Sordid story of tax reforms

The Federal Board of Revenue (FBR) during the last many years has failed on all fronts-in meeting revenue targets, broadening of tax base, implementing Value Added Tax (VAT), increasing share of direct taxes to the extent of 60% of total revenue collection and improving tax-to-GDP ratio.
Tragically, tax-to-GDP ratio in 2012, the last year of extended World Bank funded Tax Administration Reform Project (TARP), dipped to 8.2% from 10.6% in 2005 when the programme started! The World Bank in its report, "Implementation, Completion and Result Report" on TARP observed that "the current narrow-base of general sales tax (GST) in Pakistan remained almost entirely unchanged throughout 2005-2012, despite efforts to overhaul the indirect taxation structure by introducing a reformed GST featuring few exemptions and wide coverage of goods and services".
The report while highlighting the poor performance of FBR noted that "different from other sources of tax revenue in Pakistan, administration of GST entails a full-fledged operation of major FBR functionalities, including: registration, monthly tax return processing, collection, refunds, audit and enforcement. GST operation also integrates joint effort from both internal revenue administration and customs since GST import tax is collected at the borders and zero-rating is targeted for export operations, besides other activities".
The World Bank for evaluating FBR's overall performance during the 5-year-long TARP used GST administration as an indicator. The result complied is highly disappointing-GST productivity turned out to be only 23 percent, compared to an average ratio of 34 percent world-wide. According to the World Bank, "the estimation covering the project life reflected an overall decreasing trend during 2005-06 to 2010-11 suggesting feeble tax administration efforts throughout the reform period". Shockingly, throughout the reform implementation period, there was "a declining performance in both tax policy and administration". Even during the economic boom (2005-08) GST productivity index "showed a rather declining trend despite modest buoyancy gains in FBR revenue collection, signalling relatively poor tax administration performance amidst relatively favourable overall economic conditions," says World Bank.
The World Bank concluded that "during the economic crisis period and subsequent years (2008-11), GST productivity index declined at a higher rate compared to FBR tax-GDP despite a swift turnaround in project implementation and concomitant positive trends in some outputs by the last two years of project life". The report while pointing out weak compliance levels, lacklustre results in reform implementation, especially those related to short term actions aimed at curbing evasion through more effective enforcement actions by the final year of project implementation, noted "performance from 2008 onwards, far from the project's objectives envisioned at the outset". This is the sordid story of tax reforms in Pakistan even when enormous funds - over 100 million US dollars - and best professional advice was available.
FBR ruthlessly wasted borrowed funds of millions of dollars - Pakistan with tax-to-GDP ratio of 8.5% was at 155th among 179 nations at the end of TARP in 2011. According to reports, tax-to-GDP ratio further deteriorated to 8.2% during the financial year 2011-12. Not only did FBR fail to implement tax reforms, there were unprecedented increase in tax frauds that have not been taken into account by the World Bank in its report (see our article, Acts of deceit and frauds, Business Recorder, July 31, 2011).
The last one was reported on 8 July 2012 revealing that FBR was on the verge of signing off on a massive waiver of Rs 47 billion on outstanding taxes for five cellular service providers, but the move was intercepted and foiled by National Accountability Bureau (NAB). Earlier, the Federal Tax Ombudsman (FTO) pointed out evasion of customs duty of billions of rupees in 'missing containers scam' for which report was specifically prepared on the direction of the Supreme Court. Yet another one was unlawful interpretation of section 153 by FBR waiving minimum tax of 6% payable by service providers for which FTO directed action against the responsible persons, but matter as usual is lingering on.
Many ask, why should FBR be criticised when the President of Islamic Republic of Pakistan, accused of tax evasion and looting of national wealth, extended unprecedented amnesty to all tax evaders on 24 April 2012 by promulgating Finance (Amendment) Ordinance) 2012, just one day before the scheduled session of the National Assembly? They question what was the emergency that necessitated this Ordinance? Nothing, except protection of tax evaders, who made (or intend to make) enormous investment in shares, but cannot explain source(s) of their funds. The Parliament approved this law as part of Finance Act, 2012 on 14 June 2012 - by joining hands with Asif Ali Zardari they have proved themselves as ardent defenders of tax evaders. Under these circumstances, the fate of TARP could not have been different.
Pakistan is facing multiple challenges on the economic front: reckless borrowing by the government for meeting its day-to-day expenses, lack of resources for rapid infra-structure improvements, trade deficits, fiscal deficit, inflation, balance of payments, and what not. In these challenging times, the President and Parliament are providing tax amnesties and concessions and FBR officials are allegedly committing tax frauds. Yet we have the cheek to blame the World Bank and the IMF for our own wrongdoings. This is the most disgraceful attitude one can expect from any nation.
Tax reforms and revenue generation are not possible in the presence of massive customs and sales tax evasion and a permanent amnesty scheme in the form of section 111(4) in the Income Tax Ordinance, 2001 which says that no question would be asked about source of "any amount of foreign exchange remitted from outside Pakistan through normal banking channels that is encashed into rupees by a scheduled bank." Tax evaders go to money exchangers, who arrange remittances in their accounts by charging just 1.5% to 2.0% as premium. This black money protected and encouraged by the State, buys politicians, government functionaries and judges. Money power rules Pakistan and the victims are the poor and honest citizens.
World Bank in its report did not mention mafia-like operations of FBR that include amongst others, missing containers, refund scams, smuggling of goods, currency and narcotics, under invoicing, and abuse of the legal tool of issuing Statutory Regulatory Orders (SROs) to favour the rich and mighty.
Faced with grave challenges to combat terrorism, money laundering operations funding the militants and criminals, and the problem of ever-growing black money, which according to independent experts is about three times of the documented economy, our political leadership and tax officials are planning yet another amnesty scheme. Can we ever hope to improve our tax-to-GDP ratio with such erratic measures?
(The writers, tax lawyers and partners in HUZAIMA IKRAM (Taxand Pakistan), are Adjunct Professors at Lahore University of Management Sciences)