Dr. Ikramul Haq
Pakistan, for the last many decades, has been grappling with the problem of raising adequate taxes 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 Federal Board of Revenue (FBR) has finally launched a comprehensive initiative for reforms and modernisation for which a separate wing and full-time, Member Reforms and Modernisation, has been appointed. According to details, this wing will ensure monitoring and evaluation of reform process to ensure effective implementation of time-bound goals and objectives, and consolidation of efforts to transform FBR into a modern, progressive, Information and Communication Technology (ICT)-based and resulted-oriented organisation. It will focus on four key areas: policy measures, structural reforms, automation and modernisation and revamping of human resource management”.
The economic managers of successive civil and military governments have failed miserably to use automation and ICT 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 (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 tax administration if a developing country is to optimise tax collection.
The old saying, “tax policy is only as good as its administration”, is outdated.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 made ineffective by inefficient, indifferent, corrupt and incompetent tax administrations. Pakistan is a classic example of this phenomenon. FBR, apex administrative body for federal taxes, has proved time and again ineffective, non-professional and oppressive.
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 (TIS). The widest possible tax-base with low-rate needs to be identified for any tax system 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.
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.
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 then government of Pakistan Muslim League (Nawaz)! 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, FBR has 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.
Automation through TISis the area that should be given the first priority by the new wing as recently done by many countries to provide an IT platform for faceless assessment and faceless appeal. Through structural reforms, initiated by the present government, the Taxpayers’ Bill of Rights should be passed respecting and protecting the honest taxpayers and punish the delinquents. It must focus on making tax-paying seamless and faceless. Faceless as it should not matter, who is paying tax and who is tax officer, moving away from territorial jurisdictions to IT-based platforms. Taxpayers should be given the trust and respect they deserve. The faceless assessment, audit and appeals would involve random allotment of cases and electronic replies, zero physical interface of authorities and recording of all adjudicating and appellate proceedings ensuring transparency and trust.
TIS 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). We have better human resource in IT and yet could not even achieve what a small African State managed as early as in 1985! Botswana’s Tax Revenue reported collection at 4.515 US$ billion in Dec 2019. This records a decrease from the previous number of 5.218 US$ billion for Dec 2018. Botswana’s Tax Revenue data is updated yearly—it reached an all-time high of 6.151 US$ billion in 2011.
TIS will process a large volume of information leading to increase dramatically the number of new persons that should be registered as taxpayers as well as expose those who are filers but engaged in avoidance/evasion/under-reporting etc.
The potential of TIS can only be fully exploited when motivated and trained staff is employed. FBR must therefore prepare an integrated system and not resort to piecemeal efforts, which are being done these days by local and foreign experts, engaged by FBR, International Monetary Fund or World Bank, that have neither competence nor insight, to suggest any workable solutions to make FBR an effective and efficient entity that can educate and help those liable to pay taxes. Taxes should also be made fair and simple to comply with, even through simple IT Application. The present system is complex and e-filing is highly cumbersome.
The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS).