FBR: putting the house in order!

Huzaima Bukhari & Dr. Ikramul Haq

“If we realise that the FBR cannot be fixed, we will create a new FBR. This is because Pakistan’s survival is linked to it. It’s not about our liking or disliking: if our tax collection authority does not function properly, it could lead to a security risk. No nation that relies on loans can maintain its pride and independence“—address of Prime Minister to the 11th All-Pakistan Chambers President Conference in Islamabad on March 7, 2019

“The FBR contributes around 80% of the total revenues of the federal government; therefore, any miscalculation or misstargeting can severely cripple the budget, not just of the federal but the provincial governments as well”—Budget 2020-21: Highlights & Commentary, Pakistan Institute of Development Economic (PIDE)   

After 15 months of the above statement by Prime Minister, Imran Khan, and telling the nation that that “reforming FBR is essential and until that is done, we [the state] will not be able to meet our expenses“, the things have changed for the worse. After the passage of Finance Bill 2020 by the National Assembly on June 29, 2020, amid protest by the Opposition, and claim by Federal Board of Revenue (FBR) of exceeding the revised target for fiscal year (FY) 2019-20, the government removed yet another head of FBR on July 4, 2020, giving additional charge to Member Customs for three months. Is this a desirable way to reform FBR? The decision raised many eyebrows. Everyone is asking: How long will FBR remain a house in disorder?

The changing of chairman or other officers is not the solution to reform the FBR. The real challenge is how to restructure the existing oppressive tax system. It imposes undue incidence on the poor and middle-class people e.g. over 60 withholding provisions under income tax law! 17% sales tax (in fact 30% to 50% on many finished imported goods after levy of various taxes at source). It takes away larger portion of low-income groups compared to high-income groups. On the contrary, the rich and mighty enjoy tax-free perks and perquisites, exemptions and concessions on their colossal income/assets and are also offered generous asset-whitening and tax amnesties frequently.

According to a Press report [4th FBR chairman shown the door in 22 months], quoting “some sources”, the following facts have been narrated:

1. “The cabinet on Saturday removed Nausheen Javaid Amjad as chairperson of the Federal Board of Revenue (FBR) due to alleged differences over policy choices and a tussle over transfers and postings of the board officers. Nausheen is the fourth FBR chairperson to have been removed prematurely by Prime Minister Imran Khan during the past 22 months, raising questions over the government’s handling of the official tax collection machinery which is critical to the country’s economic security.
2. Javed Ghani, a Grade-22 officer of the Pakistan Customs, has been given the additional charge of FBR chairman for three months or until the appointment of a regular chairman, whichever is earlier.
3. The government secured the approval of the administrative changes through circulation of a summary to the cabinet.
4. Nausheen’s removal was also against the appointment policy that the federal cabinet had approved to ensure continuity and consistency in policies.
5. The outgoing chairperson stayed in the coveted position for less than three months—the second shortest tenure of any chairperson. The shortest tenure was of Rukhsana Yasmin who remained at the helm in FBR for about two months, from July to August 2018.
6. After removing Yasmin, the Prime Minister had appointed Jehanzeb Khan, who served as FBR Chairman for about nine months and was replaced with Shabbar Zaidi. Zaidi, too, could survive for 11 months—the longest tenure in past 22 months—but it included four months period during which he was not actively attending the office.
7. Nausheen had faced a gigantic task of stopping the nose-diving tax revenues, restructuring of the top FBR hierarchy and improving the tainted image of the tax machinery. She did achieve the revised tax collection target of Rs. 3.9 trillion and pooled Rs. 3.99 trillion but struggled hard on other two accounts.
8. In April last year, Prime Minister Imran had handpicked Zaidi as his man to achieve the goal of collecting Rs. 5.5 trillion in taxes during the last fiscal year and Rs. 8 trillion by the end of his term. But after two years of the PTI government, the tax revenues remained less than Rs. 4 trillion.
9. Nausheen did not have full freedom in selection of her team and the charge of the Revenue Division Secretary was also not given to her despite promise. She had to reverse the transfer of Director General of International Taxes within 24 hours due to the intervention of the Prime Minister’s Office.
10. During the budget-making exercise, there were serious differences over giving tax concessions and exemptions to certain segments. The Prime Minister’s amnesty scheme for the construction sector was added to the Finance Bill on the eve of the budget.
11. The FBR and Adviser to Prime Minister on Finance Dr. Abdul Hafeez Shaikh were against further concessions.
12. There were also differences of opinion on giving tax exemptions to the Naya Pakistan Housing Authority and the Foundation University, the sources added. Both these entities were added to the exemption list hours before the approval of the Finance Act from the National Assembly, they added.
13. There were also pressures on the outgoing chairperson about reversing some other posting orders including the people who were posted out of Karachi in recent weeks.
14. The cabinet has approved to give additional charge to Javed Ghani for three months aimed at picking her successor. There is one possibility that during next three months, at least two FBR officers including a woman, who are in Grade-21, could be promoted to Grade-22 and appointed as chairperson. 
15. The other possibility is to appoint a retired officer as FBR chairman through a competitive process, which is permissible under the FBR Act of 2007. Nausheen and Ghani both are retiring in April next year.
16. However, the uncertainty in the FBR is surely going to cause loss of revenue due to lack of clarity at the top. For the next fiscal year, the government has again set a daunting task of collecting Rs. 4.963 trillion that will require 24.4% growth over this year’s collection”.

The target fixed by the Government of the Pakistan Tehreek-i-Insaf (PTI) for the current fiscal year (FY) 2020-21 for FBR at Rs. 4963 billion, amid continuous economic toll of Covid-19 endemic, even according to Adviser to Prime Minister on Finance and Revenue, Dr. Abdul Hafeez Shaikh, is not achievable! In a statement, he “advised the provinces not to make their budgets on the basis of proposed Rs. 4.963 trillion tax collection target fixed for FBR for fiscal year 2020-21” and added: “The provinces should make their budgets while keeping in mind the Federal Board of Revenue’s past performance and difference between performance, projections and reality”.

The Annual Budget Statement containing estimated receipts and expenditure laid before the National Assembly of Pakistan for FY 2020-21 in terms of Article 80(1) of the Constitution gives revised estimate of FBR’s collection for the FY 2019-20 at Rs. 3908 billion against the original target of Rs. 5555 billion. Prior to Covid-19 outbreak, FBR was far behind the revised target of Rs. 5238 billion after first review of International Monetary Fund [IMF] under $6 billion Extended Fund Facility (EFF) programme. It was later revised to Rs. 4803 billion on the eve of incomplete second IMF review, held prior to Covid-19 pandemic, and after coronavirus outbreak, finally reduced to Rs. 3908 billion.

FBR claimed exceeding target of Rs. 3908 billion by collecting Rs. 3971 billion after paying Rs.135 billion as refunds of sales tax, income tax, customs and federal excise against last year’s figure of Rs. 69 billion—Rs 66 billion more (increase of 96%). In FY 2019-20, FBR paid Rs. 95 billion sales tax refunds against Rs. 21 billion last year showing increase of Rs. 74 billion. This is paid from its own collection. Additionally, an amount of Rs. 70 billion paid in respect of long-outstanding refunds through technical supplementary grant (TSG) by the government. These refunds were blocked/consumed by the government of Pakistan Muslim League (Nawaz)—PMLN. It is, therefore, unfair to say that FBR’s collection is overstated by paying through TSG. Factually, these reflect inflated figures by PMLN to years which these relate! With industry at a halt, payment to business community from TSG was primarily a relief package. However, FBR has yet not posted on its website the total quantum of refunds payable as on June 30, 2020. It should be done without any further delay, and all the pending refunds should be paid by July 31, 2020.  

The coalition Government of PTI in Finance Act, 2020 has failed to give tax relief to the salaried class, especially with no raise in the pay and pension of government employees, substantial reduction in income tax and sales tax rates for businesses, removing and/or deferment of withholding and advance taxes so that they can survive and revive in difficult times. On the contrary, FBR proposed luxury tax on the rich owners of farmhouses and palatial bungalows in Islamabad Capital Territory (ICT) but it was withdrawn in the Finance Act, 2020 after the rich legislators and their financiers opposed it.

The PTI Government by withdrawing Tax on luxury houses in Islamabad Capital Territory, proposed in the Finance Bill 2020 conceded that it does not want to tax the privileged segments of society. The Senate also recommended its withdrawal without assigning any reason. The PTI Government, while appeasing the rich, is bent upon extracting exorbitant sales tax, the incidence of which takes away a larger slice of the people with meagre incomes while the rich, mainly the unscrupulous traders and manufacturers, make more money by not only passing on the burden of it to the end consumers but also not depositing it honestly in the treasury—this results into their illegal enrichment. Had the PTI imposed ‘Tax on luxury houses in Islamabad Capital Territory’, it would have earned appreciation of masses, but it failed to do so as was done in 2014 by the PMLN by withdrawing Income Support Levy Act, 2013 levied to help the economically distressed classes but repealing it the very next year. For historical record let us reproduce the salient features of withdrawn ‘Tax on luxury houses in Islamabad Capital Territory’:

On residential buildings:

1. In case of two kanal to four kanal with covered area of more than 6000 square feet: Rs.100,000 per kanal
2. In case of five kanal or above with covered area of more than 8, 000 square feet: Rs.200,000 per kanal.

On farm houses having four kanal including area under farming

1. A farm house with covered area between 5000 to 7000 square feet: Rs.25 per square foot of the covered area per annum.
2. A farm house with covered area between 7001 to 10,000 square feet:Rs.40 per square foot of the covered area per annum.
3. A farm house with covered area of more than 10,000 square feet: Rs.50 per square foot of the covered area per annum.

   On farm houses having more than four kanal including area under farming

1. A farm house with covered area between 5000 to 7000 square feet: Rs. 60 per square foot of the covered area per annum.
2.  A farm house with covered area between 7001 to 10,000 square feet: Rs. 70 per square foot of the covered area per annum.
3. A farm house with covered area of more than 10,000 square feet: Rs. 80 per square foot of the covered area per annum.

The above tax was not applicable in the case one self-occupied house of widows. It was to be collected by the Ministry of Interior through its attached departments and deposited in the Federal Consolidated Fund. It could have fetched substantial funds for helping the needy. It must be imposed through Finance Supplementary (Amendment) Bill as new taxes were imposed by the PTI Government in this manner twice in 2018.

FBR authorities deserve appreciation for proposing a progressive tax, but powerful vested interest both in the Senate and National Assembly and the rich financing them has proved that the PTI Government like its predecessors would not tax the rich for the benefit of the poor! It exposes the claim of PTI that its aim and agenda to come into power was to ensure socio-economic justice and establishment of an egalitarian society!

Compliance cost has also been increased in Finance Act, 2020 by reverting to quarterly withholding statements instead of half-yearly. Shockingly, the power of real-time data access or otherwise is given to FBR under Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise Act, 2005 through Finance Act, 2020 in the absence of Personal Data Protection Law in the country and no safeguards against hacking and leakages as well as abuse for self-aggrandizement though this issue was raised in Finance Bill and data privacy, The News, June 21, 2020.

In the Finance Act, 2020 if only 40% of taxes waived/forgone in fiscal year 2019-20 were reduced, there would have been fiscal space of Rs. 600 billion for reducing rates of income tax and sales taxes hurting the lower-income groups, rather than continuing with high taxes and levying/enhancing existing ones, when economy, in deep recession, needs impetus for survival and revival absorbing tsunami of Covid-19 outbreak/lockdown. This is the true reality of the “no new tax” budget of the PTI Government!

The PTI Government could have done a number of positive things for resource mobilisation—tax and non-tax—as well as reducing cost of doing business in Budget for fiscal year 2020-21 as suggested above, but it decided to substantially increase prices of petroleum products on June 26, 2020 with disastrous consequences (Unconstitutional levy, The News, June 30, 2020 and The POL bomb, Business Recorder, April 5, 2019).

The PTI Government showed lack of political will to reduce exemptions, concessions, waivers and immunities to the State Oligarchy. Total tax expenditure was of Rs. 1.5 trillion in the just ended FY 2019-2020 as per own admission of FBR in Annex-II appended to Economic Survey 2019-20 [detail in Analysing ‘tax expenditure’, Business Recorder, June 26, 2020]. In fact, more exemptions and benefits have been given to the influential, whereas proudly claiming “no new tax” levied showing total apathy towards the weaker sections of society and small and medium enterprises (SMEs) facing the unbearable economic toll of Covid-19 outbreak/lockdown by reducing the incidence of exorbitant sales tax, withholding taxes and high cost of utilities and other oppressive levies like 12.5% advance income tax from all mobile subscribers [166 million as on May 31, 2020 as per Pakistan Telecommunication Authority] and internet users ( 82 million).

We have a complex tax system of over 70 unique taxes and at least 37 government agencies administering these taxes. The Prime Minister, if really sincere to reform tax system, must dismantle FBR as it is simply incorrigible! The issue of fragmentation of taxes and multiple collection agencies needs to be resolved as a first priority to provide ease of doing business and reducing cost of doing business otherwise we will never progress and come out of devastating economic effects of Covid-19 endemic.  

Pakistan needs a new National Tax Authority [NTA] as explained in detail in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’ [Business Recorder, August 31, 2018] and viable solutions were offered. Strangely, the World Bank has not acknowledged it in any of its papers/reports related to US$ 400 Pakistan Raise Revenue Project, while presenting the same concept. For example, it may be noted that the idea of NTA was given way back in 2013 in Need for National Tax Agency, Business Recorder, November 1, 2013 and then in Revamping tax system,The News, December 7, 2014. It was not only elaborated in Tax proposals—VII: Need for NTA, Business Recorder, May 22, 2015 and Case for “NTA”, Business Recorder, November 27, 2015 but its draft law was given in Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME Institute, April 2016]. It was also included by the Tax Reforms Commission in its final report submitted to the government in February 2016 [which was marked confidential by PMLN and till today is not made public even by the PTI Government despite repeated requests].

It was suggested that the NTA must be run by an independent and competent Board and its members should be selected by Joint Committee of Senate and national Assembly. The NTA should not only collect taxes at all tiers of government but also disburse benefits like social security, food stamps, universal pension, healthcare coverage and income support etc. The linkage of database of various bodies with NTA (complete digitisation) has been emphasised time and again as a great step towards e-government model for the country that is presently non-existent. The models of Swedish revenue authority [Skatteverket] and Canadian Revenue Authority (CRA) suggested as worth studying/adopting after debate and suggesting modifications suiting our peculiar requirements [details in Tax reforms strategy, The News, December 3, 2017and Comprehensive Tax reforms, The News, September 9, 2018].

The issues faced on fiscal front and how to deal with them have been discussed in detail in a number of papers and articles such as: ‘Avant-garde budget proposals’, Business Recorder,May 10, 17, 24 & 31, 2019, Essential reforms, Business Recorder, March 29, 2019, Challenges for budget-makers, Business Recorder, March 22, 2019, Optimising tax collection, Business Recorder, March 15, 2019, Fixing the ailing tax system, Business Recorder, March 1, 2019, Country needs massive reforms, Business Recorder, January 25, 2019, Time up for fiscal integration, Business Recorder, December 21 & 23, 2018, Tax policy for investment, Business Recorder, December 14, 2018, Productive tax reforms, Business Recorder, October 27, 2018, Overcoming fragmented tax system, Business Recorder, October 19, 2018, PTI & revival of economy, Business Recorder, October 12, 2018, Bridging the tax gap, Business Recorder, October 5 & 7, 2018, Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018, Overcoming debt burden, Business Recorder, August 27, 2018,  PTI and tax reforms, Business Recorder, August 17, 2018 and Wither tax reforms, Business Recorder, August 2, 2019. Unfortunately, till today, these are not considered by PTI Government and never discussed or quoted by IMF or World Bank.

Surprisingly, the World Bank, IMF and FBR ignored the proposals presented in various articles mentioned above for generating revenue of Rs. 8 trillion at federal level alone [Flawed tax reforms agenda, Business Recorder, November 15 & 21, 2019 and ‘Raising Rs. 8 trillion’, Daily Times, November 12, 2017] enabling Pakistan to overcome monstrous fiscal deficit, get rid of loans, achieve rapid economic growth and provide social services to all citizens.

The IMF in its first review of December 19, 2019 [Country Report No. 19/380] has admitted that “more than 40 percent of total tax revenue in Pakistan is collected at the import stage”. This fact of oppressive and narrow-based taxation was highlighted repeatedly by us in various articles and viable solutions were offered to make it fair and broad-based, but FBR and IMF paid no heed to these. The World Bank in 400-million Pakistan Raises Revenue Project has also made no reference of these, though many proposals have been endorsed without any acknowledgement of published work by local writers.

It is time that the Prime Minister must concentrate on the principle of reciprocity—in return for taxes he must establish a system to provide the citizens facilities of quality education, health, housing, transport, clean drinking water, sewerage etc by implementing Article 140A of the Constitution.

Our existing tax system extends extraordinary tax-free perks and perquisites to the powerful segments of society, while derisory allocations are made for health, education and other social services to mitigate the sufferings of the poor that are increasing day by day. Millions are pushed to become what Franz Fanon called, ‘The Wretched of the Earth’. Due to pro-rich policies, wealth is concentrated in a few hands and there is no devolution of administrative, political and fiscal powers as ordained in Article 140A of the Constitution to ensure delivery of social services at grass root level.

For implementing meaningful tax reforms, the Prime Minister instead of experimenting with changing captains at FBR must concentrate on fundamental structural reforms as discussed above and in recent studies of Pakistan Institute of Development Economics (PIDE), Doing Taxes Better: Simplify, Open & Grow Economyand Growth inclusive tax policy: A reform proposal,quoting Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016).

The recently launched ‘Tax Payers Alliance Pakistan’ (TPAP), a voluntary network of Pakistani tax payers to act as a pressure group of professionals, business owners and individuals, in a pre-budget maiden Press release, reminded the Government that Pakistan needs a low-rate, broad-based and equitable tax system as well as the federal and provincial governments must demonstrate transparency and end undue and wasteful expenditures—details at https://primeinstitute.org/tax-payers-alliance-pakistan-tpap/.

We need a simple, fair and predictable tax system: 10% tax on individuals (with alternate minimum of 2.5% on net wealth exceeding Rs. 10 million), 20% on companies and other entities, 8% sales tax (for exporters 0% tax). Low-rate customs duty (One Chapter, One Rate, say 2%) on all items and federal excise duties on luxury items and on health-hazard products like cigarettes, beverages etc. This will fetch us tax of Rs. 8 trillion [working available in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016].

________________________________________________________________________

The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).

“Huzaima Bukhari and Dr. Ikramul Haq have designed a tax reform plan that would dramatically change the structure of taxation in Pakistan by correctly aligning incentives to promote economic growth and voluntary tax compliance. An ideal tax system should consist of the lowest possible tax rate on the broadest possible tax base. Such a system gives people the least incentive to evade, avoid or otherwise not report taxable income. Along with sound money, free trade, spending restraint and minimal regulation, the adoption of these recommendations will launch Pakistan onto a new trajectory of economic growth and prosperity for all” —Dr. Arthur B. Laffer, Father of Supply-Side Economics, Creator of “Laffer Curve”

.