Automation of revenue collection Huzaima Bukhari & Dr. Ikramul Haq Pakistan, for the last many decades, has been grappling with the problem of raising adequate revenues, tax and non-tax, to meet needs of both the people and the state. The perpetual and burgeoning fiscal deficit, coupled with deadly debt trap and mounting debt servicing, needs to be tackled on emergent basis. The economic managers of successive civil and military governments have failed miserably to use automation and Information Technology (IT) for revenue mobilisation. Paradoxically, their pre-occupation with more and more revenue collection has made them neglect the infrastructures required to administer these very taxes. They are caught in a dilemma; on the one hand there is mounting pressure to lower the fiscal deficit and on the other all attempts to increase revenue from the existing taxpayers is proving detrimental to the already ailing economy. Pakistan needs to learn from the experience of many developing countries of the world that managed to raise revenue by improving their tax administrations and using various automation tools. In 1992, Richard M. Bird and Milka Casanegra de Jantscher presented a marvelous book, Improving Tax Administrations in Developing Countries (interestingly this was IMF publication based on a conference held in Spain in 1991). Since 1992 there has been growing awareness that more efforts are required to improving existing administration if a developing country is keen in exploring new sources of revenue. The old saying, “tax policy is only as good as its administration”, is outdated. Today’s consensus is: “Good tax administration is good tax policy” [Stanley S. Surrey, Tax Administration in underdeveloped countries, University of Miami Law Review]. Many well-intentioned laws have been laid to rest by inefficient (which also include indifferent, corrupt and incompetent) tax administrations. Pakistan is a classic example of this phenomenon. The Federal Board of Revenue (FBR), apex administrative body for federal taxes, is the most apt example of being one of indifferent, non-professional, oppressive and inefficient tax administrations in the entire world. Taxation requires pragmatic thinking and is most effective when developed from a practical and possible agenda for building a sound tax administration, for which it is necessary to start its foundation from a Tax Intelligence System. The widest possible taxpayer base has to be identified for any tax to be equitably spread across the whole taxpayer population. Even a small tax at a lower rate spread over a wide taxpayer base will invariably yield more revenue than a higher tax on a narrow base. The levy of General Sales Tax (GST) at 17% in Pakistan (at import stage its impact after adding regulatory duty, customs duty, compulsory value added tax and income tax at source ranges between 35% to 65%) has failed to bring the desired results as it is a higher tax on a narrow base. Had it been 10% harmonised levy on goods and services across the board, it could have been enforceable/acceptable as well as successful in terms of yielding more revenue being a low rate tax spread on a wide taxpayer base. The standard GST rate in Pakistan is 17% but the government has power to lower or increase rate through statutory regulator order (SRO). During 2013-2018, the elected government was levying even 35% to 45.5% GST on certain petroleum products. There were also many sectors paying less than 17%. The effective sales tax rate in 2015, according to a study, was only 4% because of exemptions and deep-rooted corruption in the FBR. How can Pakistan succeed in improving revenue collection when it lacks basic data collection and its storage what to speak of developing a modern, fully automated system creating and updating the profile of every citizen/taxpayer? The efforts in the past to create a taxpayer’s profile through National Document Survey failed. No software has been developed for achieving this goal till today by Pakistan Revenue Automation Limited (PRAL), a subsidiary of the FBR engaged in IT projects though a project under the name of NEXUS started way back in 2005 (CBR Quarterly Review, Volume 6, No. 2, October-December 2006). 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 main functions of Skatteverket are collection of taxes, registration of population and estate inventories. Everyone who lives in Sweden is registered with Skatteverket. Everyone who is registered is issued with a personal identity number, which is used in contacts with government agencies etc. Each personal identity number is unique and is made up of the person´s date of birth and a four-digit number. The Swedish Tax Agency processes a great deal of data about private individuals and companies. Everyone has a right to know about data processing under section 26 of the Personal Data Act. You can always contact a tax office or the Head Office of the Skatteverket if any personal data is incorrect or incomplete or if you have any other questions about the processing of your personal data. Had we established National Tax Authority [Roadmap for tax reforms, The News, February 12, 2017 & Need for National Tax Authority, Business Recorder, October 20, 2017] on the pattern of Skatteverket today we would not have had any problem with census or collection of taxes or managing land records. This is the kind of innovation we need to debate and implement. The leakage of taxes of nearly Rs. 3 trillion can only be plugged through such automation. Reconfiguring and restructuring the tax system is a daunting task. Broad based tax reforms cannot be undertaken the way we have been doing. The 2016 Report prepared by Tax Reforms Commission (TRC) has yet not been made public—it is marked as confidential by the government! TRC was notified on September 25, 2014 for suggesting tax reforms in all areas—from tax administration to tax legislation and related matters. Till today, the FBR has reportedly not implemented any major proposal of TRC. It is strange, rather shocking, that even minutes of meetings of implementing committee of TRC have not been made public for comments and debate. Reforms cannot be a closed door affair. They should be formulated through public debate. Tax Intelligence System is the area that should be given the first priority by the present government in improving tax administration. As far back as 1958, Professor Stanley S. Surrey of the Harvard Law School pointed out the advantages of building up a comprehensive taxpayer roll: The beginning of tax administration lies in seeing that the taxpayers are on the tax rolls. Unless the tax authorities know who are the individuals or units subject to the tax, the whole machinery of administration must necessarily function with incomplete coverage of the taxable area …. The important tasks are to select among the various sources only those which promise to be productive of names likely to be taxpayers under the tax in question (thus in some places telephone books may be very useful, while elsewhere these lists may contain only more non-taxpayers than taxpayers); to gather only so much information as can be efficiently processed; and to devise an efficient system for correlating the selected information in a continuously current form usable for enforcement purposes. Note: FBR realised the importance of preparing taxpayer roll in 2005! It confirms that we are at least 50 years behind the rest of the world in tax administration reforms. FBR, responsible for the collection of federal taxes, has miserably failed to introduce any automated system, despite the fact that it has a market-wage oriented company, PRAL at its disposal, to monitor the economic activities of corporate/business sectors. Tax Intelligence System, that is computer-based, has been proved useful in a number of countries as it:– monitors the “large taxpayers” that is all the companies registered in a tax jurisdiction; identifies the most productive centers of information from which significant data can be extracted; uses simple computer technology and can be set up quickly. [In Pakistan FBR and PRAL have made every effort to make it complicated and difficult to work] avoids any tax specific and can be adopted to any type of tax; easily extendable to all types of taxpayers. Tax Intelligence System is not a new idea. It was implemented even in countries like Botswana in the 1980s and helped in its rapid increase of diamond revenue as well as proved extremely beneficial for other areas of the economy to expand simultaneously (Botswana’s New Corporate Tax Intelligence System by K.L. De Silva, Bulletin, official Journal of the International Fiscal Association, Volume 53, Number 7, 1999, page 302). The Tax Intelligence System concentrates on third-party information that continuously originates from different areas of the government and quasi-governmental institutions to the tax department. The Tax Department of Botswana in 1983, on the advice of IMF, revived its investigation division and the Intelligence Unit that specialized in gathering information on corporate activity. Previously all information received was maintained manually in the form of registers. The problem faced by the Tax Department of Botswana was the same as is now faced by the FBR: the flood of information it was trying to process was too great and the system became too slow and prone to errors. They found an efficient way to handle it through computerization. It appears that the IMF forgot its advice to Botswana in 1980s while dealing with Pakistan in 2000 under Tax Administration Reforms programme (TARP)! We have better human resource in Information Technology and yet could not even achieve what a small African State managed as early as in 1985! It is indeed shameful and an eye-opener for the FBR stalwarts and wizards sitting in the Ministry of Finance. They must study the latest experience in this area by Kenya—Effects of automation of revenue collection on the performance of county government: A case study of Trans Nzoia, Kenya, European Journal of Business & Management, Volume 10, Number 11, 2018. There is an urgent need to set up integrated Tax Intelligence System in Pakistan to maximize the scope of revenue collection. Its salient features inter alia to cater for: a computer network for intelligence work. It should be able to record and process a large volume of information. it must increase dramatically the number of new persons that should be registered as active taxpayers and who start filing tax returns and paying taxes. it must expose registered taxpayers who need to be investigated. its impact should reflect in the increased amount of taxes collected. To exploit the capabilities of the computer network fully, a completely fresh conceptualization is required in FBR and preferably not by tax officials, but by system analysts. The knowledge of tax officials in respect of the user requirements is to be successfully fused with the skills of the computer programmers. Independent professional programmers should be contacted and given the task of building a relational database i.e. a database in which the data relationships could be established electronically. Tax officials should be left with the task of defining the scope of the project and the method of selecting, collecting and processing the data. The main purpose of the project should be of creating a database that could record and process significant information in respect of taxpayers, both existing and prospective. It is necessary to determine what is significant and to devise a selective basis for gathering data. This approach will make the work of FBR proactive rather than reactive. The problem encountered by FBR is not how to gather information or the lack of it but its abundance. Information can be gathered from many sources, e.g. the telephone directory, the list of electricity consumers, the government gazette and endless other sources including the internet. The question is: How useful are these sources? The mere fact that a person has a telephone or pays electricity or has been issued with a trading licence does not in itself determine whether that person may eventually become a taxpayer. Information should be processed on the basis of its usefulness. The information collected through withholding statements and from various departments can be useful if processed from this perspective. Otherwise it will remain trash serving no useful purpose. Therefore, several factors, including the following, are to be considered in order to make it significant: Information would be most useful if it related directly to expenditure or income. If it related to the ownership of commercial property, like farms, commercial vehicles, etc., there has to be an expectation that these assets would eventually produce taxable income. Information would be considered significant if the time lag is short between its receipt and the consequential registration of the new taxpayer. Statutory provisions place time limits on the power of the assessing/tax officials to impose additional liabilities on taxpayers and this means that old information soon loses its usefulness. Information collected is also needed to have at least the following components: a name (and if possible the address) of a person; o a description of the type of transaction i.e. whether purchase or sale or a record of the ownership of property; o the date of the transaction; o a description of the property or the service that was transacted e.g., house property, contract payments; o a monetary value above a stipulated threshold, depending on the type of property or service. The objectives in setting up the database should be: to record the “significant” financial transactions that are entered into by companies during a tax year; to consolidate into one record all the information from different sources relating to one taxpayer/person according to tax years; to send a consolidated report to the field officer in the tax division at the end of the tax year or during the relevant period. to provide quarterly and annual reports to senior managers (e.g. commissioners/collectors of the data recorded and processed; to be flexible enough to provide special reports on an ad hoc basis. On 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 does it 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? A concept of expenditure-income (“exincome”) flows (see Annexure A) should be developed to create a system that can collect and process information needed by field formations rather than work with what they passively receive. The concept of flows of income, capital, goods, services, etc. within an economy is common in economic theory. It is the basis of the value added tax system, whereas in Pakistan we are implementing it without the support of reliable Tax Intelligence system. Goods and services are monitored as they flow from one person to another and one person’s expenditure becomes another’s income. This concept is at the core of building Tax Intelligence system. For intelligence purposes whether the expenditure or income (exincome) is of a revenue or capital nature is not significant. What is important is the ability to trace one person’s income from another’s expenditure or vice versa by identifying both sides of a financial transaction. These flows could be recorded by monitoring streams of activity like those which cascade from governmental capital expenditure down to private contractors, subcontractors, employees, wholesalers, importers and finally out of the country to foreign suppliers. Once the main flows of exincome in the economy are identified it is possible to select points at which the information relating to persons and their transactions in that flow could be gathered. In Pakistan the major flows are relatively easy to map, as its main source of economic activity is “imports”. The flow of “imports” can be monitored through computerization of all points of customs where “imports” are handled. Once the exincome stream reaches the contractors, it becomes a little more difficult to trace. It spreads out through many channels in a wide spectrum of economic activity. Tax Intelligence system should be able to track some sections of this flow by examining the records of government departments and other large institutions, for which statutory amendments are required in various laws, especially the Banking Laws protecting even criminal financial transactions. From the Department of Customs, it is possible to monitor the imports of goods that enter the country and travel all over the country to wholesalers and retailers that service the large pool of householders and other consumers that are active in the economy. Intangible imports such as management or professional services by offshore companies can also be traced independently through bank records wherever necessary. Income flowing into the hands of employees can be recorded through the Tax Withholding System. Other centres of information like that of the Registrar of Motor Vehicles, the Registrar of Deeds, and various agricultural authorities and boards set up by the government, can provide information to track rental, transport or agricultural exincome that are not part of the major flows. Information in respect of offshore transactions and suppliers could be accessed using double tax agreements where possible and appropriate. One important feature of the Tax Intelligence System should be its recognition of exincome flows. Under the existing system, each piece of information received is followed up without checking whether the data is significant. This is a reactive approach that leads to an enormous amount of unsolicited, uncontrollable and unmanageable work. Once the main sources of exincome are identified the scarce resources of FBR can be deployed fruitfully in areas that have the greatest chance of producing positive results. For example we have detected tax frauds by big multinational companies in Pakistan by using ‘transfer pricing’ mechanism that can yield tax worth billions of rupees. FBR is only chasing small traders and has neither will nor expertise to unearth such sophisticated tax fraud cases. The IMF is also not very keen to help Pakistan in exposing their favourite transnational companies (TNCs), which are inflicting colossal revenue loss to Pakistan. The wizards of last government of Pakistan Muslim League (PMLN) have been resorting to increase in POL prices and relying more and more on indirect taxes through withholding taxes to force our domestic industry to close down or become uncompetitive in export markets. This was a conspiracy against Pakistan. We offered them our expertise without any remuneration in detecting tax fraud committed by many TNCs and local entities to recover tax worth billions of rupees as well as recouping of taxes from the beneficiaries of political loan write-offs. But they refused to take our help. Neither the politicians nor the FBR was willing to tax the big fish and plunderers of national wealth? It appears that the coalition government of Pakistan Tahreek-i-Insaf is facing the same dilemma. They are intentionally avoiding to even consult us when we offered the huge data available with us with respect to tax frauds by big fish. We sent them a detailed proposal for establishing Tax Intelligence System but they have shown no interest. We are thus presenting it all in these columns for the record and for public debate. Under the proposed Tax Intelligence System two types of data are to be recognized: Permanent or core data that describe the taxpayer and its activities, for example the name of the company and its business, the address, the type of business licence held etc. Periodically recurrent data in respect of the transactions of a company and other classes of taxpayers in terms of income earned, assets acquired and expenditure or liability incurred. This information, when correlated annually, can give a clearer picture as to whether the person should be registered as a taxpayer or be investigated for any tax fraud. The new database should have a very simple functional design. The system must be designed around the following two major files: The core file The core information regarding a company or a business extracted from the Registrar of Companies and Registrar of Firms should be maintained in a database in which data are entered only once. Any subsequent changes need to be made through approved procedures. This database must contain permanent information such as the name, incorporation and tax numbers, and address of the company/ business. The transaction file The other file should be the transaction file, which captures the constant flow of information that comes in respect of the activities of the companies/business. The transaction file must relate to the company/business file through a business or an incorporation number. Details of all transactions that can be captured through generic fields common to all sources of information e.g. the monetary value, whether it is a purchase or sale, the date of the transaction, the type of property, and the exact description of the property. Each source of information from which this data emanates should be coded so that the transactions can be traced to the original source. For example, different codes can be used to distinguish information from the Registrar of Lands from that of the Registrar of Motor Vehicles. The advantages of the Tax Intelligence System can be: Simple to use. Once the major flows of exincome in the economy have been identified and the information centers/sources selected, then the main task is to see: o that all the information is in fact transmitted from the different sources of information and is entered in the transaction file; and o the company and business files are kept updated. New sources of information can be easily added on to the system. “Referencing” and cross-verification to be done electronically. Information can be recorded and processed quickly. One of the problems of FBR is that by the time information reaches the taxation officer and is acted upon, the business has often closed down or the owners have sold out and left the country or the year of assessment has become statute barred. The speed of Tax Intelligence System can make it possible to track non-filers while they are still actively engaged in business. The fact that the core information is entered only once minimizes input errors, especially duplications; there are fewer chances for data corruption. The system is developed for a network. More staff can be engaged to enter data simultaneously thus speeding up the process; unlike the manual system in which only one person could use a register or the master taxpayer index at any given time. Officers can be trained to use the system in a relatively short period of time. It increases the skill levels of officers and consequently their efficiency. Junior officers can attain high skill levels that not only enable them to track non-filers but also help to identify taxpayers that merit investigation or audit. A variety of reports can be obtained on a periodic as well as on ad-hoc basis to reflect the amount of data recorded and processed. Reports can also be obtained to monitor the extra tax collected as a result of the information that has been processed, e.g. the amount of tax that the new taxpayers will be paying in their first year of registration. The cost of setting up the system is comparatively low while the cost benefit ratio is high. The entire development can be accomplished with local funds without requesting aid from donor agencies. Conclusions Carlos A. Silvani in his famous book Improving Tax Compliance in Improving Tax Administration in Developing Countries, edited by Richard M. Bird and Milka Casanegra de Jantscher, (1992) at page 274, has identified four key groups which cause shortfalls in tax administrations: 1. Unregistered taxpayers—The gap between the potential taxpayers and the registered taxpayers. 2. Stopfiling taxpayers—The difference between registered taxpayers and those who file returns. 3. Tax evaders—The difference between the tax reported by the taxpayers and the potential tax according to the law. 4. Delinquent taxpayers — The difference between the taxes assessed and the taxes paid. The proposed Tax Intelligence System can be used by FBR to alleviate some of the problems associated with revenue shortfalls in Pakistan due to above-mentioned reasons. Unregistered taxpayers can easily be located and those most likely to become regular taxpayers can be selected and followed up. Stopfilers can be encouraged to file returns by issuing or threatening to issue fairly accurate estimated assessments on their income based on reliable information available in the database. Estimated assessments can often be wild “top of the hat” estimates that are not taken seriously by the taxpayers. If the estimates are too high the taxpayer is too overwhelmed to respond. If they too low the taxpayer would rather pay the tax than file returns. Near accurate estimates send a clear message to taxpayers that the Tax Department has reliable information on their activities and could take sterner action if the default continues. In Pakistan, our tax officials are doing just the opposite and the entire tax system is discredited. Tax evaders can be quickly detected if investigation division is able to assess and collect large amounts of additional taxes by detecting inter alia the following: Companies and other persons not reporting incomes or understating the same; Companies and other persons not reporting expenditures or understating the same; companies and other persons engaged in land sale; and companies that are underpricicing imports and overpricing exports. Tax Intelligence System can come in useful when delinquent taxpayers do not pay their taxes. The availability of current up-to-date information can assist seizure of assets or income in extreme cases of default. Investment in microcomputers is extremely cost effective. In the first year of operation the cost will be recovered. The increase in taxes from new taxpayers and from the new investigation cases would justify the initial investment. There is no doubt that recent innovations in microcomputer technology have made the goal of achieving reasonably effective tax administrations attainable in developing countries, like Pakistan. However a word of caution is necessary. Current and accurate third party information is a powerful tool in the hands of the tax administration, yet in the final analysis even the best of tools are only as effective as the person who uses them. Once computer systems are introduced, sufficient resources would be needed in training the officers who are expected to use them. The potential of new computer-based Tax Intelligence System can only be fully exploited when motivated and trained staff is employed like the polio workers who perform their duties extremely diligently. The FBR must, therefore, prepare an integrated system and not piecemeal efforts here and there, which are being done these days by experts (retired FBR officials, former IMF, World Bank people or still working for them as consultants) who have neither competence in taxation nor insight into our mundane realities to suggest any workable solutions. ____________________________________________________________ The writers, tax lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS). Annex A: Exincome Flows                      Double tax agreements