the second review was concluded on March 24, 2014, with a total of SDR 1,080 million disbursed. A fourth tranche of SDR 360 million was paid on the completion of third review (July 2014). 2 imf.org/external/pubs/ft/scr/2014/cr14184.pdf. 3 IMF was certainly soft on giving the third tranche to the government-see comments by Ihtasham-ul Haque in his article, Lowering the bar, The News, July 8, 2014 and by Khalid Mustafa in his article, Going soft, The News, July 8, 2014. 4 na.gov.pk/uploads/documents/1334289655_675.pdf.
Posted on: Fri, 11 Jul 2014 00:40:42 +0000
Trending Topics
Recently Viewed Topics
© 2015