Dr. Ikramul Haq

Pakistan for the last many years has been grappling with the problem of raising revenue to survive as viable economic entity. The huge fiscal deficit, coupled with mounting debt servicing, is posing a serious threat to country’s economic revival. The economic managers have failed miserably to substantially increase the revenue as per potential.

Paradoxically, their pre-occupation with more and more revenue collection have 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 from the International Monetary Fund (IMF) and other foreign institutions 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 the tax administrations. In 1992, Richard M. Bird and Milka Casanegra de Jantscher presented a marvelous book Improving Tax Administrations in Developing Countries (interestingly 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 administration if a developing country is keen to explore new sources of revenue.

The old saying “tax policy is only as good as its administration” is outdated. Today’s consensus is that “tax administration is tax policy (Stanley S. Surrey, “Tax Administration in underdeveloped countries”, University of Miami Law Review, xii (winter 1958) at 158-88. Stanley S. Surrey at that time was the professor of law and international programme in taxation, Harvard Law School).

Anyone who has worked in a tax administration of a developing country (like me in Pakistan from 1984 to 1996) can vouch for that. Many well-intention laws have been laid to rest by inefficient (which also include indifferent, corrupt and incompetent) tax administrations. Pakistan is a classical example of it. The Federal Board of Revenue (FBR), apex administrative body for federal taxes, is the most apt example of an indifferent (though highly oppressive and inefficient) tax administration.

Taxation requires pragmatic thinking and is most effective when developed from the practical and possible agenda for building a sound tax administration, it is necessary to start its foundation from a Tax Intelligence System (TIS). The widest possible taxpayer base must be identified for any tax 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 18% has failed to bring the desired results as it is a higher tax on a narrow base. Had it been a 8% levy across the board, it could have been 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 to improve revenue collection when it has no information/intelligence system/unit to maintain the taxpayers’ individual profile? The efforts, through software developed by Pakistan Revenue Automation Limited (PRAL), 100% owned company of FBR, are neither theoretically sound, nor the strategy to implement them are scientific and in conformity with the ground realities of Pakistan.

TIS is the area that should be given the first priority in improving tax administration. As far back as 1958, Professor Stanley S. Surrey of the Harvard Law School pointed out the advantages of building up a comprehensive taxpayer roll:

                     The beginning of tax administration lies in seeing that the taxpayers are on the tax rolls. Unless the tax authorities know who are the individuals or units subject to the tax, the whole machinery of administration must necessarily function with incomplete coverage of the taxable area …. The important tasks are to select among the various sources only those which promise to be productive of names likely to be taxpayers under the tax in question (thus in some places telephone books may be very useful, while elsewhere these lists may contain only more non-taxpayers than taxpayers); to gather only so much information as can be efficiently processed; and to devise an efficient system for correlating the selected information in a continuously current form usable for enforcement purposes.

The FBR, responsible for the collection of federal taxes, has miserably failed to introduce any automated tax system, using Artificial Intelligence (AI), despite the fact that it has its own market-wage oriented company, PRAL, at its disposal, to monitor the economic activities of corporate/business sectors. FBR stalwarts till today has failed to develop TIS, a computer-based system guided by AI—proved extremely effective in a number of countries as it:

• monitors the “large taxpayers” that is all the companies registered in a tax jurisdiction.
• identifies the most productive centers of information from which significant data can be extracted.
• uses simple AI tools that can be set up quickly for simple tax compliance formats. [FBR and PRAL have made very effort to make it complicated and difficult to work]
• avoids any tax specific and can be adopted to any type of tax.
• easily extendable to all types of taxpayers.

Artificial Intelligence Tax System (AITIS) is the idea in vogue these days. Earlier, TIS was implemented even in the 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).

The Tax Intelligence System concentrates on third-party information that continuously originates from different areas of the government and quasi-governmental institutions to the tax department. The Tax Department of Botswana in 1983, on the advice of IMF, revived its investigation division and the Intelligence Unit that specialized in gathering information on corporate activity. Previously all information received was maintained manually in the form of registers.

The problem faced by the Tax Department of Botswana was the same as is now faced by the FBR; the flood of information it was trying to process was too great and the system became to slow, prone to errors. They found an efficient way to handle it through computerization. Did IMF forget its advice to Botswana in 1980s whiled dealing with Pakistan in 2025? We have better human resource in Information Technology (IT) and yet even could not achieve what a small African State managed as early as in 1985! It is indeed shameful and eye-opener for the FBR stalwarts and wizards sitting in the Ministry of Finance.

There is an urgent need to set up TIS in Pakistan, based on AI, to maximize the scope the revenue collection. Its salient features inter alia to cater for:

• a computer network for intelligence work. It should be able to record and process a large volume of information.
• it must increase dramatically the number of new persons that should be registered as active taxpayers and who start filing tax returns and paying taxes.
• it must expose registered taxpayers who need to be investigated.
• its impact should reflect in the increased amount of taxes collected.

To exploit the capabilities of the computer network fully, a completely fresh conceptualization is required in FBR and preferably not by the tax officials, but by system analysts. The knowledge of the tax officials in respect of the user requirements is to be successfully fused with the skills of the computer programmers.

Independent professional programmers and data scientist should be hired and given the task of building a relational database i.e. a database in which the data relationships could be established electronically. The tax officials should be left with the task of defining the scope of the project and the method of selecting, collecting and processing the data. The main purpose of the project should be of creating a database that could record and process significant information in respect of taxpayers, both existing and prospective.

It is necessary to determine what is significant and to devise a selective basis for gathering data. This approach will make the work of the FBR proactive rather than reactive.

The problem encountered by FBR is not how to gather information or the lack of it but its abundance. Information can be gathered from many sources, e.g. mobile users, the list of electricity and gas consumes, and endless other sources including Internet and AI. The question is: How useful are these sources? The mere fact that a person has a mobile or pays electricity does not in itself determine whether that person may eventually become a taxpayer. Information should be processed on the basis of its usefulness.

The information collected in certain areas of selected cities can be useful if processed from this perspective. Otherwise, it will remain bulk trash without any useful purpose. Therefore, several factors, including the following, are to be considered in order to consider it as significant:

• Information would be most useful it if related directly to expenditure or income.
• If it related to the ownership of commercial property, like farms, commercial vehicles, etc., there must be an expectation that these assets would eventually produce assessable income.
• Information would be considered significant if the time lag is short between its receipt and the consequential registration of the new taxpayer. Statutory provisions placed time limits on the power of the assessing/tax officials to impose additional liabilities on taxpayers, and this meant that old information soon loses its usefulness.
• Information collected is also needed to have at least the following components:
  • a name (and if possible, the address) of a person;
  • a description of the type of transaction i.e. whether purchase or sale or a record of the ownership of property;
  • the date of the transaction;
  • a description of the property or the service that was transacted e.g., house property, contract payments; and
  • a monetary value above a stipulated threshold, depending on the type of property or service.

The objectives in setting up the database should be:

—to record the “significant” financial transactions that are entered into by companies during a tax year;

—to consolidate into one record all the information from different sources relating to one taxpayer/person according to tax years;

—to send a consolidated report to the field officer in the tax division at the end of the tax year or during the relevant period;

—to provide quarterly and annual reports to senior managers (e.g. commissioners/collectors of the data recorded and processed; and

—to be flexible enough to provide special reports on an ad hoc basis.

A concept of expenditure-income (“exincome”) flows (see flowchart below) should be developed to create a system that can collect, and process information needed by field formations rather than work with what they passively received. The concept of flows of income, capital, goods, services, etc. within an economy is common in economic theory. It is the basis of the value added tax system, whereas in Pakistan we are implementing it without the support of reliable Tax Intelligence system. Goods and services are monitored as they flow from one person to another and one person’s expenditure becomes another’s income. This concept is at the core of building AI based Tax Intelligence system (TIS).

In Pakistan the major flows are relatively easy to map, as its main source of economic activity is “imports”. The flow of “imports” can be monitored through the computerization of all points of customs where “imports” are handled. Once the exincome stream reaches the contractors, it is a little more difficult to trace. It spreads out through many channels in a wide delta of economic activity. Tax Intelligence system should be able to track some sections of this flow by examining the records of government departments and other large institutions, for which statutory amendments are required in various laws, especially the banking laws etc. protecting even criminal financial transactions.

The TIS can be used by FBR to alleviate some of the problems associated with revenue shortfalls in Pakistan. Unregistered taxpayers can easily be located and those most likely to become regular taxpayers can be selected and followed up. Stopfilers can be encouraged/forced to file returns by issuing fairly accurate estimated assessments on their income based on reliable information available in the database.

Estimated assessments can often be wild “top of the hat” estimates that are not taken seriously by the taxpayers. If the estimates are too high the taxpayer is too overwhelmed to respond. If they too low the taxpayer would rather pay the tax than file returns.

Near accurate estimates send a clear message to taxpayers that the Tax Department has reliable information on their activities and could take sterner action if the default continues. In Pakistan, our tax officials are doing just the opposite, and the entire tax system is discredited.

Tax evaders can be quickly detected if investigation division is able to assess and collect large amounts of additional taxes by detecting:

—        companies and other persons engaged in land sale; and

—        companies that are underpricing/overpricing imports/exports.

TIS can come in useful when delinquent taxpayers do not pay their taxes. The availability of current up-to-date information can assist seizure of assets or income in extreme cases of default.

Exincome Flows