Huzaima Bukhari, Dr Ikramul Haq and Dr Muhammad Babar Chohan
The biggest challenge faced by our tax system at national and provincial levels is perpetuation of a highly fragmented structure that is not only inefficient but also responsible for not achieving substantial improvement in World Bank’s Ease of Doing Business Index (Pakistan is ranked 136 among 190 economies, according to the latest annual rating). In South Asia, India is at the 77th place, followed by Bhutan (89th), Sri Lanka (100th) and Nepal (110th). Pakistan, at the 136th position, is fifth in South Asia, followed by the Maldives (139th), Afghanistan (167th) and Bangladesh (176th). In 2008, Pakistan jumped up 11 places on the Word Bank’s Ease of Doing Business Index but in the ‘Paying Taxes Index’, it lost one position, standing at 173rd place. The key bottlenecks identified are delay in payment of tax refunds and multiple and frequent audits of corporations. Shockingly, more than 50% firms were elected for annual audits, but majority of cases remained pending and where audit was done, quality was pathetic. Because of multiplicity of taxes, companies have to make 47 tax payments every year that consume 293.5 hours.
Fiscal management in Pakistan is undoubtedly in disorder. The main reason, yet not realised by the fiscal managers, is scattered taxation, collection of taxes by multiple agencies working under federal, provincial and local governments without necessary coordination and data sharing. As a result, the country has extremely low collection and very slow progress on the front of broadening of tax base. Admittedly, all tax reforms (sic) so far inherently lack optimality, as far as revenue collection is concerned, causing a consistent decline in the ease of doing business indicators ranking. These issues were discussed in detail in ‘Overcoming fragmented taxation’, Business Recorder, Oct 20, 2018, ‘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 much-delayed tax reforms in a coherent and systematic manner.
In “Overcoming fragmented taxation”, Business Recorder, Oct 20, 2018, a detailed methodological framework for systematically formulizing an integrated tax system in Pakistan along with tentative deadlines was suggested and elaborated. It may be reminded that the concept and details of All Pakistan Unified Tax Service (APUTS) were presented on August 31, 2018 (‘Case for All Pakistan Unified Tax Service: PTI and innovative tax reforms’, Business Recorder). The theoretical framework was also suggested in the same article. Similarly, a detailed methodological framework was also given. The earlier tentative deadlines were basically meant for carrying out necessary research with a view to defining a clear research question (that is the integration of taxes in Pakistan) cobbled with a robust theoretical framework and a well-crafted methodological guideline. However, in line with the methodological framework, two upcoming tentative deadlines are crucial. In this regard, the integration of the Federal Board of Revenue (FBR), the Provincial Revenue Authorities (PRAs) and the Military Cantonment Boards (MCBs) may be done by Feb 25, 2019. Once this integration is done, the Establishment Division can easily issue an Office Memorandum (O.M) for the formation of APUTS. In this regard, a tentative deadline of Mar 25, 2019 was earlier suggested. As these two deadlines are approaching fast, it is time to draw the attention of Government of Tahreek-i-Insaf (PTI) to take necessary steps for ensuring that FBR, PRAs and MCBs are integrated as a first major step towards creating the APUTS.
As far as the integration of FBR, PRAs and MCBs is concerned, there are three main stakeholders: the federal government, the provincial governments and the Ministry of Defence. It is pivotal to mention that so far the government’s entire focus is on reforming the FBR particularly the separation of tax policy and tax operations. However, such separation will not work effectively unless the entire tax machinery of Pakistan is made part of a coherent fiscal framework by integrating the tax components separately administered by the federal government, the provincial governments, the MCBs and other tax authorities. This is also the requirement of Article 156(2) of the Constitution of Islamic Republic of Pakistan (“the Constitution) which says:
“The National Economic Council shall review the overall economic condition of the country and shall, for advising the Federal Government and the Provincial Governments, formulate plans in respect of financial, commercial, social and economic policies; and in formulating such plans, it shall, amongst other factors, ensure balanced development and regional equity and shall also be guided by the Principles of Policy set-out in Chapter 2 of Part II”.
Separating tax policy and tax operations only at the FBR level is going to create another form of institutional disintegration in which the in situ scope of tax reforms will be highly limited. That means the separation of policy and operations only at the FBR level, without removing the deep rooted tax anomalies at the national level, may not be more than mere ‘fiscal cosmetics’. It is not to argue that the government’s move to separate tax policy from tax operations is bad, the real issue is to first integrate all taxes in the country under one policy umbrella and then separate tax policy from operations. In the past, unfortunately, our successive governments have a history of blindly following other countries’ tax models without understanding our local and contextual tax challenges. If somebody in the reforms team suggests separating tax policy from operations, it is fine. However, it is equally important to double check what the status of tax integration in the countries is from where this model is being imported.
The deletion of the subject of national planning from the exclusive domain of the Federal Government, and the placing of the National Economic Council (NEC) in the list of subjects mandated to be the joint responsibility of the Federal Government and the Provincial Governments remains unnoticed by our parliamentarians and independent experts. Strangely, the provinces have not raised this issue till today. Centralised planning was one of the factors in the dismemberment of the country in 1971. The planning, in the post-18th Constitutional Amendment should have been federalised rather than centralised. But nobody has raised this issue. The 18th Amendment redefined NEC on the pattern of Council of Economic Interests (CCI). The NEC forms part of the Chapter 3 of the Constitution entitled ‘Special Provisions’. Before the Eighteenth Amendment, Article 156 related to the NEC had two clauses. Clause (1) described the composition and clause (2) its functions. These clauses have undergone important changes after the Eighteenth Amendment. The pre-amendment clause (1) read as follows:
“The President shall constitute a National Economic Council consisting of the Prime Minister, who shall be its Chairman, and such other members as the President may determine:
Provided that the President shall nominate one member from each Province on the recommendation of the Government of that Province.”
While the apex planning body, the NEC, has been federalised, Planning Commission continues to be centralised. The spirit of the Constitution can be satisfied by (1) making Planning Commission, in place of the Cabinet Division, the Secretariat of the NEC and (2) by reducing the number of its members to five, one each from the Provinces and the Federal Government. Prime Minister chairs the NEC and there is no need for him to Chair the Planning Commission. The Chairman should be appointed by the CCI to represent the Federation.
As the tentative deadline (Feb 25, 2019) for integrating the FBR, the PRAs and the MCBs is very close, it is high time for the PTI Government to immediately start taking concrete steps towards badly needed fiscal integration. It should not be a big job to immediately convene a meeting of the representatives from the federal government, the provincial governments, the ministry of defence, and the governments of Gilgit-Baltistan and Azad Jammu and Kashmir. The 18th Constitutional Amendment poses no hurdle in this regard as Article 144 of the Constitution clearly says:
If one or more Provincial Assemblies pass resolutions to the effect that Majlis-e-Shoora (Parliament) may by law regulate any matter not enumerated in the Federal Legislation List in the Fourth Schedule, it shall be lawful for Majlis-e-Shoora (Parliament) to pass an Act for regulating that matter accordingly, but any act so passed may, as respects any Province to which it applies, be amended or repealed by Act of the Assembly of that Province.
There is thus no need to touch the 18th Amendment or introduce a new amendment in the Constitution solely for the tax integration purposes. The solution is already provided in the Constitution and for better collection and appropriate representation in the APUTS, Punjab, Sindh, Khyber Pukhtunkhwa and Balochistan will have no objection as the distribution of revenues will within the four corners of Article 160 as amended by the 18th Amendment.
For integration of all the tax agencies at national and provincial levels, the only thing required is a resolution from all the provincial assemblies and those of AJ&K and Gilgit Baltistan. The process of integrating the FBR and the PRAs does not require any Constitutional amendment or disturbing the 18thConstitutional Amendment as wrongly claimed and/or projected by some circles.
Pakistan needs a paradigm shift in revamping the tax administration at national level. Integration as suggested above would lead to establishment of National Tax Authority (NTA), capable of generating sufficient resources for the federal and provincial governments. This must be the top priority of the PTI Government. Following a democratic process, through consultation, all the national and provincial parliaments can agree to an autonomous NTA, run by the APUTS, comprising specialists and professionals that would facilitate people to deal with single body rather than multiple agencies at national, provincial and local levels. The mode and working of NTA can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156]. By this process, all kinds of tax collection and operations will under NTA manned by APUTS. The policy formulations will be federalised as envisaged under Article 156(2) ensuring participation of federal government and all the provinces through Council of Common Interests (CCI), National Economic Council (NEC) and the Ministry of Inter-Provincial Harmony.
Eventually, it is the political will that is going to prevail. It is all about intelligently handling the power relations among various stakeholders. Like the provincial governments, the ministry of defence also needs a dedicated focus for taking back the tax component administered under MCBs. It is important to highlight that the MCBs may continue working as it is except surrendering their tax collection powers to the integrated tax administration formed by the government. It is also noteworthy that the ministry of defence is a federal organisation and transferring the MCBs tax component to the integrated tax system may not be treated as something more than mere changing the tax jurisdiction. However, no government or department would like that their powers are snatched away by the center, it is indeed all about rational exercise of power by the federal government that matters. The integration of taxes all over Pakistan is the first real test of robust tax policies and leadership of the PTI Government.
The integration of taxes is the ‘real change’ that will not only be felt by the people but also the international community. Let the Government be reminded that the inspectors of Financial Action Task Force (FATF) and Asia-Pacific Group (APG) had also highlighted institutional disintegration as the main hurdle in curbing money laundering in Pakistan. That means the integration of FBR, the PRAs and the MCBs before Feb 25, 2019, will be the first major step not only towards creating a harmonized and integrated tax system but also curbing illicit flight of money from Pakistan.
The second deadline (Mar 25, 2019) pertains to the issuance of O.M for the formation of the APUTS by the Establishment Division. It is the second step after the integration of the FBR, the PRAs and the MCBs. This will be purely an administrative step by the Establishment Division. A similar O.M was issued by the Establishment Division back in 2010 when the erstwhile Income Tax Group was converted into the Inland Revenue Service (IRS). At this stage, the Establishment Division may seek the concurrence of various occupational groups and services handling tax matters at the federal and provincial levels. That means the officers from the IRS, Customs, Pakistan Administrative Service (PAS) and the Military Lands and Cantonment Group (ML&CG) may be a given an option either to stay in their respective groups or join the APUTS. There is no harm if the officers from Provincial Civil Service (PCS) are also invited to opt for joining the APUTS on deputation basis. The long awaited tax integration, once done, will be the real change in “Naya Pakistan”. It will not only undo the current disintegrated tax system of the British era, aimed at browbeating and harassing the masses, but also introduce a culture of institutional unification in Pakistan.
Once a unified and integrated tax system is in place, run by the APUTS across various field formations of Pakistan, their benefits will immediately emerge all over Pakistan. These benefits will include, but not limited to, facilitation to taxpayers, culmination of a culture of multiple taxation, introduction of a new modern integrated tax system, separation of tax policy from tax operations, an end to tax avoidance, and snubbing of money laundering and tax frauds. A robustly devised IT and technological interventions will have an intertwined impact on the entire economy of Pakistan where it will be very hard for the tax evaders and money launderers to steal taxes and park their illicit assets safely. For this purpose, the integration of FBR, the PRAs and the MCBs is the first major step requiring the government’s attention and time is really up for this intervention.
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Huzaima Bukhari and Dr Ikramul Haq, Advocate and authors, are Visiting Faculty at Lahore University of Management Sciences (LUMS). Dr. Muhammad Babar Chohan is Additional Commissioner, FBR, holding PhD in Economic Planning from Massey University, New Zealand.