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Huzaima Bukhari & Dr. Ikramul Haq
The government of Pakistan Tehreek-i-Insaf (PTI) has been reminded in these columns time and again that no agenda for simplification of tax system and rationalisation of tax codes can improve voluntary tax compliance, unless there is substantial improvement in public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to collect taxes fairly and justly, using modern technological tools.
In a two-part series, Automation of revenue collection—I, Business Recorder, February 1, 2019 and Automation of revenue collection—II, Business Recorder, February 7, 2019 a complete road map was provided suggesting as under:
The fundamental element of tax reforms is providing an efficient and competent administration. This is nowhere visible in Pakistan. Tax machineries at federal and provincial levels lack requisite level of digitization, professionalism and human skills. Any exercise relating to comprehensive tax reforms cannot be a time-bound affair and does not mean merely making changes in tax laws or suggesting cosmetic changes here and there. Reforms can be successful only if comprehensive analysis is made of the whole system, that is, tax structure, tax administration, state of economy, taxpayers’ attitude, revenue needs of the country and many other allied aspects. Tax reforms, an ongoing process, require a fundamental structure in place. We are making reforms without first establishing a workable structure. The best example of an efficient tax structure is that of Sweden where tax agency, Skatteverket, has data base of each and every person, natural or juridical. Skatteverket is accountable to the government, but operates as an autonomous public authority. This means that the government cannot exercise any direct control over the tax authority and/or interfere in tax affairs of individuals or businesses.
The Prime Minister earnestly desires tax reforms, but needs to realise that it is not possible without first establishing an efficient, workable structure. In Automation of revenue collection—II, Business Recorder, February 7, 2019, it was suggested:
On a micro level, FBR manages four isolated tax silos—Customs, Income Tax, Sales Tax and Federal Excise Duty. The integration of all these is imperative so that the field formations have data in these isolated silos square up and could detect avoidance/evasion if there are any inconsistencies, non-declarations or mis-declarations. In short, there should be 360 degree view of every taxpayer. If there is any transaction in an external system, like banking, property, utilities, motor vehicles etc, then FBR should be in a position to know about it in order to add that information to the concerned taxpayer’s profile and also to add new taxpayers to the tax net.
On macro level, Policy Board, independent of administration apparatus, should be in a position to analyse the available databases and correlate them to various external databases to identify macroeconomic trends, anomalies and opportunities to formulate and fine tune policy in a timely manner. This would include sectoral data, tariff slabs, commodity data, regional data, demographic data, exemptions data etc and then its time dimensional (time series) analysis across various units of time (month, quarter and financial year) to understand the impact of policy and other changes in the economic environment. Such data should provide expeditious answers to questions like:
- What has been the impact of exemptions on a specific sector for e.g. automobile manufacturers, over the last three years and how do they correlate to the liberalisation of policy with respect to import of manufactured automobiles?
- How much has a specific sector contributed to the tax net relative to its share in the GDP?
- What will be the impact on revenues in the event of change in tax rates/slabs in a specific sector?
The PTI Government, before the forthcoming budget must amend Federal Board of Revenue Act of 2007 [hereinafter “the FBR Act”] for which a blue print is provided in Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, revised and enlarged version December 2020, available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/).
The following measures/steps are necessary to broaden the tax base, simplify taxation, extend support to all those affected by complete and partial lockdowns due to Covid-19 recurrent waves and other global factors resulting into demand contraction and absence of reliable national socio-economic registry:
- All adult individuals, whether earning income or not, on the basis of their Computerised National Identity Card (CNIC) used for getting mobile connectivity be registered by the Federal Board of Revenue (FBR) compulsorily by amending the law and then asked to update their profile (English and Urdu interface should be available on the website of FBR). Those having taxable income should be facilitated to file simple and easy one-page tax return made available both in English and Urdu. It will help in documentation of all households and their earning levels at national level by matching family-tree data available with NADRA. Individuals earning below taxable limit should be paid Income support (negative tax) till the time the State provides them employment and not keep them beggars for life.
- According to latest data available on the website of Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on as on January 31, 2021 is 178 million (83.09% teledensity), out of which 93 million are 3G/4G subscribers (44.50% penetration), 2 million basic telephony users (1.3 teledensity) and 95 million broadband subscribers (44.6% penetration). At present, the entire taxable population and even those having no income or income below taxable limit are paying income tax (12.5%) at source as mobile users. From this it is not difficult to establish income taxable base and then through automation send them even prepaid return.
The PTI Cabinet in November 2018 approved the summary to separate FBR’s policy from its operation. The PTI Government also held maiden meeting of the reconstituted Policy Board on February 12, 2019 and the then Finance Minister, Asad Umar, highlighted the statutory requirement of separation of tax policy and administration. However, no practical steps were taken and like its predecessors, the PTI Government also relied on FBR machinery to make policy and prepare finance bills in 2019 and 2020 violating the law and negating its own decision. It should not be the case for 2021 as on February 11, 2021, the Finance Minister, Dr. Abdul Hafeez Shaikh, “after due deliberation, accorded approval for the establishment of ‘Tax Policy Unit’ under the administrative control of the Finance Division”. This step was suggested in Automation of revenue collection—II, Business Recorder, February 7, 2019 as quoted above.
The FBR, should only collect taxes within the framework of laws passed by the Parliament and fiscal policy formulated by a statutory Policy Board consisting of minister for finance as chairman, and members to include ministers of commerce, industries, textile, privatisation chairmen and one member each of standing committees of finance and revenue of Senate & National Assembly, chairman FBR (to act as secretary as well) and any other persons to be nominated by prime minister having necessary qualifications, experience and expertise from amongst sectoral specialists and business on honorary basis. These nominations as per subsection section 6(5) of the FBR Act “shall be subject to ratification by the Standing Committees on Finance and Revenue of the Senate and National Assembly”.
Section 3 of the FBR Act says, “There is hereby established a Board to be called the Federal Board of Revenue, which shall consist of not less than seven members to be appointed by the Federal Government”. FBR, in terms of section 2(12) read with section 80(2)(b)(ii) of the Income tax Ordinance, 2001, is to be assigned the status of “company”. Every ‘company’ under section 114(1)(a) of the Income Tax Ordinance, 2001 is bound to file tax return whether it has taxable income or not as provided in Article 165A(1) of the Constitution: “For the removal of doubt, it is hereby declared that Majlis-e-Shoora (Parliament) has, and shall be deemed always to have had, the power to make a law to provide for the levy and recovery of a tax on the income of a corporation, company or other body or institution established by or under a Federal law or a Provincial law or an existing law or a corporation, company or other body or institution owned or controlled, either directly or indirectly, by the Federal Government or a Provincial Government, regardless of the ultimate destination of such income”.
Since 2007 FBR has been violating Article 165A(1) of the Constitution and section 114(1)(a) of the Income Tax Ordinance, 2001 by not filing tax returns, even if earning no taxable income. What a mockery that FBR did not bother to abide by the law that it enforces on others! It was elaborated in detail in The case of missing returns [The News, December 21, 2015].
In the third and final part of this series, operational aspects of working of FBR will be highlighted to make it an efficient tax agency having data of each and every person, natural or juridical. It should be accountable to the government, but operate as an autonomous public authority. This means that the government cannot exercise any direct control over the tax authority and/or interfere in tax affairs of individuals or businesses.
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The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)