Revenue mobilization is a challenge grappling the Pakistan economy for the last many decades. It has reached at a stage where the future of the country, economic growth, prosperity of the citizens and even its sovereignty now hinge on the success in this critical area. All the efforts made at the policy level, both in the form of legislation and administrative reforms, have failed to yield positive results. There is a need to evaluate the entire system with a new perspective and determine the key elements missed in the past endeavours to bring a paradigm shift in the future reform efforts. The history of reforms reveals that the rot is so big that anything short of surgery is bound to fail.
One thing we cannot escape noticing is that nowhere in the past, any reform efforts have been made to win over the trust of the most important stakeholder in the entire paradigm, the taxpayer. Any country with lower tax morale cannot achieve success with revenue mobilization efforts. No system can deliver unless there is a ‘willingness to pay’ by the citizens of the country. The engagement with the taxpayer even at the FBR level is almost non-existent except for a minimal and limited contact in the budget making process.
It is impossible to pay taxes honestly in the present circumstances existing in the country. There is so much distortion in the business landscape owing to smuggling, massive tax evasion, higher tariffs and corruption, which makes it very hard for any willing taxpayer to sustain the present tax burden fairly, thus forcing him to become part of the rot. Every firm in the organized sector is willing to pay its legitimate obligation provided there is a level playing field and the tax compliance does not make its business unsustainable. There is a general lack of trust in the ecosystem of our business sector, as it is not being engaged by the state to resolve the issues and create an environment conducive for payment of taxes. Therefore, it is a time to write a new fiscal contract between the state and the citizens of Pakistan. The state cannot succeed unless it creates a level playing field for its businesses, makes payment of taxes a sustainable option, ensures the benefits of taxation for all its citizens and wins their willingness towards the same.
Modern tax administrations should be a semi-autonomous organizations working independently and reporting to the state. Given the range and nature of the laws to be administered, the tax administration has to attend to a large number of clients and needs adequate powers and autonomy to perform in an efficient and effective manner. On the other hand, it must operate in a fair and impartial manner, and be subject to a range of checks and balances to ensure transparency in its operations. In addition to that, a proper accountability mechanism should also be instituted for overall management of the tax system by a tax administration. It should have a chairperson and a vice chairperson. The new position of vice chairperson is very important to effectively support the chairperson in discharging the core functions.
For effective enforcement and compliance, the FBR should be restructured into a dynamic and robust institution. An institution that operates as a professional organization and enjoys the trust of the taxpayer. An institution that has its own independent human resource function free of civil service shackles, which can reward and compensate according to market conditions and based on meritocracy. An institution that has the capacity to monitor the wealth of the citizens and ensure tax compliance. Therefore, it is also required to establish a strong governance and oversight mechanism over FBR. It should work without direct interference by the Federal Government under a strong and functional board. A board that persistently keeps a vigil on FBR performance and functions as a fiscal policy advisor for the Federal Government. The road to success lies in a robust institution, which is under a continuous reform process, keeping in view the fast changing economic realities in line with the national interest of the country.
Taxation policy is the fundamental part of the overall economic policy and planning of any country. In all the developed societies, there is an interactive participation of the stakeholders in policy formulations. This process could not be replicated meaningfully in Pakistan in the past due to lack of democratic structure, transparency and independence. Therefore, potential revenue has been compromised owing to the absence of requisite policymaking that is essential to ensure sustainable growth in the revenue. Moreover, the job of policymaking should also be independent of the tax administration.
There is no strategic oversight of the FBR performance in discharge of its obligations under the law. The review by the finance ministry and parliament is very restrictive, just focused on the broad figure of tax collection. It does not provide an in-depth oversight of entire work process, which is the root cause of most of the problems plaguing FBR. We need to address the capacity, capability and governance issues at FBR on an urgent basis. Accordingly, an approach is required to address the issue of HRM, autonomy, governance and oversight mechanisms on short, medium and long-term basis.
The contemporary reform efforts globally revolve around technology, which provides avenues and innovations to support tax revenue mobilization. It presents an opportunity to formalize informal businesses, expand the tax base, and increase the tax capacity. Simplifying processes and reducing the cost of formalization can help firms make the transition to the formal sector. The largest impact on compliance can result from the real-time exchange and analysis of taxpayer/trader data among the FBR, provincial tax authorities, withholding agents, other national and international databases. This greater storage capacity (big data) and computing power help tax authorities to better detect tax evasion by tracking and registering a vast volume of transactions.
The critical function of the tax administration involves not only registration, but also an assessment of the taxpayers based on their legal obligations. There should have to be an audit and fraud investigation program based on clear risk assessment criteria. The transition to technology-based audit will result in fewer, well-targeted taxpayer audits. It will enable the tax officers to devote quality time to medium and high-risk cases, build confidence of the compliant taxpayers and enhance the FBR image.
Moreover, smuggling has played a central part in fuelling the informal economy and limiting growth. The government should rationalize the import duties and contain the smuggling through a single law enforcement agency, rather than mandating it to multiple agencies as being done presently. The customs checking and monitoring of the western borders should also be upgraded in addition to visible vigilance and action in the markets selling smuggled goods. FBR should also digitalise its customs entry-exit system by investing in equipment and software for non-intrusive inspection of import, export and transit cargo. It will accelerate customs clearance, reduce frequency of inspections and detect the fraudulent declarations.
The customs should put due emphasis on stringent and independent check and control of under-invoicing at the import stage. It should implement third party validation to determine the value of goods imported. The customs value is essential to determine the correct amount of customs duty to be paid on imported goods. The objective of this verification is to ensure that the customs value declared is fair, reasonable and reflects commercial reality. It will provide a level playing field to local manufacturers that will boost domestic production, create employment and generate valuable foreign exchange.