Correction or collection?

The Pakistan Tehrik-e-Insaf (PTI) government is trapped in the dilemma of ‘correction or collection’ especially in the matter of tax collection. I then as Chairman of Federal Board of Revenue was in 2019, chasing a target of Rs 5,550 billion revenue collection with a task of effecting a correction in the taxation system without disturbing the existing system. I do not see any reason why a correction in the system should not lead to improved collection, however, this general statement needs to be qualified with special circumstances in Pakistan’s tax system. It is my firm view that in Pakistan, correction of the taxation system in a real sense will bring in a temporary dip in the collection target which is not acceptable in our case to any government, international lending agencies, media and the so-called academic economists. Their approach is devoid of proper understanding of the ground realities of Pakistan’s fiscal landscape and in every case places an undue burden on the Prime Minister, Finance Minister, Chairman FBR and other persons directly responsible for tax collection and running the country’s economy. The target for 2021-22 of Rs 6,100 billion is another example of the same and in March/April 2022 the FBR Chairman will be facing either a nervous breakdown or a demand for his removal. Having experienced dilemma myself, it is my sincere advice to the GoP, the IMF to understand Pakistan’s tax system before starting a campaign to correct it. On 6th of May 2019, in Nadia Coffee Shop of Marriott Islamabad I tried to explain this to Mr Ernesto of IMF before we signed the IMF deal and I failed. It is therefore a reminder to Mr Ernesto to appreciate that what I had said on that day is still true. The victim of that disagreement is the GoP, the IMF and my health and desire to serve Pakistan. It was a loss to everybody. In this respect, it is also important to note that our people in Ministry of Finance are equally responsible for not addressing this misunderstanding and at times some of them act holier than the pope. I sincerely feel that there is serious trust gap between the IMF staff in Pakistan and the GoP. I was extremely annoyed when they said to me that Pakistan’s track record is not reliable. This credibility must be addressed effectively.

It is reiterated that all corrections in the tax system should directly increase in improved collection. Nevertheless, this equation does not operate in the said manner in Pakistan. Unless we understand that this dilemma cannot be corrected. The following are the reasons:

1. A very large part of the economy operates in undocumented sector. This includes the cases of non-reporting as well as ‘under-reporting’. For example, there is serious under-reporting in sugar, cigarettes, motorcycles, batteries, home appliances and many other sectors. There is a tendency to slow down the activity whenever there is any attempt to document the economy which is essential for improved collection. This is a very big unmanaged factor in this equation. Unless there is a space in the GoP to sustain the pressure of a perceived slowdown there cannot be any chance for any correction. The only result of status quo is the demise of GoP;

2. ‘Shutter power’ of shopkeepers. The writ of state has become so weak in fiscal affairs that it is not ready to make the major correction being the documentation to the level of wholesalers and retailers. Notwithstanding any other result, the consequence of this situation is the heavy under-reporting at the manufacturing stage which is documented and siphoning out and sharing of money between the manufacturer and the wholesaler and retailer;

3. Informal banking is another major element of Pakistan’s business culture. Whenever there is an attempt to bring in the trade in commodities and other agricultural-related items, informal banking provides ‘space’ for unfair means. Unless there is a serious curb on informal banking and prosecution both by the central bank and the so-called protectors on the religious side, this space will continue to hamper any growth in tax collection;

4. The gap between the tax demand raised and actual collection is another mystery that needs to be resolved. It is reported that during the last three months a demand of around Rs 1.3 trillion has been raised. I do not want to comment on the validity of the demand, however, my experience in this field reveals that out of the total demand of Rs 1.3 trillion, recovery of even 10 % will be a miracle. This does not mean that our courts are too liberal in giving stay orders against demands. The reason is the non-genuine demands raised only to cover up inefficiencies of the tax administration and shifting the blame from tax official to courts; and

5. High denomination notes and easy means to deal in property and business constitute another reason for a mismatch between correction and collection.

The aforesaid discussion is only to highlight that in Pakistan there is no way to relate correction in the taxation system that results in increase tax collection. It fact at least for the gestation period of one to two years there will be a slowdown in the economy and decrease in tax collection. In case the GoP and the IMF are not ready to accept that then based on my experience after working on all sides, is that status quo will prevail that shall spell disaster for the economy. It is suggested that for taxation matters ground realities be taken into account instead of academic considerations. At the moment we are saying that thieves should continue to stalk the streets with safety of properties in the house. These two opposite forces cannot work together. Bureaucracy is a partner in the ‘joint venture’. They will never seriously agree with a sustainable solution. The institution of bureaucracy will be at stake if there is any successful effort aimed at bringing about a genuine correction. Resultantly, there is a natural desire for status quo.

Copyright Business Recorder, 2021