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Huzaima Bukhari and Dr. Ikramul Haq
The Prime Minister, Imran Ahmad Khan Niazi, as per media reports, has hinted at dissolving the Federal Board of Revenue (FBR) showing extreme displeasure over its poor performance. A new organization may replace FBR in the wake of its dissolution in a bid to lay the foundation of a more efficient, robust and responsive organization with the ability to bring the country out of economic turmoil by optimizing revenue collection and catching tax dodgers and money launderers. It was highlighted in a number of articles in these columns [‘Productive tax reforms’, Business Recorder, October 27, 2018, ‘Need for efficient tax authority’, Business Recorder, February 16, 2018 and ‘Need for National Tax Agency’, Business Recorder, October 20, 2017]. The tapping of the actual tax potential, bridging the tax gap and countering tax evasion is only possible if FBR’s workforce reflects the highest standards of human capital development, effective operational tools, critical skills, determined and visionary officers, robust e-procedures, state-of-the-art tax training institutions, merit-based appointments, and strict rules for the officers while moving along the seniority pyramid towards senior scales. Indeed of all these, the human capital factor is the most critical one, but highly ignored and neglected in FBR.
Almost all economic growth theories have directly or indirectly acknowledged the critical importance of human capital development in an organization. Endogenous economic growth theory (EEGT), for example, holds that economic growth is a result of three factors: human capital, innovation and knowledge. The EEGT also suggests that economic growth is not a result of external forces but comes from within, ‘the endogenous factors’. Based on this theory, it is not difficult to establish that the organizations compromising on human capital and knowledge systematically endanger their very existence. It is because the workforce of such organizations lacks necessary skills, knowledge, will to effectively deliver and the critical ability to analyze economic trends. In other words knowledge-based organizations ultimately replace the inefficient and lethargic organizations. The EEGT also holds that the long run economic growth rate directly depends on policy measures aimed at building capacity of the work force, improving human capital development, and systematically increasing knowledge through research and development (R&D). Several case studies on human capital development, in organizational rehabilitation processes, indicate that the integrity of workforce improves with the improvement in their knowledge through increased R&D. In other words, the knowledgeable workforce has a better integrity gradient. The answer to the Prime Minister’s concerns is, therefore, contained in the EEGT explaining how competent workforce, integrity and efficiency are intertwined.
Unfortunately, as of today, the FBR has awfully compromised over the most important factor of human capital development. The Inland Revenue Service (IRS), being FBR’s most critical wing for tax collection and administration, is a weird amalgam of officers with shabby service profiles. There is a long list of officers who have managed to enter into the mainstream IRS seniority list through back door entries either by exploiting rules or through ill-interpreted court judgments. The IRS seniority list of officers can be divided into two broad categories: the Central Superior Service (CSS) officers, and the non-CSS officers. The non-CSS officers can be further divided into four sub-categories: the Inland Revenue Officers (IRO), the defunct Assistant Collectors directly hired by the Peoples Party PM in the 1990s, the auditors and the inspectors.
As far as the CSS officers are concerned, it is understandable that they are selected through a systematic rigorous selection process through the Federal Public Service Commission like other service groups. As such they are better groomed and equipped with necessary skills and knowledge to be elevated to higher echelons of the service ladder. They are career officers, and if provided opportunities to further build their capacity, with better level of human capital index and knowledge profiles. They are part of Pakistan Civil Service and selected through the countrywide combined competitive examination. In case of the CSS officers, the only need is to keep building their capacity so that they can effectively deliver at the senior most positions. Some of the CSS officers hold PhDs, MPhils and Masters from top universities of the world. All non-CSS officers are generally expected to fade away at junior level on or below BS-19.
It is generally a practice, in almost all occupational services and groups of the CSS cadre, that the CSS officers get promoted to the top most positions subject to fulfilling service conditions. However, FBR’s IRS is perhaps the only bizarre organization that has unjustly inducted non-CSS officers into the main stream IRS officers’ seniority list. These non-CSS officers were inducted into FBR in BS-16 as Income Tax Officers (ITOs), later named as IROs. The IROs batch was promoted to BS-17 as Assistant Commissioners in just three years and their seniority was fixed between 29th Common Training Program (CTP) and 30th CTP officers. As a result they were promoted to next grades with the same speed as the CSS officers. Now the entire batch of IROs has been promoted to the senior positions of Additional Commissioners (BS-19) working all over the field formations in Pakistan. There are rumors among the FBR officers that the entire IROs batch was promoted on the behest of an influential lady IRO from their batch. Now the entire IRO batch is part of mainstream IRS merit list ready for promotions to BS-20 in about two years. These non-CSS officers, entering into main stream IRS through shabby and doubtful means, will rise to BS-21 and BS-22 in future. That means, between 2023 and 2030, most Chief Commissioners, Members and even Chairman could be from the non-CSS IRO cadre. This is the biggest compromise that the FBR has made as an organization towards human capital development. The induction and highly accelerated promotions of non-CSS officers is in direct collision with the recommendations of the EEGT. This single point is enough to justify the dissolution of the FBR and creation of a new human capital based robust tax organization.
Another small cadre of officers was inducted by government of Pakistan People Party as Assistant Collectors Sales Tax (BS-17). Following the IROs induction into the main stream IRS cadre, this small cadre of officers also succeeded in getting inducted into the IRS. However, they have now reportedly been removed from the mainstream merit list and made ‘cost accountants’. Another group of officers are auditors who were inducted in FBR in BS-16. They have recently been promoted to BS-18. This cadre is also putting its best efforts to be part of IRS so that, like IROs, they could also be promoted to senior most slots. It is like looting and plundering where everyone is busy in grabbing its maximum share. Another group consists of BS-16 Inspectors Inland Revenue (IIR). They are either from the ranks or recruited directly by the FPSC. They have a better right to be promoted to BS 17 & 18 against their quota. So much so officers from other departments, e.g. Railways and Postal groups etc—sarcastically called “Dubai Group”—were also inducted into the mainstream IRS. They should immediately be repatriated to their parent departments.
Consequent upon the concurrence of Finance Division for creation of additional posts in Inland Revenue Service (IRS) and Pakistan Customs Service (PCS) vide FBR’s sanction letter No 13(2)S-MIR/2012 and Finance Division vide Dy. No 341-FA(FBR)2014, the cadre strength of IRS and PCS with effect from February 7, 2014 was: IRS: BPS-22, 2; BPS-21, 47; BPS-20, 170; BPS-19, 255; BPS-18, 377; BPS-17, 378—total cadre strength 1229. PCS: BPS-22, 1; BPS-21, 18; BPS-20, 64; BPS-19, 133; BPS-18,150; BPS-17, 101—total cadre strength 467. Lower cadre number is about 23,000 for IRS and PCS.
The current Chairman of FBR is from Pakistan Administrative Service. He is junior to many serving officers of IRS and PCS. The Prime Minister, according to media reports, had justified his appointment as Chairman (allegedly recommended by Principal Secretary to the Prime Minister Muhammad Azam Khan and backed by PTI’s strongmen like Pervez Khattak and Jahangir Khan Tareen) while talking to anchorpersons. The best thing the government of PTI can do is to re-visit the seniority list of the IRS officers and take all possible steps to ensure that only the competent and better skilled officers are promoted to BS-20 and above.
The CSS officer, holding PhDs/MPhils/Masters from top universities of the world, should be promoted to next levels on OPS (own pay scale) basis. The PTI government may also consider reverting the IROs batch back to BS-16. They are currently working as Additional Commissioners (BS-19). This can be done on the basis of the Supreme Court order through which many senior police officers, working as DIGs and SSPs, were reverted back as inspectors and sub-inspectors in the police department. Furthermore, the PTI government needs to consider forwarding the case of undue promotions of IROs to the National Accountability Bureau (NAB). All those FBR officers who have been part of the process of the IROs undue promotions should face a fair NAB enquiry. In the given circumstances, these are the minimum steps that the government must take to make FBR functional and effective, failing which it shall be dissolved and replaced with National Tax Authority—see details in ‘Overcoming fragmented taxation’ Business Recorder, October 10, 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.
The current performance of FBR depicts a very gloomy picture. It could collect only Rs 1.1 trillion in first four months of the current fiscal year thus falling short of Rs 68 billion with a revenue growth at less than 7 per cent. The government has already revised the annual target downwards to Rs 4.39 trillion from Rs. 4.44 trillion. If decisive measures are not taken, both short term and long term, the FBR may again face a huge shortfall of Rs 150-200 billion. Owing to such shortfalls, the budget deficit would widen to as much as 1.4 per cent of the first quarter’s gross domestic product.
Major failures of FBR are because of lack of requisite human capital among its ranks. The PTI government should immediately make a rule that the non-CSS officers/ranker officers aspiring promotions to BS-20 must have a minimum 28 years of service at their credit. The same rule should also be applicable to the “Dubai Group”, if FBR at this stage is unable to repatriate them back to their parent departments for any reasons.
As per media reports, the FBR has, so far, not been able to frame simple tracking systems for tax evasion by various businesses such as cigarette manufacturers. Lack of requisite human capital and necessary skills has made FBR unable to frame a simple one-page income tax return. These factors clearly indicate and prove the validity of the recommendation of the EEGT. Any organisation, including the FBR, cannot afford to ignore the EEGT; and if it does, its dissolution is justified beyond an iota of doubt but it should be for the better and not the worse!
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The writers, lawyers and partners in HUZAIMA, IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)