Taxpayers' woes

The Federal Board of Revenue (FBR) indeed faces many challenges, the biggest being attaining a hike in the tax-to-GDP ratio. It is a tough ask given the fact that vast chunks of the economy remain undocumented, but equally true is the fact that FBR went about inducing tax payment in a variety of convoluted ways.
As always, this year too, the last date for filing tax returns was August 31. It was then extended to September 30, next to October 25, thereafter to October 31, and as of now it is November 21. These extensions were granted because the revised formats of tax returns couldn't be finalised by FBR until the last week of October.
There is no way of increasing tax collection unless, to begin with, well before tax return formats are devised and made mandatory, all stakeholders who have a role in providing taxpayers with FBR's required data, are advised unambiguously to ensure that they provide it to taxpayers on FBR-acceptable formats. Taxpayers' experience shows that this wasn't done. Even banks didn't know they had to provide certificates to their depositors about the profit paid on deposits and withholding tax deducted from it bifurcated into its portions recovered during July-March 14, and then during March 15-June 30 along with the flood surcharge.
Based on my experience of 40 years, banks calculate profit on deposits on a monthly, not bi-monthly, basis. Unless FBR had made it mandatory for them in FY-11 to calculate profit on deposits on bi-monthly basis in March 2011, it is not known whether the flood surcharge was recovered accurately on profit earned after March 14.
I experienced too the fallout from such gaps in FBR directives. Besides, a highly controversial Annexure-D was included in the tax returns to be filed even by individuals. Inclusion of this annexure was challenged by Tax Bars all over Pakistan but the FBR conceded to their demands in instalments, the last on October 24. In the interim period, lives of the taxpayers and tax advisors were rendered miserable because they didn't know how to document the vast majority of expenses for which they simply never got any bills/invoices, courtesy the non-documentation of the economy. FBR doesn't know what havoc this gaffe played with its image.
As it is, tragically, FBR is perceived to be the agency that collects taxes for eventually being wasted by state offices. It is time FBR realised that, given this disadvantage, it should do everything possible to make tax payment as easy as possible; insisting on electronic filing of returns was certainly not one such initiative.
The effort to devise mechanisms that force people to tell the truth may begin with the assumption that people are dishonest (a flawed beginning in any case) but should be realistic enough to seek evidence that taxpayers can provide, but avoid providing. To ask for what can't be provided is a wholly dumb idea.
A saner course is to announce (via the media) at the start of a tax year what evidence goods/services suppliers must provide to their buyers (taxpayers) about tax deducted at source with bill/invoice payments. For banks, it should have been mandated that they include a statement to this effect at the end of each statement of account instead for expecting that depositors will get bank certificates.
In commerce and trade, buyers should have been told to check in the bills/invoices they pay, the details of the supplier's being a FBR-registered tax deducting agent. There were many cases wherein tax advisors informed their clients (and rightly so) that the suppliers who deducted withholding tax weren't registered FBR agents.
It is questionable whether the ordinary taxpayer knows much about these fine details. Primarily, it is the job of FRB's monitoring wing to catch businesses that deduct withholding tax without being licensed FBR's tax-deducting agents. To-date, FBR hasn't realised the hazards of imposing too many indirect taxes.
As per last year's tax revenue figures, FBR collects nearly a two-thirds of tax revenue via indirect taxes. Indeed, there is justification for indirect taxes, but in economies with nearly half the population close to or below the poverty line, indirect taxes must form a much smaller proportion of total tax revenue.
FBR's logic for this high share of indirect taxes may be the non-documentation of the economy but should that be the case after 64 years of Pakistan's existence? Besides, how well does FBR ensure that every penny of indirect taxes collected by its agents is actually handed over to FBR is an unanswered question.
Disclosures in recent years indicate that, while taxpayers keep paying indirect taxes, these taxes are surrendered only partly to the FBR. The most unfortunate perception this distortion gives rise to is that, unwittingly, FBR assists corrupt businesses to enrich themselves at the expense of the taxpayers.
Given its socially unbalanced taxation system, Pakistan is among the countries that have pushed ever-larger numbers below the poverty line. Although the Planning Commission is yet to release its statistics on poverty, in all likelihood, over 40 percent have fallen below the poverty line. That reflects poorly on the FBR as well.
While taxation and use of tax revenue are essentially the responsibility of political regimes, FBR should design tax return formats realistically ie keeping in view how much information an ordinary taxpayer can be expected to provide about the various taxes he or she has paid, given the level of documentation of the economy.
Besides, tax returns shouldn't be devised by FBR staffers (many with no clue about the ground realities) in isolation; they must consult all stakeholders because tax returns are to be filed by stakeholders, not FBR staffers. The chaos this year reflected no interaction with the stakeholders, or sheer defiance of their advice.
Taxpayers may eventually end up filing their tax returns but it has been a bad experience for many of them. The one positive outcome thereof can be FBR's learning of some lessons to avoid chaos and embarrassment next year. FBR and the stakeholders must get together, without any further delay, to plan a strategy for FY-12.
FBR and the stakeholders must workout return formats that advise all FBR-appointed tax deducting agents very precisely their information obligations to the taxpayers so that, at year-end, taxpayers don't face problems in filing their tax returns. Finally, this entire arrangement must be publicised through the media.
Since indirect taxes are being deducted every day, these arrangements must be finalised and advertised as early as possible so that the backlog of conforming to new reporting arrangements doesn't become too heavy. As it is, we are in the second quarter of FY-12.