Overcoming fragmented taxation

Huzaima Bukhari, Dr Ikramul Haq & Dr Muhammad Babar Chohan

Fiscally, Pakistan is a highly undisciplined country. The main reason is scattered taxation by multiple agencies working under federal, provincial and local governments without necessary coordination and data sharing. As a result, the country has witnessed low tax-to-GDP ratio and very slow progress on the front of broadening of tax base. Furthermore, so far, all previous tax reforms inherently lack optimality, as far as revenue collection is concerned, causing a consistent decline in the ease of doing business indicators ranking. These issues have already been discussed in detail by us in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’, Business Recorder, August 31, 2018, and ‘Doing business under scattered taxation’, Business Recorder, September 7, 2018]. This article is a continuation of the same discussion with a view to highlighting some methodological issues in practically bringing about the tax reforms in a coherent and systematic manner.

Several articles written by Professor Bent Flyvbjerg of Oxford University underpin the need to strategically plan big projects in the public sector with a specialized focus on economic, technological, political and aesthetic fronts—terming them as four sublimes. These sublimes can equally be relevant for streamlining our scattered tax system that has jeopardized the country’s fiscal discipline as compared with other regional and international economies. The culture of disjointed taxation, without a deeper connection with a national level strategic framework, is a kind of break-fix model. In this model, the policymakers first suggest a package of reforms, reverse it when confronted with challenges owing to shallow economic thinking, attempt to fix it, and then continue with the same. The question remains, what are the strategic connections among our business, fiscal and monetary policies?

In this regard, a 2003 article from the Journal of Monetary Economics, authored by William Easterly and Ross Levine, highlights two factors responsible for accelerating economic growth: geography and institutions. This suggests that the economic growth dynamics of the Gilgit-Baltistan region, for example, are different from the Sindh. Similarly the geographical business tendencies of Balochistan will be different from Azad Kashmir and other parts of the country. Therefore, geographical diversity is an important factor requiring due attention of the policymakers in any tax reforms effort/package. Likewise, institutions play a pivotal role in augmenting economic growth as a whole. It is because economic growth occurs in a multi-sectoral institutional setting. This suggests that any tax reforms must primarily focus on harmonizing and integrating tax institutions so that the challenges faced by multi-sectoral governmental settings, coupled with geographical diversity, could effectively be handled. Furthermore, the coordination failure between different tax agencies is also a big factor that can hamper Pakistan’s economic take off.

Policymaking, therefore, is the most challenging job because it involves research as well as critical thinking of the economic and business challenges. Rest is all about implementation of the policies. This suggests that if the policies are rightly directed, the implementation is just an auto process that does not require much energies and focus. In this context, it is important to critically line up our economic and business priorities coupled with a well thought out political vision so that an effective economic way forward could be evolved. It is equally important to look into the political, economic, technological and aesthetic considerations before finalizing the fiscal and monetary policies. A four stage methodological framework is suggested in Figure A below: (1) Initially integrating the jurisdictions of the Federal Board of Revenue (FBR), the provincial sales tax revenue authorities (PRAs), and the taxes administered under the military cantonment boards (MCBs), (2) Issuing the Office Memorandum for the formation of All Pakistan Unified Tax Service (APUTS) by the Establishment Division, (3) Establishing the National Tax Academy (NTA) in Islamabad, and (4) Streamlining and integrating all other provincial taxes with the taxes already integrated at stage 1.

Figure A: Methodology for tax integration reforms along with tentative deadlines

The issue: Integration of federal and provincial taxes (Aug 31, 2018)

Theoretical framework: Kenny & Winer’s three-tier framework: the cost effect, the base effect & the scale effect (Aug 31, 2018)  : Integration of federal and provincial taxes

A four dimensional methodology (Oct 19, 2018)

Stage 1: Integrating FBR, PRAs and MCBs (Feb 25, 2019)

Stage 2: Issuing O.M. for APUTS (Mar 25, 2019)

Stage 3: Inaugurating NTA Islamabad (Jul 3, 2019)

Stage 4:  Integrating other provincial taxes (Oct 30, 2019)

Recording challenges & feedback about the taxes integration (Jun 30, 2020)

Finalizing the integrated tax system after accommodating the feedback (Oct 19, 2020)

Source: the authors

The methodological chronology of the proposed tax reforms package, as shown in the Figure A, can be divided into six broad steps. In the first step, we have identified the issue, i.e. the integration of federal and provincial taxes in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’, Business Recorder, August 31, 2018. The second step was also defined in the same article. Today’s article is aimed at illustrating the third step in which a detailed methodological framework and way forward has been suggested alongside necessary tentative deadlines. In forthcoming articles on this issue, we will suggest the practical steps to be taken for materialising the actions at Stages 1, 2, 3 and 4. The suggestions for recording and methodology for challenges and the feedback will also be covered in another write up. The last article of this series will finally provide the practical steps for converting the current haphazard and scattered taxation into a coherent and systematic singular taxation capable of handling the challenges faced by our tax system.

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Huzaima Bukhari and Dr Ikramul Haq, Advocate and authors, are Visiting Faculty at Lahore University of Management Sciences (LUMS) and Dr Muhammad Babar Chohan (babarchohan21@gmail.com) is Additional Commissioner, FBR, holding PhD in Economic Planning from Massey University, New Zealand.