The Federal Board of Revenue (FBR), the tax collecting arm of the government, has come under considerable criticism from the ministers as well as members of the Opposition. There is a consensus that something must change if the country is to move towards fiscal self-sufficiency. The question is what?
The chorus that the FBR is the most corrupt of all state institutions with 500 billion rupee estimated leakages in any given year, as per the then Finance Minister, Shaukat Tarin, has gathered momentum as the government struggles to contain the deficit. Given that this country has in recent years witnessed the misuse or misappropriation of millions of dollars in state-owned entities (SOEs), the fact that the FBR is still considered as the corrupt most institution places it in a rank unto itself not only in Pakistan but in the world. The recent revelations with respect to complicity of a range of customs officials of various ranks in systematic abuse of the Afghan Transit Trade, over several years, has not done much to improve its image.
This, so claim those few, no more than a million and a half, who are income taxpayers of this country is the main reason why this country's rich have no qualms about giving large sums annually to charitable institutions but do not pay taxes honestly. The conclusion is obvious: the taxpayers have faith that each rupee they donate to a charity of their choice would be targeted towards the vulnerable, while a part of each rupee they pay the FBR as tax would be siphoned off to FBR staff, to a government that will spend it on a set of priorities that are not focused on the vulnerable but on sustaining itself politically and last but not least to pay, the expenses of the cabinet members and foreign trips.
In this context it is relevant to accept two facts: the collection arm of the FBR is as suspect in the minds of the country's taxpayers as the expenditure priorities set by the government. What is ironical is that the FBR has been the focus of a range of donor programmes, including the World Bank, with the objective of reforming the institution. What reforms are required is well known by now, however, the public has realised that there is a Catch-22 to these reforms. For example, the need to audit the taxpayers, a common enough right in the tax collecting arms of governments all over the world, is resisted in this country on the premise that giving the audit powers to FBR staff would increase corruption and not decrease it. And ironically, this is a legitimate concern on the part of the taxpayer. But the reformists argue that this can be dealt with appropriately by empowering the Tax Ombudsman to take complaints from the taxpayers against tax officials, investigating the matter promptly and awarding exemplary punishment. It is the award of punishment, a lengthy process spanning years if not decades that accounts for the failure of successive governments to make a difference with respect to curtailing corruption in FBR.
The second major issue with the FBR is its persistent failure to come up with a tax system that is equitable and non anomalous. However it must be acknowledged that it is the prerogative of the Finance Ministry to accept or reject tax proposals drafted by the FBR and therefore blame for the current tax system must be placed on successive Pakistani governments. Our governments, past and present, have been susceptible to influentials operating in the field of politics and industry/finance/agriculture and the growing number of skeptics amongst us link the degree of susceptibility to the extent of the bribe received - be it in the form of political gains or indeed actual handouts. Yet an economic case has also been made by many a pressure group, wherein their contribution to employment generation as well as export earnings are highlighted in an effort to ensure a tax regimen that would favour their business concern. This has led to a tax system that is simply not equitable. In addition, there is also evidence to suggest that the tax system is anomalous, wherein inefficient government (civil or military) operated businesses face a more favourable tax regimen than their private sector counterparts. This defies imagination as it seeks to support incompetence over financial efficiency.
Third charge against the FBR is its inability to come up with suggestions that would increase the tax to Gross Domestic Product (GDP) ratio. In this context it is relevant to acknowledge that the number of studies designed to determine the exact nature of reforms required in the FBR are numerous and have been funded by multilaterals like the World Bank and several countries including most recently Germany. Pakistan Tax Policy Report Volume I and II state that "Pakistan can take measures to increase the tax to GDP ratio by around 3.5 percentage points over the next five years. In order to ensure a healthy long-run economic development, Pakistan needs to embrace substantial changes in tax policy aimed at increasing the buoyancy of the tax system, broadening the tax bases, reducing distortions and phasing out exemptions... Beyond adequate administrative resources and an implementation strategy, this will require a clear political recognition of the importance of the task and the willingness to persist with tax reform over the long haul."
The focus, therefore, is rightly on political recognition across-the-board because that has been and continues to be the main impediment to increasing tax-to-GDP ratio. Or in other words, ownership by politicians of all parties in parliament is required to ensure a change in the tax system. That has certainly been lacking. In this context the decision of Hafeez Sheikh to bring tax proposals to parliament for approval, namely the Sales Tax Bill 2010, envisaging the implementation of the Reformed General Sales Tax that he had failed to sell to other parliamentarians, as well as a one-off tax on the existing income taxpayers and some one-time revisions on other taxes in an effort to fund the reconstruction efforts related to the summer floods, is now clearly seen to be a flawed decision for two reasons: Sheikh did not have the clout to sell his proposals but more importantly his proposals were seen as strengthening the existing inequity in the tax system without the critical guarantee that spending would be focused on the vulnerable.
The current parliament successfully worked for over a year on an entire gambit of constitutional amendments - a success evident from the passage of the eighteenth and nineteenth amendment. And yet there was no mention of amending the constitutional provisions dealing with taxes. Thus tax on the income of the bulk of the national assembly members, including the Prime Minister, was to remain a provincial subject. The blame thus does not solely rest with the PPP-led government but must be shared by other parties in the parliament as well as in the provincial assemblies. It is clear that the current parliament needs to work out a mechanism dealing with taxes and their collections in the country's parliament and provincial assemblies.