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ARTICLE: Two years is a short time to roll out taxation reforms in any country; let alone a country like Pakistan which is marked by hostile political climate not helped by excessive focus on corruption (under the current regime) which seems to have come at the cost of governance reforms and political consensus building. But two years should be construed enough to sow the seeds of reforms, which is what appears to be wanting.

For the uninitiated some background may be necessary. Pakistan's first tax reform commission was formed in 1949 and since then the country has had no less than seven different tax reform commissions set up under various regimes, the last one set under the 2013 PML-N regime. These and other efforts, such as the World Bank's famous TARP (I & II), have not borne fruits. Such is the chronic nature of the problems across the myriad facets of reforms: broadening of tax base, rationalization of rates, simplification of procedures, strengthening of tax administration, promoting tax culture and so forth.

Add to this the leviathan that FBR is. With more than 20,000 employees collecting nearly 90 percent of the total taxes withholding or excise mode, the organization is reputed to be weak and inefficient at the one end and corrupt at the other. A recent paper titled "FBR human resource management policy: issues and challenges, suggested policy intervention to increase productivity" by the National School of Public Policy flags that there is not even any research available that identifies the issues and challenges with respect to FBR's human resource management policies, or which suggest human resource management intervention with a view to enhance productivity of FBR.

These deep wounds reflect in the country's tax performance. The tax body's growth in tax collection net off nominal GDP growth remains weak and has worsened in the last two fiscal years. The department is famous for targeting lofty growth numbers only to face embarrassment later on, albeit several insiders say that such lofty targets is usually the brainchild of successive finance ministers for whom it has become quite fashionable to say that there is nothing wrong with having ambitious targets. As if other public and private sector stakeholders are not affected when targets aren't met! Given the historical complexity of the problem, and the importance of fiscal stability, one would have thought that the PTI had come with a plan to address tax problems to roll it out immediately after being elected to power. Instead, in less than 24 months the government had four different FBR chiefs, which speaks volumes about the political leadership's capability to build the right team for what is construed to be the central pillar of Pakistan's economic reforms.

Or consider the fact that the January 2020 progress report on institutional reform boasted that "Policy Board of the FBR has been separated and located in the Ministry of Finance". That is indeed true. The first and last meeting of FBR's tax policy board was held in February 2019, a few months after the cabinet had given its in-principle decision to separate policy from administration at the FBR.

That decision pending for more than a decade so all credit to PTI for the decision to separate policy. However, even after the PM was recently approached for reactivation of tax policy board in March 2020, the board only exists on paper without clearly specified functions. When such is the state of progress on an agenda item announced with much fanfare, then one can only imagine the state and progress of reforms on other fronts.

                                      FY21-B**    FY20-B**     FY20-P*      FY19      FY18    FY17     FY16     FY15     FY14     FY13    FY12     FY11    FY10     FY09     FY08
Total FBR taxes                            25%         45%          4%        0%       14%      8%      20%      15%      16%       3%     21%      17%     14%      15%      19%
Direct taxes                               37%         44%          3%       -6%       14%     10%      18%      18%      18%       1%     23%      15%     19%      14%      16%
Customs                                     3%         16%        -10%       13%       22%     23%      32%      26%       1%      10%     17%      15%      8%      -2%      14%
Sales tax                                  20%         44%        9.6%       -2%       12%      2%      20%       9%      18%       5%     27%      23%     14%      20%      22%
Real GDP growth                           2.1%        2.4%       -0.4%      1.9%      5.5%    5.2%     4.6%     4.1%     4.1%     3.7%    3.8%     3.6%    2.6%     0.4%     5.0%
Inflation                                6.50%       12.0%       10.7%      6.8%      4.7%    4.8%     2.9%     4.5%     8.6%     7.4%   11.0%    13.7%   10.1%    17.0%    12.0%
Nominal GOP growth                        8.6%       14.4%       10.3%      8.7%     10.2%   10.0%     7.4%     8.6%    12.7%    11.0%   14.9%    17.3%   12.7%    17.4%    17.0%
Growth in direct tax collection
(net of nominal GDP growth)              28.4%       29.6%       -7.3%    -14.7%      3.8%    0.0%    10.6%     9.4%     5.3%   -10.0%    8.2%    -2.3%    6.3%    -3.4%    -1.0%
Growth in sales tax collection
(net of nominal GDP growth)              11.4%       29.6%       -0.7%    -10.7%      1.8%   -8.0%    12.6%     0.4%     5.3%    -6.0%   12.2%     5.7%    1.3%     2.6%     5.0%
Growth in total FBR tax collection
(net of nominal GDP growth)              16.4%       30.6%       -6.3%     -8.7%      3.8%   -2.0%    12.6%     6.4%     3.3%    -8.0%    6.2%    -0.3%    1.3%    -2.4%     2.0%
** FY21-B and FY20-B are based on original budget target at the time of budget announcement in June 2020 and June 2019 respectively
* FY20-P provisional estimates released in July 2020, FY08-FY-19 are based on actual revised numbers
Source: BR Research based on Economic Surveys; Budget in Brief, FBR Yearbooks

In addition to the separation of policy with administration, a host of other new measures have been taken, some as half-baked as the tax policy one, some yet to bear fruits and some still on the anvil even after two years. For instance, in budget FY20 the government had done away with zero-rating of top five exporting sectors, a gambit that has not net yielded tremendous results in so far tax collection has concerned. It may have resulted in improved documentation, but neither are those documentation indicators reported on monthly basis, nor has the FBR figured out a way to make use of the data.

Although, the idea of FBR's access to bank accounts has been around for nearly a decade, and the PTI had advocated the same when it came to power; it is only recently (mid-August 2020) that the FBR has asked banks to provide key information (CNIC, NICOP, passport number, NTN, name, title of account, resident/non-resident status, address, telephone number, account opening date, account number (IBAN), amount deposited in a month or amount of cash withdrawal during a month, amount of tax deducted and profession/business/occupation of accountholders). Included in the list of information is account holders' deposit statement, credit card payments statement, cash withdrawal statement, profit on debt statement and other ancillary details. Whether or not, this time banks will give these details is another story, but suffice to say the progress has been slow.

Media reports also suggest that the FBR has missed its deadline to set National Tax Council for formal launch of a single sales tax return system for the taxpayers registered with the FBR and provincial revenue authorities, whereas the plans of business registry with Nadra continue to catch dust.

Reportedly, FBR has finally developed a computer application "Taxray" for 360-degree view of the taxpayer by linking data directly obtained from the taxpayer including income tax, sales tax and customs duty with the third-party databanks. However, it still hasn't finalized the infrastructure and framework for real-time access to information and databases and aligning it with its own database, albeit in another recent development Nadra had asked the FBR to provide third-party data including property/land data, vehicles/utilities' information, telecom, banks/stock market data, etc, for analysis/working out tax liability of tax evaders/short-filers to which the FBR provided a list of 100,000 CNIC numbers unregistered with the FBR.

Seen in isolation, it's a good development. But since it's the FBR that has to send out notices to non-filers and hold them accountability, the outcome of such exercises in analytics may be as useful as the thousands of notifications sent by FBR in the last two years to non-filers that borne little fruits if any. The story of refunds is no different. Despite the so-called FASTER system of refunds, as much as Rs232 billion of refunds were yet to be paid at the time or writing this piece in third week of August 2020. The government has reportedly decided to take "speedy measures", but such promises have been made before. Likewise, track and trace system planned to be implemented in 10 sectors/industries and the widening the scope of the point of sale system for the retailers to cover a large number of retailers with real data transmission to the FBR is yet to be implemented, where one can't help notice that track and trace of cigarettes, an IMF condition, hasn't been put in place either. Also pending is the implementation of FBR's reform and restructuring plan to devolve administrative and financial powers to its field formations, action against corrupt tax officials, and professionalization of its field force.

Considering that most plans to reform taxes and FBR that are currently yet to be implemented were already long identified by the last TRC headed by Masood Naqvi, PTI's failure to implement them on fast track basis clearly cast a dark shadow over some noticeable improvements in budget FY21. These improvements include measures towards ease of doing business in so far as taxation is concerned, reduction in withholding taxes, and the slashing of import tariffs on nearly 9000 tariff lines to encourage local manufacturing. The further the delay in the implementation of tax reforms, the longer it will take to bear fruit, and short of a miracle, the current pace of affairs leads one to believe that fruits may not be borne by 2023.

Copyright Business Recorder, 2020