Tax reforms and the future of the economy
Taxes and duties are collected by FBR in Pakistan therefore these words have become synonyms with FBR over time, and used collectively in common parlance and drawing room discussions, even in the policy echelons. Anything meant to reform the tax system actually means to reform the FBR, its structure, functions, and its legal Framework. Reform is a process which must continue unabated in each and every institution all the time and throughout the life cycle of any organisation. FBR is no exception, if history is any guide it has not happened as per the above universally accepted principle of change in an evolutionary manner, catering to the needs as and when they arose. It is the second big national institution after army and has an equally important function to perform. The job of this organisation is time bound, with deadlines and also quantifiable at the end of each financial year. This makes it distinct than the others in the state structure of Pakistan. The significance of the job that it does has its direct implications on the national economy particularly the fiscal deficit which always keep it in the lime light.
When the job shows any slackness, it is measured by only one parameter which is target, its bashing starts from right, left and centre. The most common critique is that it has failed to broaden the tax base, issue wiry firry notices, squeezes and teases the existing taxpayers and so on for achieving their targets. These arguments generally degenerate to outright and sweeping allegations on the integrity of the organisation. When the present govt took over, this attained more speed and significance as the prime minister publicly and particularly in his first speech to the nation repeated these allegations more forcibly specifying in a blunt and terse manner, making everybody believe in it. And why not, when it came from the chief executive of the state, under whose executive authority it was to perform for five years. The spat of these charges didn’t stop here, but trickled down to the Finance Ministry, the political tail enders, and the chambers of businesses. Without going to the merits of this tirade, its impact on the national revenue ‘up to around expected 400 billion plus’ is more important and biting the nation. The institution has come to a standstill and is at a complete halt now. Obviously, the officers are worried about their future and career, and why not? After all it was none less than the PM charging them as a mafia. The workforce got demoralised, de-motivated and went on the back foot.
In the same breath, the prime minister made a public commitment of getting rid of this evil by reforming it or doing it away altogether and replacing it with a new tax collecting agency. The commitment to fix it and reform it looks like a far cry even today, even after the lapse of almost eight long months. More worrisome is that there doesn’t appear anything on the scene known to the common man. A-team has been formed, consisting of some past and new members, most of them having no background knowledge of the working in FBR. Anything done so far has been done behind closed doors, without the participation of FBR, a major stakeholder. Coming back to FBR reforms, the history of reforms is important to take stock of. It has been reformed on a number of occasions in the past as well, as a project, by the government of Pakistan and some financed by the multilateral organisations. To enumerate the important ones, 1990 to 1991 Resource Mobilisation and Tax Reform Commission (RMTRC) was formed. In 1993 Structural Adjustment Facility (SAF) was signed with International Monetary Fund (IMF) and TARP programme under the World Bank assistance.
Reforming the FBR is a buzz word again, and every Pakistani wishes it to be fixed and reformed and quickly. To my understanding, more than everybody else, FBR officers themselves wish it to be reformed. They also wish that action should speak louder than the words and hollow rhetoric. Nobody doubts the intention of the present government for doing the same, but what is doubted is the capacity of team doing it and ground information available to them. The team derives it spirit from the TARP reforms programme and the recommendations of the tax reform commission in the previous government. A good work was done on both these occasions and most of the ground towards success was covered. This is a good idea to continue the effort as huge money was spent on those reforms. Quite a few of the recommendations made by TRC were also enforced, particularly the legal one.
Since the present members of reform commission include both the heads of these reforms’ programmes, we are confident they will contribute by informing the new reform members as to where these reforms were successful and where they failed. Furthermore, the failures will be picked up one by one and solutions found out. This is the way forward rather than the disastrous path of undoing FBR and making a new revenue setup. Referring back to the history of reforms for guidance, there is no denying the fact that the only meaningful reforms made, were under the TARP programme, as they were based on broad-based consultation of all stakeholders, researchers, intellectuals and international experts. These reforms made a difference also. The present structure of RTOs and LTUs is the product of those reforms. It changed the age-old territorial system of administration to functional, with universal self-assessment scheme. Risk audit management system was introduced. Technology was also introduced aiming at a paperless environment. Centralisation of authority occurred in administration. New income tax ordinance 2001 was introduced as a modern legal framework. Infrastructure changed to look like corporate outfits. This was a paradigm shift.
There exists resentment against the Federal Board of Revenue (FBR). Centralisation of authority occurred in administration. New income tax ordinance 2001 was introduced as a modern legal framework. Infrastructure changed to look like corporate outfits. This was a paradigm shift. Unfortunately, it had some unintended consequences, which incurred unanticipated collateral damages to system resulting in the present-day resentment. The very purpose was a sweeping change and complete overhaul of the system, dissociating itself away from the past thought to be bad and unwanted as we feel today. As unintended consequences, it developed gross functional anomalies like shrinking of base rather than broadening of base, deterioration of compliances to the worst in the history, and tax to GDP ratio had a free fall.
File movement on multiple desks, diluted the officer’s authority and ultimately created disciplinary issues. This became the major cause of corruption rather than combating it. Worst load shedding in the country at that time falsified the dream of paperless environment. Transforming taxpayer and tax collector relation to an interface with a faceless machine evaporated. The change created a new department of Inland Revenue Services (IRS) and income tax, as service was disbanded. The IRS got a sway over sales tax and federal excise in addition to the income tax for one window solutions and cross matching of information, cross match and catch new taxpayers and calculating income of existing taxpayers for detecting concealments of incomes and assets. However, the number of concealment cases fell sharply as against the goal.
The change boosted the revenue to a trillion in absolute terms for the, first time in the history of FBR, hailed and used as a justification to continue the change. Everyone, including myself celebrated, but without knowing that the most authentic parameter to gauge the success of reforms, tax to GDP ratio was steeply falling. The salutary impact in the beginning started phasing out with time. The drop in the tax to GDP ratio was pointed out to the bosses of that time, (privy to the discussion) and was brushed aside as the initial teething problem and adjustment phenomenon which was to be corrected with time. However, it was never corrected till today despite all efforts and we are still way low on the table if compared with the world and region. The number of amnesty schemes brought after the change is the evidence that it has failed to tap all domestic resources and even today, we are back to square one. We may be repeating it again tomorrow if not done as suggested.
Issues for consideration
There is no doubt in my mind that the present reform committee will be taking care of all the offshoots/ backlash of aggressive reforms in the past. They are also sensitive to the broadening of base and reducing tax burden on existing tax payers. The separation of policy board was an act in the right direction, but it was enacted in the FBR in the previous reforms. Frankly policy always remained with the Finance Ministry. The FBR was only the secretariat for doing the spade work for them so it was just a cosmetic change.
The team must analyse the malaise and ailments of the institution by diagnosing them one by one and then curing in a scientific manner based on data, home-grown solutions and experience on the ground. It is necessary, as ecology of administration is a full-fledged subject taught in all management schools in the world. The fact of the matter is that the tax base is very narrow, and taxpayers on record are overburdened.
The best system of taxation is more people paying and lesser rate of taxes. Therefore, the urgency of the reforms should be the treatment of this important symptom of the illness, resulting from low/no outreach of the department on one hand and policy changes on the other. Tax culture in the country has also not developed and paying taxes are not considered a matter of pride, rather the other way round. It is considered fine to hide tax, considered as penalties by the state. Nobody is named and shamed on the basis of tax evasion. Such culture is linked to the luxurious spending, misuse of their money, cars, bungalows and overbearing lifestyle of the political and bureaucratic elite. Moreover, taxes are not providing security, education, health and other social services.