Tax reforms: Pakistani style


Tax reforms, initiated at the command and demand of foreign donors in 2000, failed to yield any positive results in the last eight and a half years. Every year since then we have had larger and larger fiscal and revenue deficits. Decline in tax-to-GDP ratio, huge revenue leakages and above all, tax exemptions to the rich and mighty have been the salient features of reform agenda!

In the last 10 years, tax incidence on the poor has increased manifold (nearly 37%) whereas the absentee landlords that now include those who receive lands as grants and awards have not paid even a single penny as income tax on their colossal incomes or wealth. The crooked businessmen, beneficiaries of loan write-offs, corrupt politicians continue to violate tax obligations and the nation has been further burdened with more foreign loans to reform the ailing tax system.

What a tragedy that even for reforming ourselves we need foreign loans and grants! It is reported in Press that the Federal Board of Revenue (FBR), through Economic Affairs Division (EAD), has sent a request to the World Bank to extend its deadline for meeting the target envisaged under Tax Administration Reform Project (TARP) by two years from December 2009 to December 2011. We are infamous for doing everything a la mode – violating all the established rules and norms – thus tax reforms Pakistani style is no different.

At the end of TARP, our tax bureaucracy is asking for two years’ extension’! Nobody has asked the FBR stalwarts who is responsible for wasting borrowed funds and why the targets have not been met on time. It appears that all members of the concerned selected committee of the Parliament are quite oblivious of these developments.

They are paid (ironically by the taxpayers of this country) to hold the bureaucracy accountable for lapses, but they on the contrary, seek to establish good relations with the tax machinery; after all, none of them is paying taxes properly. In these circumstances, the FBR top-brass thinks it is above law – the recent decision of the apex court holding that the new income tax law was enacted in utter haste and without adhering to proper consultative process, is an eye-opener.

Taxes worth billions of rupees have been lost due to incompetence of FBR, yet the government and Parliament are least pushed. In any civilised society, in the wake of such a decision, there would have been resignations at the top level and inquiry through an independent commission to pinpoint the responsible persons for proper punishment under the law. But in the Land of the Pure nobody has even bothered to take note of it although the apex court has given categorical finding against the FBR.

In the face of this, the Chairman of FBR – a very junior DGM officer heading the organisation and having no knowledge of tax system or tax laws – was telling the media that he would slash the cost of TARP to 50%. According to him “earlier the cost of TARP was over pitched by including certain computer-related projects in it”. If his version is correct then who will take action against those responsible for giving wrong proposals and estimates?

It is strange that without taking the permission of the Parliament, the executive is directly approaching foreign lenders for reduction in already approved low-rate loan facility. By admitting that earlier the cost of TARP was “over pitched”, Chairman of FBR is giving not only a wrong message to the concerned quarters but also depriving the government from approved easy-repay-back-low-interest-rate foreign funding (after economic meltdown and our going back to IMF, loans are quite expensive).

The new Chairman will not be here in 2011 and at that time when the new head asks for fresh loans it will of course be on very high rates. This is what our marvellous bureaucracy keeps on doing – rejecting, modifying and destroying each other’s programmes and plans – but our parliamentarians simply keep mum and take no action against bureaucrats. Why they just look the other way is quite un-understandable. The only plausible explanation can be existence of an unholy alliance between the two against the people of Pakistan.

Chairman FBR, while revealing to the media the great deed of sending request for “scaling down the cost of ongoing Tax Administration Reform Project to $70 million from earlier estimated $149 million”, did not give any explanation why for 5 years original allocation was not revised. Why was such an important process not debated publicly and even no discussion ever took place in the Parliament?

According to original estimates, FBR was to spend $149 out of total $149 million, UK-based DFID committed $25 million grant while the WB agreed to lend $78 million IDA credit (soft loan) and $24.4 million IBRD loan (commercial loan). Pakistan government committed to share the remaining amount of $23.1 million. The main component of the TARP was targeted to automate the FBR by spending $90 million amount for developing software and hardware to ensure maximum usage of computers.

Under the TARP project, mainly funded by the WB, the FBR initially planned to allocate $54.30 million to develop a computer software programme for establishing connectivity among all major four taxes in Pakistan. The FBR has failed to achieve any such connectivity-on the contrary court battle is going on between the income tax and sales tax officers (what an achievement of reform programme).

According to the original agreement, FBR allocated $3 million for procurement of goods, $24 million for works, $16 million for technical assistance, $10 million for training, $3.10 million for programme management, $54.30 million for ICT (Customised software), $35.65 million for PCs and other office equipment and $2.90 million for other expenditures. Now after 5 years, FBR failed to even spend 50% of approved funds.

It proves that the issue is not that of funds but lack of proper governance. Our bureaucracy and politicians are experts in squandering funds but lack of willingness and competence to meet the given targets. This is where our real weakness lies and not dearth of funds as usually propagated by official quarters.

TARP, prepared, designed and monitored by foreign consultants, lacks proper remedies for our ailments. Its aims and objectives are ambiguous and flawed. It will take an entire decade for the evolutionary changes suggested in the existing tax system for bringing Pakistan at par with many developing countries in achieving a desirable tax-to-GDP ratio of over 15% (presently it is just 9%).

On the contrary, some radical changes – like broadening of tax base and reduction of exorbitant sales tax rate, simpler and fairer tax codes – will encourage investments and savings. Pakistan needs to re-prioritise its tax goals to improve tax-to-GDP ratio, attain better compliance and collections, coupled with rapid industrial and business growth.

During the last 5 years of TARP, FBR has just paid lip service to slogans under its amended motto of ‘vision, mission and value’ (previously ‘value’ was missing!). The “mission” of broadening tax base has suffered numerous setbacks in the last five years-as the mighty politicians, generals and big absentee landlords are reluctant to come into the tax net.

Lack of political will to tax the rich and wastage of taxpayers’ money by the rulers is the root cause for the absence of tax culture. People justify non-payment of taxes by saying why should they bear the burden for the luxuries of the corrupt rulers and government officials. Nullum tributum sine lege expresses the requirement that rule of law must be applied to assessment and enforcement of taxes.

FBR must comply with the enacted laws (eg should issue refunds as promptly as it collects taxes at source) and taxpayers must be able to predict in advance the consequence of their transactions. In case of non-compliance with the rule of law, legal remedies must be provided to protect the individual or the corporate body concerned. Faith in the system will never be restored unless rule of law is enforced both for the tax machinery as well as the taxpayers.

How to achieve tax compliance is the main challenge before the government. The State must remember that if taxation is viewed as being unfair or favouring some taxpayers, it remains counter productive in the long run. The crisis with Pakistan is that general acceptance of tax system is undermined.

Special efforts and rational policies are needed to restructure the tax system and restore public confidence in the tax officials. Even a good tax system will not work if the prevalent negative mindset of the tax official persists. There is an immediate need to improve both the system and the human fabric that controls it. The tax system must provide:

— Rule of law and predictability of the authority to tax

— Principles of proportionality, efficiency, effectiveness, flexibility, continuity, reciprocity, fairness and equity

— Tax harmonisation

— No double taxation or intentional non-taxation

— Non-discrimination

— Strict anti-tax evasion rules

The present tax system imposes greater and undue incidence on the poor and middle-class people eg 16% sales tax (in fact 40% of finished imported goods after levy of all kinds of taxes) takes larger portion of low-income groups compared to high- income groups).

The rich and mighty are enjoying complete tax exemption as their colossal agricultural income and enormous profits made through speculative transactions made in real estate and on the money/share market are outside tax net. Since they are not paying a single penny as tax, the vast majority of citizens argue as to why they should be subjected to exorbitant and multiple taxes?

From 2003 to 2008, FBR miserably failed to improve universal tax compliance under the TARP [it should be renamed as TRAP] and the situation in 2009 will not improve unless the government takes some concrete and positive steps in taxing capital employed in unproductive areas thus ensuring its shift to productive sectors that generate more goods and services, leading to greater employment possibilities.

Courtesy: Business Recorder

Leave a Reply