Replacing Suhail Ahmad with Salman Siddique as Chairman, Federal Board of Revenue (FBR) in the mid of fiscal year 2010-11, has raised many eyebrows-some saying he failed to "market" Reformed General Sales Tax (RGST) package. Besides his failure to defend the case for RGST, he also admitted before the Finance Committee of Parliament that tax reforms, initiated at the command and demand of foreign donors in 2004, failed to yield any positive results.
Since the start of the so-called Tax Administration Reforms Programme (TARP), there have been every year larger and fiscal and revenue deficits, decline in tax-to-GDP ratio and huge revenue leakages. Under the tight noose of the World Bank and IMF, tax concessions for the rich and mighty and increasing burden on the poor have been the salient features of tax reforms! In the last 20 years, tax incidence on the poor has increased manifold (nearly 37%) whereas the rich classes, especially the absentee landlords that now include mighty generals, who have received lands as grants and awards, have not paid even a single penny as income tax on their colossal incomes or wealth. The crooked businessmen - many of whom are beneficiaries of loan write-offs - unscrupulous traders and corrupt ruling classes continue to defy tax obligations with the result that the nation has been indebted to an extent that more loans are required only to pay interest on excising ones - debt servicing is now consuming 65% of our total revenues. How ridiculous that even for the purpose of reforming ourselves we need foreign loans and grants!
The TARP - prepared, designed and monitored by foreign consultants - from the very beginning lacked proper remedies for our ailments. Its aims and objectives were ambiguous and flawed - it has taken us from bad to worse. The TARP suggested patchwork in the existing tax system - foreign tax experts (sic) wanted us to wait for 10-15 years to come at par with many developing countries in achieving a desirable tax-to-GDP ratio of over 15% (presently it is just 9.8%). On the contrary, many local experts suggested some radical changes - like broadening of tax base and reduction of exorbitant sales tax rate, simpler and fairer tax codes, reduction and elimination of corruption in the FBR - for encouraging investments and savings that could ultimately bring in more taxes. They argued that Pakistan was in dire need for long-term policies to re-prioritise its tax goals, improve tax-to-GDP ratio and attain better compliance and collections, coupled with rapid industrial and business growth.
From 2004 to 2010 - during the TARP (many call it TRAP) - the FBR just paid lip-service to slogans under its amended motto of 'vision, mission and value' (previously 'value' was missing!). The "mission" of broadening tax base suffered numerous setbacks in the last eight years - the mighty generals and civil servants, politicians, traders and big absentee landlords were and still are reluctant to pay income tax according to their ability. Lack of political will to tax the rich and wastage of taxpayers' money by the rulers is the root cause for the absence of tax culture. People justify non-payment of taxes by saying why should they bear the burden for the luxuries of the corrupt rulers and government officials.
Nullum tributum sine lege expresses the requirement that rule of law must be applied to assessment and enforcement of taxes. The FBR must comply with the enacted laws (eg should issue refunds as promptly as it collects taxes at source) and taxpayers must be able to predict in advance the consequence of their transactions.
In case of non-compliance with the rule of law, legal remedies must be provided to protect the individual or the corporate body concerned. There is immediate need for enacting Taxpayers' Bill of Rights. Faith in the system can never be restored unless rule of law is enforced both for the tax machinery as well as the taxpayers.
Only 2.5 million or 1.47 percent of the total population pay direct taxes: It includes 1.8 million salaried taxpayers who pay Rs 27.376 billion income tax. This information was provided to the Upper House by the Minister of State for Finance and Revenue Hina Rabbani Khar in a written reply to a question from PML-Q President, Chaudhry Shujaat Hussain on July 30, 2009.
Former Finance Minister, Shaukat Tarin before the presentation of budget 2009-10 announced that agriculture, services, stock exchanges and real estate business would be taxed for boosting revenues, but he failed to do so. The same happened with Dr Abdul Hafeez Shaikh, present Finance Minister, who said on the floor of House that the rich politicians and other mighty segments are not ready to pay direct taxes.
How to enforce tax compliance is the main challenge before the government. The state must remember that if taxation is viewed as being unfair or favouring a few taxpayers, it remains counterproductive in the long run. The crisis with Pakistan is that general acceptance of tax system is undermined.
Special efforts and rational policies are needed to restructure the tax system and restore public confidence in the tax officials. Even a good tax system will not work if the prevalent negative mindset of the tax official persists. There is an immediate need to improve both the system and the human fabric that controls it. The tax system must provide:
--- Rule of law and predictability of the authority to tax
--- Principles of proportionality, efficiency, effectiveness, flexibility, continuity, reciprocity, fairness and equity
--- Tax harmonisation
--- No double taxation or intentional non-taxation
--- Non-discrimination
--- Strict anti-tax evasion rules
--- The FBR needs to introduce Tax Intelligent System (TIS) to support new audit initiative. Unreported income represents the largest component of the tax gap (non-tackling of this issue has made Pakistan one of the lowest tax-to-GDP ratio countries in the world). FBR must develop a new tool-Unreported Income Discriminant Index Formula (UI DIF) for identifying returns with a high probability of unreported income. UI DIF would give FBR the ability to systematically identify returns at high risk for unreported income.
--- National Research Programme (NRP) is the need of the hour if FBR really wants to improve the return examination and selection process. FBR has never conducted research to detect huge untaxed incomes and undeclared assets. Without this information that needs to be gathered through NRP, the FBR will never be able to develop the capacity to improve tax-to-GDP-ratio and enforce compliance effectively, with accuracy and precision.
--- No effective mechanism has so far been evolved to check any unfair practices on the part of tax administrators. They are not made liable to punitive actions and/or pecuniary damages even after the final fact-finding authority adjudges their actions arbitrary, excessive and beyond their assigned powers. The Federal Tax Ombudsman (FTO) should be given the statutory power of awarding damages in such instances.
--- Taxpayers must be given adequate rights before the state justifies strict actions for enforcing tax obligations. For restoring confidence of taxpayers the state should promulgate Taxpayers' Bill of Rights in the coming budget that must:-
--- safeguard and strengthen the rights of taxpayers;
--- ensure equality of treatment;
--- guarantee privacy and confidentiality of their declaration;
--- right of recording of all proceedings before tax and appellate authorities;
--- provide right to assistance by State in tax matters;
--- guarantee unfettered right of appeal through an independent tax appellate system; and provide facilities for independent review of disputes with tax authorities.
The present tax system imposes greater and undue incidence on the poor and middle-class people eg 17% sales tax (in fact 30% on finished imported goods after levy of all kinds of taxes), takes larger portion of low-income groups compared to high- income groups). The rich and mighty are enjoying complete tax exemption on their colossal assets and "agricultural income" (sic).
They make enormous profits through speculative transactions in real estate, which is chargeable to tax being adventure in the nature of trade, but FBR stalwarts treat it as exempt being "gain on sale of immovable property", which the federal government cannot tax under the Constitution. This is total gross misinterpretation of law.
The provinces also protect the rich and might by not levying tax on agricultural income of Rs 500,000 or more and capital gain tax on sale of immovable property. The rich and mighty in Pakistan are virtually outside tax net. Since they are not paying a single penny as direct tax, the vast majority of citizens argue as to why they should be subjected to exorbitant and multiple taxes? They are especially annoyed with indirect taxes the burden of which is heavy of the weak sections of society.
From 2004 to 2010, the FBR miseProducing CNC machine tools indigenouslyrably failed to improve universal tax compliance under the TARP and the situation in 2011 cannot improve unless the government takes some concrete and positive steps in taxing capital employed in unproductive areas thus ensuring its shift to productive sectors that generate more goods and services, leading to greater employment possibilities.
(The writers, tax lawyers and authors of many books on Pakistani tax laws, are visiting professors at the Lahore University of Management Sciences)
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