Dr. Ikramul Haq
Pakistan presents a classic case study of failure in every sphere of governance— the inefficient State institutions are the root cause of perpetual crises as they have no regard for the rights of the people. We need to correct the situation by restructuring all such institutions (no meaningful reforms have been done during the last 70 years). All State institutions should have strong check and balance systems and no lapse should go unnoticed and unpunished. The case study of one institution, Federal Board of Revenue (FBR), is an eye-opener, where in the name of reforms huge money (borrowed funds) has been criminally squandered and/or wasted.
It may be recalled that the World Bank in 2004 extended to Pakistan $125.9 million, including IDA credit of $102.9 million and a UK DFID grant of $23 million, for Tax Administration Reform Project (TARP). The objective of TRAP was to improve “the integrity and fairness of tax administration by improving organizational efficiency and effectiveness of the revenue administration”. It was a national shame that for improving the integrity and fairness of tax administration we agreed to such heavy external borrowing/grant.
Since 2004, in the name of tax reforms, FBR has been imposing more and more obligations on the citizens of Pakistan. The nation has been burdened with a number of cumbersome tax terms and over 65 withholding taxes without any compensation. There is news that under the new round of World Bank-funded reforms (sic), some hand-picked foreign and local consultants will be hired to further destroy tax policy and administration.
The problem of Pakistan is that its tax system is extremely complexed and does not facilitate the citizens. We can collect much higher taxes through millions of income tax filers, if the following steps are taken:
- All individuals having taxable income should be required to file one-page, simple and easy tax return form which should be available both in English and Urdu.
- Tax rate for individuals should be 10% subject to minimum alternate tax of 2.5% of net wealth. They should be given a chance to whiten all untaxed assets, at home or abroad, by paying 10% tax latest by June 30, 2019. After the deadline, stringent action under the law should be taken including confiscation and imprisonment.
- One-time de-log litigation scheme for taxpayers to pay certain percentage of tax arrears between January 1, 2019 to June 30, 2019. This will clear backlog of pending cases in various courts with struck up revenue of Rs. 1142 billion.
- Government must offer representatives of businesses and trade, namely Federation of Pakistan Chamber of Commerce & Industry (FPCCI) and All Pakistan Anjum-e-Tajaran, to convince their members to pay income tax/sales tax for the next 3-years as a package deal and thereafter no audit or inquiry to be made. It would bring much-needed money in just one year to overcome fiscal deficit. While the businessmen concentrate on business growth, the Government should prepare their tax profiles by data integration. After three years, both would be in a position to determine income tax/sales tax payment on actual basis.
- Simplified, low rate sales tax with no exemptions.
- Simplify Customs tariff with ‘One-Chapter One-rate’—2% rate for all imports.
- TVs, air conditioners, cars, tobacco, liquor should be taxed at a higher rate.
- Radiographic scanning of all inbound and outbound containers.
- Asset-seizure legislation with effect from July 1, 2019 for untaxed and undeclared domestic/foreign assets.
- No functional mechanism has so far been evolved to effectively check any unfair practices on the part of tax administrators. They are not made liable to punitive actions and/or pecuniary damages even after the final fact-finding authority adjudges their actions arbitrary, excessive and beyond their assigned powers. The Federal Tax Ombudsman should be given the statutory power of awarding damages in such instances.
- Taxpayers must be given adequate rights before the State justifies strict actions for enforcing tax obligations. For restoring confidence of taxpayers the State should promulgate Taxpayers’ Bill of Rights that must safeguard and strengthen the rights of taxpayers, ensure equality of treatment, guarantee privacy and confidentiality of their declarations, provide right to assistance by State in tax matters, guarantee unfettered right of appeal through an independent tax appellate system and provide facilities for independent review of disputes with tax authorities.
- There is massive sales tax evasion—even registered persons are not depositing full amount of sales tax. A scheme should be announced entitling a payer of sales tax to get refund of 20% of the amount paid. He/she should send invoices to FBR, which will authorise and remit refund after verification of genuineness of the invoice (by checking sellers’ registration number). In this way, FBR can develop data base about sales of all persons and then cross verify the same with the receipts declared by them in their sales/income tax returns.
We do not need any loan/grant from the World Bank or other donors for any reforms. If we take money from them then we are bound to follow their conditions, as beggars cannot be choosers. Many capable and qualified local experts can do reform work in all spheres of governance either voluntarily or at much less cost than what we have and would be wasting on foreign consultants at the commands of World Bank and others once again.
It is high time that a National Commission on Reforms, under the supervision of a retired Judge of Supreme Curt, is constituted to achieve national consensus for resource mobilisation, elimination of wasteful expenditures and debt enslavement after consulting all the parties involved. The bureaucratic leadership for any tax reform processes is highly undesirable as they are the people who are responsible for the present messy situation. Bureaucrats, serving or retired, dominate the advisory committees, and this is where the fault lies. The reform process by the government should be undertaken by engaging specialists, outcomes debated in the Parliament and must be monitored by public representatives at all times.