Of unpaid refunds & figure fudging  

Huzaima Bukhari & Dr. Ikramul Haq

The story of “impressive” performance of Federal Board of Revenue (FBR) during the period 2013-18 needs a through probe. The jadoogar [magician] Ishaq Dar, we all know, was master of figure fudging, for his shenanigans Pakistan was fined by the International Monetary Fund (IMF) way back in 1999. Huge refunds blocked during Dar’s tenure have not been paid till today. Now, the crafty tax bureaucrats, hoodwinking the Government of Pakistan Tehreek-i-Insaf (PTI) lacking experience to deal with them, have acquired a new weapon to undo already created/paid refunds by amending the Sales Tax Rules through SRO 1320(I)/2018, issued on November 2, 2018.

The amendments made in Rule 26 and 36 of the Sale Tax Rules, 2006 on November 2, 2018 have empowered the Commissioner of Inland Revenue (CIR) to order manual post-refund scrutiny on the pretext of “suspicious” claims for which “he has reasons to believe” that the same were not allowable. Was it due to fraud on the part of taxpayers alone or connivance of official also involved? The same CIR, who earlier created and/or paid refunds, will now declare some of these as ‘suspicious’. If earlier sanction/payment of refund was wrongly made, will the responsibility be fixed for lapse? Will there be punishments for those who failed to detect the fraud/irregularities? The amendments have given fresh bargaining power to officials. This is a sheer travesty of law and mockery of administration. But this is why people are not only critical of FBR but are also afraid of filing income tax returns/statements under the Income tax Ordinance, 2001 and get registered under the Sales Tax Act, 1990. There are numerous withholding provisions leading to overpayment and FBR hardly pays refunds (except where palm is greased).  

In a report published in the media, Muhammad Zubair, ex-Governor Sindh and once colleague of now fugitive ex-Finance Minister Ishaq Dar in the Cabinet as Chairman Privatisation Commission, while talking to journalists on September 27, 2017, alleged that ousted Prime Minister, Muhammad Nawaz Sharif, was cheated by his financial wizard. Mr. Zubair reportedly said: “Dar misled Nawaz Sharif, presenting to him a rosier picture of the economy. Dar told Nawaz Sharif that everything is alright in the economy. I interrupted him [Dar] and said no, everything is not all right. Businessmen are facing hardships due to long pending tax refunds”.

The painful episode of blocking refunds started in 2013 when Dar assumed the portfolio of Finance Minister. It was narrated in great detail in a report [‘Dar accused of delaying tax refunds’, The Express Tribune, June 19, 2016], prepared by the chairman of a committee constituted by Federal Tax Ombudsman (FTO) on the complaint of Pakistan Apparel Forum. The report held Ishaq Dar directly responsible for withholding bona fide refunds of exporters and others to show higher collection figures to IMF and impress others of his “extraordinary performance: of achieving over 20% growth in tax revenues. On publication of this report at FTO’s website, Ishaq Dar became furious. He ordered FTO to remove it immediately from its website and instructed FBR to dissociate itself from the report, which it endorsed when draft was circulated!! The details of this entire agonizing saga can be read at Blocked tax refunds: FTO comes under pressure, removes repot from website, The Express Tribune, July 5, 2016.   

The culture of figure fudging in fiscal matters and cheating in financial affairs has been promoted not only during the three governments of Pakistan Muslim League (Nawaz) but also under Zardari and Musharraf rules. Shaukat Aziz, first as finance minister and then prime minister of Musharraf, admitted this fact as narrated by economist, Dr. Pervez Tahir in his op-ed of July 28, 2011, A history of figure fudging, as under:

“Fudging began in late 1999…… when the IMF pointed towards discrepancies in the fiscal accounts. The coup-makers, who had just seized power, were quick to blame it on the ousted government….in particular on …..Ishaq Dar…. The newly-imported finance minister, Shaukat Aziz, was too eager to pay the penalty to the IMF and bill himself as the country’s maiden Mr. Clean”. 

Shaukat Aziz, as ‘Mr. Clean”, according to Dr. Pervez, played havoc with figures to prove his dismal performance as the ‘greatest feat’ of Pakistan’s economic history. Dr. Pervez commented that Shaukat Aziz specifically targeted the Federal Bureau of Statistics and manipulated figures of poverty, growth, prices and employment. Instead of appointing full-time secretaries of statistics division, Shaukat Aziz assigned the work to additional secretaries in-charge “who had no shame in acting as director-general of the FBS, a junior position”, wrote Dr. Pervez.

Convicted parliamentarian for committing contempt of court by Supreme Court, Daniyal Aziz, ex-Minister for Privatization under PML-N, once blue-eyed boy of Musharraf, in a TV talk show in which Ishaq Dar also participated accused him of tampering with figures that led to a “fine of Rs. 9 billion to Pakistan”.

During the Zardari era, Chairman FBR, in a hurriedly called Press conference during the late hours of June 30, 2011, announced that the revenue target was surpassed “by a comfortable margin of over Rs. 2 billion and receipts are still flowing in”. Later, he admitted the fact of figure fudging before the National Assembly Standing Committee on Finance, Revenue and Economic Affairs as then Governor State Bank refused to become part of FBR’s fraud (of taking cheques from some banks and maneuvering clearance before June 30, 2011).

During the rule of PML-N from 2013-18, many statistical discrepancies were reported in budget documents by experts—these were in fact undesirable acts of window dressing through fudging of figures to show a healthy picture of the economy. The claim by Ishaq Dar that FBR met, rather exceeded, the targets for the fiscal year 2014-15 and 2015-16 were proved wrong. A report [Non-tax revenue: Rs. 195 billion included in taxes to claim lofty collection, Business Recorder, July 3, 2016] revealed that Rs. 195 billion collection on account of non-tax revenue (Gas Infrastructure Development Cess and Natural Gas Development Surcharge) was shown as “other taxes” to claim “higher tax collection”. These were part of non-tax revenue till 2013-14.

In 2014-15, FBR failed to meet the third revised target. The original target of Rs. 2810 billion was first reduced to Rs. 2691 billion and then to Rs. 2605 billion. On shortfall of over Rs. 220 billion vis-à-vis original target, FBR stalwarts received kudos from Ishaq Dar, besides bonuses! On November 26, 2015, Ishaq Dar confessed [‘Culture of cheat’, The News, May 22, 2016] before the National Assembly’s Standing Committee on Finance, Revenue, Economic Affairs, Statistics and Privatization that FBR withheld refunds of Rs. 200 billion.

For 2016-17, FBR missed even the revised target of Rs.3521 billion by a margin of over Rs. 200—original goal was Rs.3621 billion. As in past years, the collection figures of 2016-17 include blocked refunds of billions of rupees and advances taken from many large taxpayers. This aspect, as suggested earlier in these columns, needs a thorough probe by an independent commission. Public Accounts Committee in the past, even after admission of figure fudging by FBR bosses never punished them. Strangely, but expectedly, till today nobody has raised this issue in the National assembly or Senate. Since elected members favour FBR bosses, they also protect them from probe and audits. The cases of many members of Parliament selected for audit for tax year 2016 have been hushed up as no proper inquiry has been conducted. It is known to all that majority of legislators are declaring meagre income as compared to their standard of living yet FBR is not willing to probe and impose tax. This marriage of convenience, rather unholy alliance, must end if we have to end the culture of cheat and deceit in society and collect taxes from all, wherever due.  

For the fiscal year 2017-18, the target assigned to FBR was Rs. Rs. 4013 billion that was later reduced to Rs. 3935 billion. FBR collected Rs. 3842 billion. Every year, FBR fails to collect [see Table] downward revised target what to speak of originally assigned figure in the budget estimates. This widens fiscal deficit resulting in more borrowing and taking away large part of budget for debt servicing/payment of principal amount. 

FBR has been single handedly destroying Pakistan’s growth by anti-business actions, especially during Dar’s era. Ishaq Dar, now a proclaimed offender of the Accountability Court and suspended senator, gave free hand to tax officials to block bona fide refunds, take undue advances from large business houses, use negative taxes like raising unjust demands and freeze bank accounts for recovery. Exporters and other taxpayers, still waiting for refunds, have been denied lawful right of payments/compensation within stipulated time. Had Ishaq Dar concentrated on growth above 6%, as done by China, India and even Bangladesh in the region, we could have avoided the present fiscal and economic mess. Tax is a byproduct of growth. Harsh taxation only hampers expansion and prevents investment in existing and new businesses.   

Everybody knows that collection shown by FBR contains blocked refunds of billons, advances from government-owned corporations and amounts extorted, though not yet due. The sordid story of over-reporting of collection and overstating targets will continue till the time action is not taken directly by the Supreme Court as even the present financial team under Finance Minister Asad Umar has not issued the long outstanding refunds. No action was taken either by the Public Accounts Committee or Standing Committees of Parliament even after extorting confession from FBR bosses of wrongdoings. The young State Minister for Revenue, Hammad Azhar, has also shown no inclination to take any punitive action against corrupt elements in FBR despite leads given in ‘PTI and tax reforms’, Business Recorder, August 17, 2018). On the contrary, under his control obnoxious SRO 1320(I)/2018 was issued on November 2, 2018 to deny even bona fide refunds through discretionary powers. He should have rather taken action against the refund mafia engaged in selling flying and fake invoices. This is rampantly in use due to connivance of corrupt officials and unscrupulous tax advisers/taxpayers.  

Table: FBR Tax Collection (2001-02 to 2017-18)(million rupees)
Fiscal Year	Direct Taxes	Sales	Excise	Customs	Total of Indirect Taxes	Total Tax Collection
2001-02	142,505	166,561	47,186	47,818	261,565	404,070
2002-03	151,898	195,139	44,754	68,836	308,729	460,627
2003-04	165,079	219,167	45,552	91,045	355,764	520,843
2004-05	183,372	238,537	53,104	115,374	407,015	590,387
2005-06	224,988	294,798	55,272	138,384	488,454	713,442
2006-07	333,737	309,396	71,804	132,299	513,499	847,236
2007-08	387,862	377,430	92,137	150,663	620,230	1,008,092
2008-09	440,271	452,294	116,055	148,382	716,731	1,157,002
2009-10	528,649	517,302	121,182	161,489	799,973	1,328,622
2010-11	602,451	633,357	137,353	184,853	955,563	1,558,014
2011-12	738,822	804,846	122,460	216,898	1,144,204	1,883,026
2012-13	743,410	842,525	120,922	239,459	1,202,906	1,946,316
2013-14	877,274	996,100	138,064	242,799	1,376,963	2,254,237
2014-15	1,033,720	1,087,790	162,248	306,220	1,556,258	2,589,978
2015-16	1,194,609	1,321,685	177,580	406,181	1,905,446	3,100,055
2016-17	1,344,226	1,328,965	197,911	496,772	2,023,648	3,367,874
2017-18	1,536,638	1,491,297	205,877	608,324	2,305,498	3,842,136

Source: http://www.sbp.org.pk/ecodata/tax.pdf

The main reliance of FBR since 1991-92 has been on indirect taxes, even under the Income Tax Ordinance, 2001 that contains over 65 withholding tax provisions many provisions relate to presumptive taxation and minimum taxation that in reality are pass through items—indirect taxes in substance. According to details given in FBR’s Year Book 2017-18, out of total direct tax collection was of 1536.6 billion, income tax was of Rs.1528.5 billion. The website of State Bank of Pakistan (see Table) does not give bifurcation of amount of Rs.1,536,638,000,000 collected as direct tax. The same is the position in FBR’s Year Book 2017-18 [‘Of taxpayers and non-filers’, The News, November 4, 2018 and ‘Reluctant return filers’, Business Recorder, November 2, 2018] that does not mention what was the nature of direct tax of Rs. 8.1, other than income tax of Rs. Rs.1528.5 collected for 2017-18.

The bifurcation of  income tax collected during 2017-18 as FBR’s Year Book 2017-18 is: Rs. 1047 billion was from withholding taxes (68.5%), Rs.335.79 billion came as advance tax (21.9%), Rs. 41.64 billion with returns (2.7%) and Rs.1.31 billion under ‘Tax Arrears Settlement Incentive Scheme (TASIS) 2008’ (.08%). FBR’s own efforts (collection on demand) yielded only Rs. 102.82 billion (6.7%)—from arrears Rs. 17.69 billion (1.2%) and from current demand Rs. 85.13 billion (5.6%). It confirms negligible share on the part of FBR to tap the actual tax potential as it would have been hurtful to the rich, majority of which are non-filers, despite having substantial undeclared, untaxed wealth and the audacity of ruling this country as a matter of right. They are ready to pay additional tax at source as non-filers but are not inclined to file tax returns.

According to document available on the website of Ministry of Finance (‘Pakistan: Summary of Consolidated Federal and Provincial Revenue 2017-18’), the total collection under direct tax during fiscal year 2017-18 was of Rs. 1,536,636,000,000 whereas on the website of State Bank it is 1,536,638,000,000—such discrepancies become more conspicuous when there is no mention of what was the nature of collection of direct tax other than income tax. If it included Worker’s Welfare Fund as well, as ‘Annual Budget Statement 2017-18’ shows, then it was violation of law as Supreme Court has already held in Workers Welfare Funds m/o Human Resources Development, Islamabad through Secretary and others v East Pakistan Chrome Tannery (Pvt.) Ltd through its GM (Finance), Lahore etc. and others [(2016) 114 TAX 385 (S.C. Pak.)] that it is not “tax”. If it included Capital Value Tax (CVT), it can no longer be levied on immovable property by the National Assembly as after 18th Constitutional Amendment, it is right of the provinces under Item No. 50 of the Federal Legislative List, Fourth Schedule to the Constitution of Pakistan, which says: “Taxes on the capital value of the assets, not including taxes on immovable property”.

As evident from above, FBR has a long history of overstating revenue collections [‘The FBR Figures’, Business Recorder, July 4, 2014] by manipulating the figures, blocking bona fide refunds [‘FBR’s refund system bleeding both ways’, The News, June 3, 2015] and taking advance payments from banks and other large taxpayers. Tax bureaucrats on the instructions of political masters inflicted shame on the country by gross misreporting of data to the IMF [‘A history of figure fudging’, The Express Tribune, July 28, 2011]. Subsequently, a commitment was made to the IMF to review fiscal data from financial year 1989-90 onwards. The data compiled for financial years 1994 to 2000 confirmed that tax revenues were inflated by billions of rupees. The tax collectors—data manipulators is a more appropriate term for them—showed higher tax collections through fudging of figures and the nation had to pay a heavy cost for it (not only in terms of fine paid to the IMF) but further tarnishing the image of the country in the international community that nothing is transparent here.

Never ever has FBR disclosed in its collection statements how much undisputed and established refunds remained unpaid on the closing date of the fiscal year, which must be subtracted from the gross revenue receipts to portray the correct net revenue collection. It only mentions the actual refunds issued, whereas accrued and ascertainable liability of refunds should also be taken into account to reflect the true picture of net revenue realised during a financial year. It is strange that star Finance Minister of PML-N, being a foreign qualified chartered accountant, had been ignoring this established norm of accounting. Thus, the acts of deceit, manipulation, fraud and highhandedness by FBR testify to the criminal culpability of political masters as well. It is for the new government of PTI to take cognizance of this important issue where the apex revenue authority is destroying businesses and tarnishing the image of the country by wrong projection of its performance.

The persistent manipulation of revenue collection figures by FBR is a serious, but neglected matter. Time and again independent analysts and foreign institutions have expressed their indignation over this malpractice, but the successive governments have never ordered any inquiry into the matter. In recent months, the Supreme Court of Pakistan ordered the audit of Pakistan Railways and Pakistan International Airlines to find out the causes of rampant corruption and inefficiency in these two loss-bearing organisations. The same is the story of almost every government institution. FBR has not only been allowing people to remit billions abroad without paying taxes but has also indulged in overstating the collection figures, blocking refunds and depriving taxpayers of lawful rights like giving appeal effects after courts decided matters in their favour. Unfortunately, neither Supreme Court of Pakistan nor Standing Committees on Finance & Revenue of National Assembly and Senate till today has taken any notice of these lapses.  

______________________________________________________________________

The writers, lawyers and partners in HUZAIMA, IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)