Fix the fragmented tax system

Dr. Ikramul Haq

Pakistan needs a paradigm shift in the existing tax policy and revamping of entire tax administration—establishment of a National Tax Authority [NTA], capable of generating sufficient resources for the federal and provincial governments, must be the top priority. Through democratic process, all the provincial parliaments can under Article 144 of the Constitution of Islamic Republic of Pakistan [”the Constitution”] pass resolutions for establishing autonomous NTA, run by members of All Pakistan Unified Tax Service (APUTS). The mode and working of NTA can be discussed and finalised under Council of Common Interests [Article 153] and its control can be placed under National Economic Council [Article 156].

Pakistan is confronted with several financial challenges requiring immediate action and prompt solutions based on rational and bold decision-making. The fiscal crisis faced by Pakistan, in terms of abysmally low tax-to-GDP ratio and lower revenue collection vis-à-vis the tax potential of the country. These taxes are, therefore, insufficient for the needs of the country such as debt servicing and defense expenditures, poverty alleviation and pro-poor economic growth. Lower revenue collection and embarrassingly low tax-to- GDP ratio remain major hindrances for Pakistan to handle the gigantic tasks of improving good governance, better handling public services delivery system alongside improving human capital thus preparing the country to reach a “take-off stage” necessary for economic revival and ‘quantum leap’.

One major hindrance towards optimizing revenue collection is the scattered and haphazard tax collection through multiple authorities at the federal and provincial levels. The trend was further strengthened after the 18th Constitutional Amendment [‘the18thAmendment’] after which the provinces established their own tax collection agencies at the provincial level. Although the 18th Amendment was widely appreciated by the provinces, it created fissures in the revenue collection authority of Federal Board of Revenue (FBR) resulting in further decline in tax collection because tax on services fell in the provincial domains. On one side, the move was hailed by the provinces but, on the other, the taxpayers immediately started raising their eyebrows because they had to now face both federal and provincial tax authorities. All major Chambers of Commerce expressed their concerns and showed reservations on the scattered tax collection in the aftermath of the 18th Amendment.

Now that the PTI-led government has appointed Dr. Abdul Hafeez Shaikh with the aim of restructuring the entire tax system, it is time to emphasize the administrative issues of tax collection for optimizing revenue as per the country’s potential. For this, the formation of APUTS should be a major step towards harmonizing the tax system and culture in Pakistan.

The APUTS should function similar to All Pakistan Unified Group (APUG) services such as Pakistan Administrative Service (PAS) and Police Service of Pakistan (PSP). The most salient feature of APUTS will be to harmonize three main tax agencies, FBR and all the provincial tax authorities. The officers can be posted anywhere in Pakistan, both at federal and provincial levels, directly from the Headquarters of NTA. The provinces will continue to enjoy the benefits and power under the 18th Amendment as is the case of working of the PAS and PSP officers. The formation of APUTS would be a win-win situation for the federal government, the provincial governments and taxpayers. The APUTS will have following advantages towards maximizing revenue collection at the federal and provincial levels:

1. The tax officers of NTA will then be posted anywhere in Pakistan, both at federal and provincial levels, through centralized postings/transfers. The taxpayers will feel satisfied that they are dealing with only one organization, NTA.
2. The APUTS will better handle tax matters all over Pakistan as a unified service just as PAS and PSP. There will be better coordination among federal and provincial tax authorities that will eventually increase badly needed revenue.
3. NTA will emerge as a strong but accountable government service spreading over the federal government, all four provinces, Gilgit-Baltistan and Azad Jammu & Kashmir.

The formation of APUTS can usher in a new era of reformed taxation in Pakistan. It will be a beginning of an end to the British era scattered tax system that was meant to subjugate the masses. It will be a first serious step towards eliminating multiple tax authorities, and integrating taxes thus paving way for one window operations in Pakistan. As a strong and accountable service, the APUTS will have the courage to say no to illegal orders and political interference as envisioned by the Premier Imran Khan. Through better data coordination among federal and provincial tax authorities, the APUTS will not only be better equipped with information for broadening the tax base but also it would prove a gigantic step forward towards integrating taxes through national level long term strategic planning.

Dr. Muhammad Babar Chohan, Commissioner, FBR, holding PhD in Economic Planning from Massey University, New Zealand, has very rightly highlighted in an article:

“It is also important to highlight some administrative misunderstandings that the PTI-led government may face in forming APUTS. The PAS and provincial services may raise objections on the formation of APUTS because they are predominantly dealing with the provincial Excise & Taxation, Board of Revenues and other revenue collection departments. Similar objections may be raised by the cantonment boards. The provincial revenue authorities formed after the 18th Amendment are also functioning under the respective Chief Secretaries and Chairmen who mainly belong to PAS. However, such misunderstandings may easily be overcome by highlighting the fact that the purpose of APUTS is to discipline and harmonize tax collection in the country and it is not targeted at grabbing the powers of provincial governments or cantonment boards. Its working will be just like the working of PAS and PSP where the services of federal officers can be placed at the disposal of provincial governments, other departments and institutions. Furthermore, the officers from provincial services may also be posted in the tax agencies of the provinces. In this regard, the Establishment Division may issue an Office Memorandum (O.M) in terms of Civil Servants (Appointment, Promotion and Transfer) Rules, 1973. A similar O.M. was issued by the Establishment Division when the erstwhile Income Tax Group was successfully transformed into Inland Revenue Service back in 2010”.

As an immediate measure, the Directorate General of Training and Research Inland Revenue (DOT) in Allama Iqbal Town Lahore can be transformed into National Tax Institute (NTI) on the lines of National Police Academy in Islamabad. At a later stage, a state of the art NTI and Institute of Fiscal Research (IFR) may be established in Islamabad, for achieving the long run strategic objectives of NTA and APUTS, where all federal and provincial taxes such as income tax, sales tax, federal excise, customs, taxes administered by cantonment boards, property tax, agricultural tax, land revenue, capital value tax, registration fees, professional tax, infrastructure cess, registration fee and all other miscellaneous taxes could be taught in a strategically conceived national tax framework.

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The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS).