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Tax Reforms in Pakistan

The proposed research will cover the following area:

INTRODUCTION

The issues and problems relating to reforming the tax system in Pakistan can only be tackled through a professional and scientific approach. Inter alia, the most important and urgent task is to analyse causes for inefficiency and corruption rampant in all the tax departments and to take concrete steps for making the tax apparatus efficient, responsive and friendly.

II.      NEED TO BE PRACTICAL

–          We live in a complex world where most business transactions are intricately interwoven.

–          A meaningful and effective tax system that must cater for real life situations, cannot but be “simple”.

–          “Simplicity” needs to be sine qua non of mutual trust, fairness and a gentleman’s approach on the part of tax-collectors, taxpayers and their advisers.

III.     NEW ECONOMIC POLICY VIS-À-VIS TAX SYSTEM

–          An urgent need to examine, analyse and re-engineer the existing administrative processes and procedures is clearly necessitated to deal with both exogenous and endogenous circumstances.

–          The exogenous factor means initiation of a new economic policy, whose basic ingredients should be:

            (a)       openness for inflow of foreign capital particularly investments by foreign institutional investors;

            (b)       de-regulated interest and exchange rates;

            (c)        higher economic growth in a competitive, commercial and industrial environment;

            (d)       growth of exports and removal of restrictions both on imports and exports;

            (e)        disinvestment of public sector equity; and

            (f)        reduction of fiscal deficit through increased revenues and decrease in public expenditure.


The interface of tax system with global players underscores need for speed, sensitivity, responsiveness and uniformity in application of laws and regulations.  TAX REFORM STRATEGY: VITAL CONSTITUENTS Strategy for tax reform should focus on: resource management through appropriate re-designing of financial management systems to harmonize authority with responsibility, flexibility in organizational structure, augmenting manpower resources and skills, empowerment of appropriate levels, improvement in conditions at work-place and finally recognizing excellence in performance; (ii)   operation management which should eliminate/reduce unproductive or less productive activities, delineate the essential and critical areas of work, re-engineering the existing practices, establish feasible norms and standards of performance, enforce their adherence and introduce responsibility accounting and; (iii)  employee motivation to be engendered through appropriate financial satisfaction, psychological inputs, training and interaction with superiors within the organization, the transformation aiming at change in leadership style from bureaucratic and fault-finding to supportive and responsibility sharing, involving the key attributes, integrity and professional competence.
The tax collectors must not be seen as an impediment in the onward march of the economic engine while ensuring due collection of revenues and booking of defaulters.
The endogenous factors encompass two aspects:
 (a)   The concern for reforms in tax system has primarily been restricted to changes in rates of taxes, and re-drafting of laws and regulations. It is only a patchwork. There should be an integrated approach towards Reform Agenda.
 (b)   There has been no serious effort so far to retool the nuts and bolts of the administrative system. The CBR should be made an independent autonomous body and tax collectors should be given a fair deal in remuneration, benefits and service conditions.

IV.     LACK OF ACCOUNTABILITY, CORRUPTION & INEFFICIENCY

–          With the inadequacy of resources, constraints of space, archaic methods of storage of records and often-unhygienic work environment, the assessing officers’ reliance on their supporting staff increases.

–          In this impossible situation, accountability becomes the first casualty.

‑        The scope of unscrupulous operators, be it in the matter of refunds or collection of revenues, or selection of cases for scrutiny, or a battle against tax evasion, is inbuilt in the present system This situation is responsible for harassment and corruption in the system. –       Framing of action plan objectives on the basis of workload or pre-determined norms without reference to ground realities has led to almost chaotic conditions at the operating levels. –       Though quantitatively the departments’ performance has been improving, yet a large-scale evasion of taxes has become an established reality. –       The situation calls for a radical shift from an activity-based to a value-based system with a conscious effort to reduce the routine workload and to concentrate only on a fewer but information-based assessments.SIMULTANEOUS APPROACH
IS PREREQUISITE
Reforms can be successful only if simultaneous analysis is conducted of the whole system, that is, tax structure, tax administration, state of economy, taxpayers’ attitudes, revenue needs of the country and all other allied aspects. Measures that are necessary to make a tax system successful relate to: 1.     Devising and running an efficient and truly independent justice system, 2.     Provision of expert legal advice for drafting of laws, 3.     Designing of tax forms and procedures, 4.     Improvements in management of tax department, 5.     A broad-based personnel policy, 6.     Training of tax administrators, 7.     Educating taxpayers and making them realize their duty to pay tax. 8.     Development of work ethics, 9.     provision of healthy working conditions and 10.    Efficient redressal machinery for problems of workmen and taxpayers.

V.      ESCAPE OF A LARGE SEGMENT OF TAXPAYERS FROM TAX NET

–          A close look at the statistics would reveal that 40 to 60 per cent taxpayer population has not been filing returns of income, year after year.

–          The reasons for such behaviour could range from lack of trust and laxity, low probability of being detected and penalised, to complete lack of faith in the credibility of the State and wasteful use of public revenues.

VI.     AREAS OF CONCERN, WITH UNDERLYING REASONS

–          The significant areas for individual and societal concerns are:

            (a)   tax evasion;

            (b)   mounting arrears of tax;

            (c)   delay in refund of excess tax and             (d)   administrative delays in responding to taxpayers’ needs and requirements. Most of these emanate from:             (i)    inadequate resources             (ii)   low employee morale,             (iii) insensitivity to taxpayer’s needs,             (iv)  lack of predictability in decision making,             (v)   absence of mechanism for quick and effective resolution of grievances, and             (vi)  public perception about observance of law being only for the weak and the meek. VII. NEED FOR A NEW-LOOK – FLEXIBLE ADMINISTRATION The inefficiency and ineffectiveness of the system are likely to increase and aggravate unless initiatives are taken to re-engineer the organisational processes, re-fashion the organisational structure and design to impart greater flexibility to cope with the emerging requirements. It is suggested that allocation of work amongst assessing officers should be based on feasibility norms, their aptitude, skills and available information.PRIME CONCERNS OF
TAX POLICY
‑     The tax system is considered as one of the most important economic and political institution in a society. ‑     Structural features of the tax system in a society are determinant of its commitment to social and human development. ‑     In Pakistani context, the most disturbing aspect of our tax policy is inconsistency and ad hocism. ‑     The prevailing tax structure in Pakistan needs a thorough overhaul. ‑     The tax system should be redesigned that the cost of public service is to be shared and wealth is to be distributed. ‑     The deepening economic crisis is destroying all the components of growth and industrialisation. In the circumstances, the exercise of major tax reform, without proper homework and public participation, can have a disastrous impact. ‑     The issues of justice, fairness and equity, instead of achieving targets, should be a central concern of our tax policy. ‑     The tax-base cannot be broadened by introducing irrational harsh, unjust and unfair taxation measures. ‑     The foreign investors are already sick of unpredictable policies and ad hocism in our tax law. An independent Advance Tax Ruling Authority is, therefore, the need of the hour.

VIII.  SPARING USE OF PENAL MEASURES

–          Mounting litigation and slow disposal thereof have combined to detract from the efficacy of penal measures as a deterrent against non-compliance.

–          Except in case of recalcitrant taxpayers, payment of additional tax should be regarded as an adequate punishment.

–          Indiscriminate issue of penalty notices merely leads to harassment and corruption. It has an adverse effect on the image of an organisation.

–          Clear and categorical instructions should be issued setting forth conditions under which penalty and prosecution must necessarily be initiated.

–          To enhance taxpayers’ faith in the fairness of the system, penalty and additional tax provisions need to be modified immediately.

IX.     PERSUADING PEOPLE TO FILE RETURNS

–          Concerted efforts must be made to pursue the non-filers and tax evaders.

This can be achieved by: –

(a)       re-deploying the existing work force, and

(b)       augmenting the strength in certain cadres.

The regular taxpayers need to be treated with respect and dignity.

Litigation is instrumental in increasing cost of compliance for a taxpayer. The revenue department should aim at reconciliation rather than confrontation with a taxpayer.

X.      REFORMING FINANCIAL MANAGEMENT SYSTEMS

–          The CBR is the apex responsible for administration and management of the Tax Departments and collection of revenues. However, its authority to conceive, plan, manage and provide the requisite inputs is severely limited due to archaic and often dysfunctional financial management systems and procedures.

–          The Board should be given full autonomy in policy making and financial matters like the State Bank of Pakistan.

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