By Dr. Ikramul Haq*
Tinkering with direct and indirect tax laws is becoming increasingly common. Every government in Pakistan, in recent years, made tall claims about reforming the tax system. The present Government, soon after taking over, also constituted an Expert Group (sic) to suggest changes in tax system that had become necessary in the light of new economic agenda set by the Chief Executive. The out put, Tax Laws (Amendments) Ordinance, 1999, promulgated on 16 December 1999, again confirmed the shortsightedness of the policymakers as the only thing it highlighted was revenue TARGETS. However, in this exercise, the plights of the people who were to administer the laws and the taxpayers who had to bear the onslaught of the changes were completely ignored. The exercise proved counterproductive.
Recently two Committees have been established to review the tax laws and to carry out studies for administrative reforms. A number of consultants, having no specialization in taxation, were hired on exorbitant pay. An expert from Washington, who has no idea of ground realities in Pakistan, heads the administrative reform project. The so-called experts invited from abroad (who cannot even drive themselves home on Pakistani roads) are not capable of understanding the ground realities prevailing in Pakistan. They may be very competent, and sincere too, but the task of tax reform in Pakistan cannot be successfully carried out by them or the tax bureaucrats sitting in CBR. A number of articles appeared in national Press have already criticised the idea of reforming Pakistan tax system through these experts and their disappointing performance so far (see Mr. Shamim Ahmad’s article in Dawn Business & Economic Review of December 2, 2000).
The terms of reference given to the Tax Reform Committees are impressive. The cause is noble and the issue is of national importance. However, the following questions are relevant:
- Do we really need a new Income Tax Law?
- What is wrong with the present one?
- Can we really improve the tax system and tax apparatus by just promulgating a new law?
- Do the present government against whom taxpayers have no right to vote has legal or moral authority to enact a new tax law?
These and many other questions of pivotal nature should be addressed before any adventure is made to further destroy the existing tax legislation.
All the Tax Reform Committees, including the present one headed by Mr. Shahid Hussain, have failed to consider this matter important enough to merit full-scale attention. Even if they recognised it as a problem they decided to leave it for the relevant quarters. The undeniable reality is that no agenda for rationalization or simplification of tax reforms can substantially improve tax compliance, unless there is a substantial 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 interferences. We are talking of giving “market” wages to officers, but nobody has even thought of improving the over all working conditions of tax departments. Mr. Shahid Hussain should go to a tax office as a taxpayer and only then he will feel the taste of inhuman and insulting treatment, the ordinary citizens receive daily. There is even not a proper waiting room for the visitors at tax offices. Does it really need huge money to extend them respect they deserve? Does this issue relate to market wages?
Every successive government in Pakistan has conveniently overlooked that the tax reforms are proposed by the Finance Minister, legislated by Parliament, implemented by tax administrators and finally suffered, for better or for worse, by the taxpayers. Unless everyone in this chain contributes his full support, there is little hope that the ultimate outcome will be favourable! If tax reforms were carried out on the basis of ‘commissioned’ studies as we got done through the ‘Expert Group’, these would hardly bring about the desired results. The piecemeal approach to reform of the kind resorted to by our experts sitting in the Ministry of Finance (sic) is hardly helpful. Such effort produces only patchwork effects.
It is an inescapable conclusion that tax laws, as these exist today in Pakistan, reflects a confused thinking. Presumably, the direct tax system is intended to achieve the twin objectives of maximising the revenue as well as utilising the direct taxes for achieving socio-economic objectives. In actual practice, the system has failed to achieve either of these objectives. In fact, the complex regime of incentives and disincentives built into the direct tax law cannot but lead, per se, to difficulties in enforcement and to the opening of opportunities for tax-dodgers/evaders. At the operational levels, this has resulted in undue bureaucratization, corruption and harassment of the citizens. Undoubtedly, the time has come to resolve these contradictions and to completely convert direct tax regime into simple tax laws. The new approach should aim at generation of resources besides achieving some limited but important economic objectives like promotion of savings and conservation of energy.
Equity in taxation
For any meaningful reform, solutions have to be found for those issues that have been sidetracked for years. One problem that affects personal taxation significantly relates to tax brackets, exemption limits, tax rates and fairness of the system of indexing for inflation. On the eve of each year’s budget exercise, these issues are raised but avoided rather than solved by an appeasement policy of increasing the exemption limits, standard deduction, re-arranging the tax brackets and making some minor changes in tax rates. When ‘indexation’ has been accepted as a policy for working out the cost for levy of tax on capital gains, there is no reason why this should not be accepted as a full-fledged policy for ensuring equity in taxation. The case for adjusting the structure of the personal income tax to inflation, to retain the same levels for taxation and collections in real terms, should receive the first priority in any future tax reform to enhance the credibility to the system.
Policy on tax incentives
Policy decisions concerning tax incentives should be based on firm footing. Tax concessions erode the revenue base and increase the quantum of work for the officers of the tax department. The more the tax concessions granted, the higher have the rates to be on the remaining base to raise the requisite revenue. Where rates cannot be raised to sufficient levels, revenue shortfalls exacerbate existing fiscal imbalances and contribute to macro problems.
Broadening tax net
We, in Pakistan, have been running after small fry to broaden the tax net. For example, a person with a telephone will have to file the return whether he has taxable income or not. Such an exercise generates tremendous infructuous, unproductive and wasteful work without any significant gain to the revenue. It strengthens the feeling that the Government, unable to tackle the hardened tax evaders, is unduly harsh on salary and wage earners. A feeling goes around that they are made to bear the major burden of taxes. The consequence is that ordinary people who generally think of themselves as honourable and honest end up in participating or advising others to practice evasion of taxes! Could such a measure be called a measure of tax reform!
The administration of a tax system is highly complex. A proper bureaucratic input is vital for making the system successful. Unfortunately, this aspect of the problem, which deserves utmost priority, has been neglected for no ostensible reasons. All the Tax Reform Committees in their reports failed to consider this matter important enough to merit full-scale attention. Even if they recognised it as the problem decided to leave it for the relevant quarters. The undeniable reality is that no agenda for rationalization or simplification of tax reform can substantially improve tax compliance, unless there is a substantial improvement in public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to relentlessly pursue and punish tax evaders without political and other interference.
Make CBR an autonomous Board
There have been umpteen suggestions for improving the service conditions of tax officials. Unfortunately, every Government has been turning a deaf ear to various suggestions made by eminent expert panels for improving the lot of the officials working under the Central Board of revenue (CBR) and meeting their just and humble demands. Committee after committee has recommended giving appropriate status to the CBR – the apex body in tax administration. The CBR should be made an autonomous Board. The Government should scrupulously respect its autonomy and the Board should be insulated from political pressures. Delegation of full financial powers to the CBR on the lines of the State Bank of Pakistan is the need of the hour. Such powers are absolutely necessary if the Board is to discharge adequately its responsibility of running the tax apparatus efficiently. The time is now ripe for making CBR as autonomous and independent body free from its secretarial workings. The Government while scrupulously respecting its autonomy and independence may enjoy powers to issue directions of a general nature in writing, wherever necessary.
Government should make a full review of the position regarding the powers and duties of the CBR including the position under the different laws and assign to the Board as many duties as possible so that the direct governmental share of activity will remain confined largely to fiscal policy and planning budget, framing of legislation and exemptions notifications.
Recruitment & Promotion Policy
The present policy of recruitment and promotion in tax departments is highly unsatisfactory for want of transparency. Long delays occur in filling up the posts, Departmental Promotion Committees’ meetings are not held in time and when held, their recommendations are not implemented promptly, because of delay in getting requisite approvals, etc. Naturally, such delays have adverse repercussions not only on the pace of work, but also on its quality. No reforms can be successful if the work force is not well treated. A solution of these problems does not require any large spending of money or resources. Shedding the apathetic and unhelpful attitude towards their problems and taking a realistic view of the situation can solve most of these. Nothing more can be said the emphsise the importance and urgency of taking care of personnel problems and working conditions. But in practice, these remain most neglected!
Tax reform not a time-bound but a continuing exercise
The exercise relating to tax reforms cannot be a time-bound affair and does not mean merely making changes in law. Reforms can be successful only if simultaneous analysis is made of the whole system, that is, tax structure, tax administration, state of economy, tax payers’ attitudes, revenue needs of the country and so many other allied aspects. Measures that are necessary to make a tax system successful relate to: –
- devising and running an efficient and truly independent justice system,
- provision of expert legal advice for drafting of laws,
- designing of tax forms and procedures,
- improvements in the management of tax department,
- a broad-based personnel policy,
- training of tax administrators,
- educating the taxpayers and making them realise that it is their duty to pay tax,
- development of work ethics,
- provision of healthy working conditions and
- efficient redressal machinery for the problems of workmen and taxpayers.
Relatively successful reforms in Indonesia, Jamaica, Malawi, etc., were carried out in three to four years’ time and these involved substantial preparation and transition arrangements including extensive consultations with all the parties affected by tax reform. These involved continuity in key decision-makers and major educational campaigns concurrent with the introduction of tax reform proposals to familiarise taxpayers with the new requirements. In Pakistan we want to do it in a slip shot manner, ignoring what devastating effects it can have for the large majority of people.
The Royal Commission on Taxation in Canada (the Carter Commission) and the Musgrave Commission in Columbia are said to have done the finest work up to that time in applied public finance because of their comprehensive analysis, rational approach and recommendations which could not have been possible, if a short time frame had been prescribed.
There is no short cut to tax reforms. Viscount Simonds, in one of his decisions, observed:
“The law must be related to changing standards of life … having regard to fundamental assessment of human values and purposes of society…”
This makes continuous attention to tax and other economic laws inevitable. Ad hoc decisions cannot provide lasting solutions. A unified and concerted effort is necessary. The need of the time is a Permanent National Tax Commission to take care, on a continuous basis, of all facets of tax reforms – not merely legislative matters. The recommendations from such an independent and expert panel can be expected to command more acceptability and will help the Government to achieve its avowed objective. In the words of Prof. Richard M. Bird, the reforms proposed should conform to the rules of results, robustness and relevance. The present Government, while resorting to tax reforms, must remember that in the past short-cut approaches did not succeed and they will never help to put this country back on the economy revival track.
* The writer, a leading International Tax Counsel, specialises in tax, corporate and constitutional laws. He is Chief Partner of Lahore Law Associates (Email firstname.lastname@example.org); Website: http://www.paktax.com.pk. He is member of Visiting Faculty of Institute of Direct Taxes in Lahore. He is author of numerous books on Pakistani Tax Laws. He has recently been conferred Doctorate of Law for his research on Tax Reform in a Quasi-Constitutional Perspective.