Small data

Pakistan's economic management is on roller coaster ride, we now have a new Chairman Federal Board of Revenue (FBR). Sincere best wishes for him on assuming the unenviable role of the head tax collector of Pakistan; in a world where no one wants to pay taxes, tax collectors generally get civility comparable with the Grim Reaper, and rest assured Pakistanis are not from Mars either. In fact to venture a guess, even Martians would never pay taxes, if they knew they could get away with it. And perhaps that exactly is also the problem with collecting taxes in Pakistan; the tax evaders remain confident that the system is stacked in their favour and they will get away with it, whilst the honest face the brunt of the tax man's wrath.
As of now, the first order of the new Chairman, whilst probably controversial for his FBR team, is perhaps encouraging for the business community as a whole, and perhaps a step in the right direction. Freezing bank accounts and unilaterally withdrawing other people's money on the pretext of recovering taxes is a rather, arguably, draconian practise. The perception that the FBR is out to get businesses needs to be changed, if at all the objective is to transit the informal sector into the folds of the documented economy, and thereby foster economic growth.
But there is a lot more to do then changing perceptions. In an environment where the IMF wants the fiscal deficit reduced, wants all kinds of subsidies removed, including on utilities, wants the rupee on a free float hence further depreciated, wants interest rates increased, wants the Central Bank to curtail lending to the State and after all that still wants tax collection to be increased by Rs. 700 billion, performing to expectations will not be a walk in the park for the Head Tax collector. The plan for next week's column is to deliberate and focus on why compliance with all these IMF requirements, whilst may or may not improve Pakistan's macro indicators in the short run, but most likely will not result in substantive economic growth in the medium term; however for the moment let us stick to collecting Rs 700 billion of more taxes.
As they say, you can't make a rock bleed; in this case the rock being the unlucky taxpayers already in the tax net. Unlucky because they probably belong to the documented sector and hence cannot, much as they would want too, hide from FBR's cross-hairs. With taxes where they already are, with inflation rising, with utilities and fuel prices exploding, any further taxation on the existing unfortunate taxpayers is likely to push them to the extreme end of the Lafer's curve; why work just to finance the Government's squandering.
Essentially what is being said is simple: any further taxes on existing taxpayers or any further indirect taxation would be unethical and immoral unless the FBR can credibly establish that all taxes from everyone under the current legislation are being diligently collected; beyond morality, any such design is expected to push the country into a serious recession and panic. And perchance, on a lighter note, if all taxes that should be collected are already being collected, than we are in deeper shit than we thought we were in!
Fortunately, the World Bank thinks not; "A detailed gap analysis that has been recently completed by the World Bank indicates that Pakistan's tax revenue potential would reach 26 percent of GDP, if tax compliance were to be raised to 75 percent, which is a realistic level of compliance for LMICs. This means that the country's tax authorities are currently capturing only half of this revenue potential, i.e. the gap between actual and potential receipts is 50 percent. The size of the tax gap varies by tax instrument and by sector". By the way LMIC stands for Low and Middle Income Countries; complex articulation riddled with unnecessary abbreviations is quintessential World Bank, and IMF for that matter, in fact all similar institutions. Being ambiguous an unintelligible is most likely an informed strategy on the part of these institutions; "You got it wrong, we never meant that", is a perfect defense when things go south with their programs or recommendations, which they mostly do.
Most likely the FBR is dissecting the 19-page Pakistan Revenue Mobilization Project of the World Bank, and best of luck to them in figuring out the when and how of the World Banks recommendation and plan to improve tax compliance. For my money the answer is Data.
As an example, in terms of imported industrial raw material of any kind, how difficult can it be to trace the ultimate importer, estimate the production of finished goods based on industry standards, determine the benchmark profit and compare with actual results to determine evasion if any. And don't tell me that in today's world there are no automated systems at the ports to reconcile itemised imports, such as telephones, with custom duty recovered at the FBR level; and that retail items cannot be tracked and taxed on actual profits, considering that their real world and domestic prices are a click away on the net.
Is it comprehensible that even today we cannot through technology monitor our agricultural produce, such as tobacco and cotton, when the world has the technological ability to exactly identify historic yields and perfectly establish estimated produce per acre anywhere on the globe? Contrarily, we still wait to count the bales and bundles after they reach the market and apparently are not very good at it even now. But if we by some quirk of fate could somehow accurately predict our crops/produce, could we than not track those till the ultimate buyers and tax their profits?
And how come we have not been able to tax each and everyone associated with importing luxury cars, luxury mobiles, luxury foods and goods, despite claims being made for the last decade that lists of owners of luxury vehicles and properties have been compiled and FBR is sending notices; whatever happened to those notices? And where is all the information which should be available with the FBR today under the OECD convention on mutual administrative assistance in tax matters; is the information inadequate or are there other reasons for this endless procrastination.
When there is a will, there is a way. Reconciliations of the type discussed in the examples given in the paragraphs above, can provide significant comfort in establishing whether or not taxes are being recovered in Toto; and these are examples of small data. While the pursuit, analysis and reconciliation of small data alone can do wonders for tax collection; big data is a different league all together. Governments of all kinds have historically excelled in collecting all kinds of necessary or unnecessary data; the difference is that in the developed world today, technology helps their governments in utilising all these mountains of data for better governance, while we still rely on the tools of antiquity to even determine our GDP; which by the way, for me is in any case a useless indicator. Nonetheless, Pakistan needs to swiftly copy best practices in relation to usage of Big Data by other countries; no need to reinvent the wheel. Timely capture and analysis of data is the way forward for increasing tax collection; not more taxes and definitely not a belligerent and adversarial FBR.
But until we get to the big data, at least do not ignore the small data!
(The writer is a chartered accountant based in Islamabad. Email: [email protected])