Tax collection: Correct strategy

The Federal Board of Revenue (FBR) - under tremendous pressure to generate "extra revenue" - is resorting to all kinds of oppressive measures to achieve a meagre revenue target of Rs 1,588 billion-revised downwards from Rs 1,680 billion-during the current fiscal year. According to official figures, the FBR managed to collect only Rs 1,060 billion in the first three quarters (July-March) of the current fiscal year.
The shortfall of Rs 528 billion, despite blocking genuine refunds and using negative tactics for recovery, once again exposes the efficacy of our tax machinery. Under enormous pressure from the top, the field officers are adopting the old disgusting practice of creating huge fictitious demands and resorting to collection through coercive measures even before the decision of first appeal.
What a tragedy that the rich and the mighty are not taxed. They are living shahana zindagi (emperors-like life). If FBR is an effective body, it should tell the nation how much tax was paid by the main political leaders (eg Zardari, Gilani and Nawaz Sharif). Let the government make public the names of all those who got their loans written-off during the Musharraf-Shaukat era and then the FBR should tax them. This should be the correct tax collection strategy rather than squeezing the existing taxpayers.
The civil-military bureaucrats, corrupt politicians-cum-unscrupulous industrialists, greedy hoarders and absentee landlords are the de facto beneficiaries of the state's resources - generated mainly by the tillers and industrial workers. Pakistan is not a poor country - the state's kitty is empty because of the unwillingness of the government to tax the rich, due to colossal wastage of the taxpayers' money on unproductive expenses and non-exploitation of vital natural resources.
The absentee landlords (these include the mighty generals who have been allotted state lands under one pretext or the other during the last many decades), have consistently been resisting personal taxation of their enormous income and wealth.
It is shameful to note that total collection by the four provinces under agricultural income tax is less than Rs 2 billion. An unholy anti-people alliance of the indomitable civil-military bureaucrats, corrupt and inefficient politicians and greedy businessmen - controlling and enjoying at least 90% of the state resources - contribute a paltry 2% towards the national exchequer.
Adding insult to injury, the government is not ready to reduce its gigantic and useless machinery - doing nothing for public welfare - that is busy wasting whatever taxes are collected. The army of ministers, state ministers, advisers, consultants, high-ranking government servants (sic) are not willing to cut down their perquisites and privileges.
They are not ready to live like the common man by surrendering the unprecedented perks and privileges that they are enjoying at the cost of the taxpayers' money. For their luxuries, the poor - landless masses - are continuously being burdened with more and more taxes.
Take the example of the FBR itself that has mercilessly wasted borrowed funds of million of dollars for the implementation of the Tax Administration Reform Project (TARP). At the fag end of the five-year programme, serious infighting erupted between the Income Tax and Sales Tax groups - they became engaged in court litigations and what not.
After five years of TARP, our tax-to-GDP ratio dipped to 9% from 12.5% in the 2000-2001. During the last many years - especially when Musharraf-Shaukat duo was in power - the FBR propagated great success in every area of tax administration. The nation was told that wonders had been achieved. Every year the budgetary target was surpassed (sic) and officials were showered with generous rewards.
In 2009, it was suddenly revealed that everything was a farce. All claims were false. It is admitted by all that our tax base remains punctured and narrow and growth (sic) in tax collection has been negative in real terms, if the inflation rate is accounted for.
Independent analysts have been expressing serious concerns about the narrow tax-base, the lower tax-to-GDP ratio and shifting of the tax burden on the poorer sections of society. There is a consensus between official and independent quarters that Pakistan needs to strive very hard to come at par with many developing countries in achieving a desirable tax-to-GDP ratio of over 15%. Some radical changes - like the broadening of the tax base and the reduction of exorbitant sales tax and corporate rates, simpler and fairer tax codes - are required.
Pakistan needs to reprioritise its tax policy to improve the tax-to-GDP ratio, attain better compliance and collections, coupled with rapid industrial and business growth. The sole stress on revenue collection through harsh measures as are being taken by FBR at present, will not serve any purpose. The IMF-fixed cap on budget deficit can be achieved by drastic cuts in non-productive expenses coupled with rapid industrial growth that would ultimately improve the tax-to-GDP ratio. As a first step, both the rulers and bureaucrats, who are plundering and wasting national resources ruthlessly, should start living at the level of common people.
The mighty segments of society do not pay personal taxes and then through their handmaiden FBR's stalwarts, periodically avail loathsome amnesty schemes to decriminalise their untaxed wealth and incomes that amounts to sneering at honest taxpayers. Our President who, before his election on September 6, 2008, got $60 million unfroze in Switzerland, did not bother to tell the nation how much tax was paid on this colossal wealth and why it was lying abroad. The same is true for the Nawaz-Shahbaz duo and many others who first looted this nation and then took away this money abroad.
Before taking the oath of office President Asif Ali Zardari did not declare his assets and liabilities with evidence of payment of taxes where due. If the man at the top is a delinquent in paying taxes, how can tax enforcement be ensured? The same is true for every politician. It is high time that all public office holders should make their tax returns public. There should be a public campaign that the absentee landlords, most of whom are members of parliaments, should reveal their wealth and tax declarations. The judges and high-ranking public servants should also be required under the law to make public their assets and tax declarations.
The tendency to squeeze out more and more from the existing taxpayers and give a free hand to non-filers and under-filers has eroded the tax base to the extent where voluntary compliance and tax enforcement have lost their relevance. The present tax system imposes greater and undue incidence on the poor and middle-class people (eg the 17% sales tax takes a larger portion of the low-income groups compared to the high-income groups).
The rich and mighty agriculturists (eg our prime minister and many other ministers) are enjoying complete personal tax exemption. Adding insult to injury, they get unprecedented privileges and perquisites at the cost of the taxpayers' money.
We can raise the tax-to-GDP ratio to 20% in one year if we tax absentee landlords, speculative dealings in real estate (this would also help in promoting the construction industry as the prices of land come down to affordable limits) and introduce asset-seizure legislation for untaxed assets and incomes. It is the need of the hour that the FBR should be insulated from all kinds of political, financial and administrative pressures. It should be an autonomous body like the State bank of Pakistan.
The appointments of the Chairman and members of FBR should be through a Select Committee of Parliament and not left at the whims of the ruling political party headquarters. Through public debates and democratic processes, the Parliament should devise a rationale and workable tax policy after taking inputs from all the stakeholders and experts in the field. This alone can help in broadening the tax base and improving the tax-to-GDP ratio in the country - but extorting money by traumatising taxpayers through the creation of demands that buckle in appeals can never prove beneficial in the long run.
(The writers, tax lawyers and author of many books, are Adjunct Professors at Lahore University of Management Sciences (LUMS)