Reforming the tax system

191

Situationer

M. Ziauddin

Pakistan continues to suffer from acute resource constraints for decades now making it increasingly difficult for the official economic managers to balance the budget without resorting to heavy domestic and external borrowings. And at times successive governments have also resorted to tax amnesty schemes which the Tax Reforms Commission (TRC) finalized in 2013 had identified as one of the major factors causing distortions in the country’s economic system. Indeed, these schemes have been identified as incentives for dishonesty.
Legitimate fear of the ‘corrupt-to-the-core’ tax collectors is often quoted by tax evaders as an excuse for not paying their tax dues. Even today it is the same fear that keeps the non-filers from documenting their real incomes. Intriguingly, no government since the very inception of the country has done anything so far to save the non-filers from the high handedness of the tax collector, though digitisation has made it so easy to eliminate the physical interface between the taxpayer and tax collector.
According to the Tax Reforms Commission Report made finalized in 2013 revenue collection is said to be crucially influenced by the administrative capacity to perform key functions, the existence or absence of a comprehensive, coherent tax code and adequate systems of registering taxpayers, as well as monitoring, recording and controlling payments and declarations in a timely manner. The Federal Bureau of Revenue (FBR) does not even notify taxpayers when they fail to ?le or pay on time. There is no system of selecting and performing audits and collection activities effectively. Overall organisational development and management training in tax administration is ignored blatantly. In audit selection, no clear criteria based on automated systems and good data is used. Revenue forecasting for each tax type, taxpayer type and geographic region is not done at all.
What is, therefore, needed to be resolved on a priority basis improving the culture and management capacity of the FBR to willingly support a reform programme, mitigating the unsettling effects of frequent and ad-hoc legal and administrative changes. These frequent changes provide opportunities for increased discretion and corruption, insufficient knowledge of taxpayers on their tax obligations and decreased motivation to comply with tax demands.
The FBR has a list of 3.5 million rich Pakistanis who frequently travel abroad, live in posh areas, operate multiple banks accounts with more than one vehicles registered in their names but are out of tax net. So far the Board seems to have only kept gazing at the list making no move at all to put these individuals on notice.
In Pakistan, the poor are subjected to heavy and harsh taxation to finance luxuries of the elite, enjoying free perquisites, benefits, including purchase of valuable state-owned plots in prime locations at throw-away prices. The way they waste and plunder taxpayers’ money is no secret. The country is surviving on bailouts from the IMF due to perpetual failure of the ruling elite to tax the rich and mighty that matter in the country. 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. The federal and thereafter the provincial governments have shown little interest in collecting progressive taxes e.g., Estate Duty, Gift Tax, Capital Gain Tax and so on.
During General Zia’s rule of 11 years and that of General Musharraf for nearly nine years, absentee land-owners 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. All four provinces have laws to this effect, but total collection in 2013-14 was less than Rs2 billion (share of agriculture in GDP was about 22 per cent). 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 the Finance Act, 1977. If we add total loss of revenue through various exemptions, non-taxation of benefits given to the state oligarchy and through Statutory Regulatory Orders issued during the last four decades, the number comes to more than Rs100 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.
In a 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 while maintaining vertical and horizontal equity. 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 e.g., women and children, minorities, the disabled and unemployed. All these elements are missing in our polity and tax policy.
Unfortunately in Pakistan, successive rulers had 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 make the rich, richer and the poor, poorer. 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. Our politicians lack willingness or the vision to achieve a sensible balance between income, capital and consumption taxes. The country actually needs more investments in creating human capital (e.g., education, vocational training and health), and necessary public infrastructure to increase productivity of the economy.
Along with amnesty scheme, the following have been identified by various studies on the subject as the major reasons for crisis in the taxation system: 1) extremely poor compliance levels and awful enforcement; 2) presumptive taxes and lack of documentation; ad hoc-ism in terms of economic and fiscal policy and a flawed tax system; lack of consideration for values and integrity; serious under-performance by the IT support; the SRO culture; exemptions, concessions and reduction in the tax rate; inadequate facilitation of taxpayers; adversarial relationships; training of FBR staff — serious capacity issues when it comes to FBR personnel; weaknesses in terms of integrity of data and its ownership; no effective concept of taxpayers’ rights; inadequate focus on technology and training of users; lack of research and analysis.
Perhaps many ills of collection could have been overcome if only the audit aspect of the tax system had been reformed. Tax audit is the core function of any revenue authority and should have received the maximum focus and attention. But the prevailing structure of the Audit Wing and its field formation are not geared to undertake the required task. The staff of the wing numbers about 650. This means a workload of about 400 audits/assessments per officer, per year. Therefore, it is not surprising that an overwhelming number of tax audits are conducted in haste and are perfunctory creating space for tax evasion and avoidance. The system needs a complete overhaul to cater to the complexities and diversities of tax audit. Modern-day tax audit requires resources in auditing, accounting and information technology, together with specialised sectorial knowledge.
For example, transfer pricing, sale and purchase of properties, benami accounts and undeclared assets held outside the country and so on, are all very lucrative sources of direct taxes. But unless the tax administration is geared to probe these fields, the vast resources covered by these activities would always remain out of the tax net.
In addition, the audit function should be completely separated from rest of the FBR. A separate audit division needs to be created, to plan and execute the work of audit. Experts have suggested formation of a semi-government, autonomous audit body, hiring accounting and audit professionals instead of Civil Service Academy-trained superior service officers.