Fundamental tax reforms   

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“—Prime Minister Imran Khan

In 2014 in an article [Revamping tax system, The News, December 7, 2014 ], it was emphasised that Pakistan needs a paradigm shift in tax policy and revamping of entire tax administration—establishment of a National Tax Agency, capable of generating sufficient resources for the federal and provincial governments must be the top priority. The government of Pakistan Muslim League (Nawaz) did nothing about it and now strangely in 2019 our Prime Minister is still not sure about taking a definitive decision for revamping of Federal Board of Revenue (FBR).

Like it predecessors, the government of Pakistan Tehreek-i-Insaf (PTI has sought budget proposals for fiscal year 2019-20 from all the stakeholders. The conventional proposals for changes in the existing tax codes/rules/regulations, made every year before the annual budget, have proved futile, even counterproductive. Unfortunately, policymakers in the past have been ignoring or sidetracking fundamental institutional reforms to make the tax system fair and efficient. The PTI government, as emphasised by Premier Imran Khan, wants to undertake meaningful reforms. However, it lacks both expertise and knowledge for it.

The government of PML-N (2013-18) did not bother to undertake any institutional reforms. In five years, they failed to tackle the essential issues of documentation of economy and increasing number of filers. The irrefutable fact is that existing so-called functional system, introduced on the dictates of donors replacing the circle-based system, has miserably failed—it has rendered FBR ineffective. There is no will to tax the rich as the Income Tax Ordinance, 2001 relies mainly on presumptive taxes and/or minimum taxes—these in substance are indirect taxes. These regressive taxes since 1991 have immensely widened the rich-poor divide. Such taxes make the rich, richer and the poor, poorer. 

The policy of appeasement towards tax evaders still prevails, giving free hand to tax evaders to whiten money through section 111(4) of the Income Tax Ordinance, 2001, section 9 of the Protection of Economic Reforms Act, 1992, tax amnesties, increasing exemption limits, raising deductions, and serving the rich and mighty has eroded the income tax base substantially over the years.

Every year, thousands of budget proposals are ignored/rejected without even a single reading by wizards sitting in FBR and Ministry of Finance [MoF]. For the last many years, substantial reforms have been suggested for improving tax administration and creating a growth-conducive taxation, but never considered by Revenuecracy and babus of MoF. Shahid Kardar, ex-Governor State Bank, once very candidly remarked: “We three [Shahid, Huzaima and Ikram] write just to get things off our chest not because we believe even for a moment that they [people sitting in Mof and FBR] will ever change”. Neither disappointed nor disheartened, we and many others continue to make attempts on regular basis to convince the wizards in MoF and FBR to go for structural reforms in the tax system to achieve the cherished goal of self-reliance and prosperity for all.

No agenda for rationalisation of tax codes or simplification of tax system can improve tax compliance, unless there is significant improvement in public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to relentlessly pursue and punish tax evaders without any political and other interference. The present functional structure of Inland Revenue Service (IRS) has failed to achieve these objectives. While there is always talk of giving “market” wages to tax officials, nobody has ever emphasised improving the overall working conditions of FBR and honing professional skills of officers and staff. If one goes to a tax office as a taxpayer only then one would feel the taste of inhuman and insulting treatment, an ordinary citizen receives on daily basis. Does it really need enormous money to extend a well-deserved respect and courtesy to taxpayers? Does this issue relate to market wages or foreign funding or advice?

The fundamental element of tax reforms is providing an efficient and competent administration, which is nowhere visible in Pakistan. Tax administrations, both at federal and provincial levels, lack the requisite standards of digitization, professionalism and human skills. Any exercise relating to comprehensive tax reforms cannot be a time-bound affair and does not mean merely altering 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.

We desire tax reforms without first establishing an efficient, workable structure. The best example of an efficient tax structure is that of Sweden’s tax agency, Skatteverket.  It maintains data of each and every person, natural or juridical. Skatteverket is accountable to the government, but operates as an autonomous public authority. We need to establish National Tax Authority (NTA). This kind of innovation alone can counter massive pilferages in collections that are estimated at Rs. 3 trillion by IMF in its country report, Unlocking Pakistan’s Revenue Potential.

Successive governments, military and civilian alike, have failed to tackle the twin menaces of hidden economy and tax evasion. The study, What is hidden, in the hidden economy of Pakistan? Size, causes, issues and implications, by Ahmed Gulzar, Novaira Junaid and Adnan Haider, shows that corruption and tax evasion are not only causing an expansion in the size of the informal economy but also hampering the growth rate, thereby adding more to economic uncertainty, income inequality and poverty.

The existing tax system is not taxing the rich 5 million. Resultantly, income and wealth distribution disparities are rapidly widening. Under the given scenario, efforts are needed both at federal and provincial levels to enhance the size of the pie by shifting to growth-oriented taxation—see details in ‘New Tax Model’, Business Recorder, August 28, 2015.

PTI in the budget 2019-20 can introduce fair and transparent tax system for which complete model and step-by-step action plan is available in ‘Towards Flat, Low-rate, Broad and Predictable Taxes’, published by PRIME Institute. This model provides for revenue collection of Rs. 8 trillion along with accelerated and sustainable economic growth of over 6 percent.

It is time that Imran Khan takes concrete steps to achieve a sensible balance between income, capital and consumption taxes. He should also spend not on ill-designed programmes introduced more to collect votes than social returns, but on important investments in creating human capital (e.g. education, training and health), and necessary public infrastructure to increase productivity of the economy. Tax is byproduct of growth and productivity so the PTI Government should concentrate on it.   

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The writer is Advocate Supreme Court and Adjunct Faculty at Lahore University of Management Sciences (LUMS). Email: ikram@huzaimaikram.com; Twitter: @drikramulhaq