As a single drop of water falling consistently on the hardest of rocks eventually makes it to soften, luckily our restlessness writings since 1994, drawing attention of the revenue authorities towards affluent segments of the society evading taxes with impunity, has finally borne fruit. The Federal Board of Revenue (FBR) in a bold move has ultimately decided to nab 700,000 tax evaders.
It has proved that if there is a will and determination, those who have been shamelessly depriving the exchequer of billions of rupees, can be taken to task. Not only are such persons criminally culpable of destroying tax culture, they are also responsible for shifting the burden on the shoulders of those who are not even liable to pay a single rupee as income tax. Their offence is worse than that of a criminal, whose act may affect one or two families because their sin, has directly affected the entire nation. Many decades of tax evasion has flung the country into debt slavery, retarded economic growth, abject poverty, political turmoil, foreign aggression and the overall atmosphere of despair.
As of today, in its bid to tighten the noose around the evaders' necks, the FBR has issued thousands of notices to tax dodgers about whom it possesses definite information of investments in huge houses, expensive cars and multiple bank accounts - courtesy data maintained by Nadra.
FBR's advertisements appearing in all the leading newspapers these days clearly warn:
"Before the law comes knocking let us pay our due taxes - FBR has collected credible data of citizens who own valuable assets but are not paying income tax."
We have been clamouring through these columns that there is a wealth of information available with Nadra and many other institutions with respect to ownership of massive immovable property, heavy utility expenses, high-priced luxury and sports vehicles, weighty bank balances etc. but nothing was being done to bring them to task. After all, does tax collection only imply getting more and more revenue? Is it not meant to strike a balance in the make-up of the society and to direct the flow of capital towards productive investments in order to propel the cycle of large-scale economic growth? Is it not meant to empower the government for the benefit of the entire nation, to equitably redistribute wealth so that not a single son of the soil is left deprived and destitute?
The new turn of events at FBR is indeed a welcome relief whereby, those in authority have eventually resolved to deal with the evaders with an iron hand. The Chairman of the FBR has expressed the institution's determination to add another 2.3 million taxpayers to the existing 2.7 million thus touching the figure of 5 million registered taxpayers - the real potential is nearly 20 million. All these measures are reflective of the actual purpose justifying the creation of the Federal Board of Revenue. Instead of choosing to become the handmaiden of the corrupt politicians and unscrupulous traders, this time the FBR has started emerging as an effective institution that visibly intends to take the bull by its horns, blatantly defying its earlier notorious reputation of favouring the rich.
Unless all persons who earn taxable income pay their dues honestly, there is no way that Pakistan can break free from the debt shackles and humiliating submission before foreign donors. With dishonesty eventually being brought to justice, honest taxpayers have reasons to revel. For a long time they have been bearing the main brunt of high taxes, while their deceitful counterparts were on different occasions, generously awarded with extremely low-rated amnesty and money-whitening schemes. Tax evasion is nothing new to the nations. Countries boasting high tax-to-GDP ratio also have cases of tax fraud, but to an extent that does not result in a significant dent in collection. However, when the scales are tilted towards more evasion and less collection then obviously, there is serious cause for concern.
Tackling the twin menace of black money and tax evasion has always been a failure in Pakistan - but recent reports show that other governments of the world have also proved ineffective in checking the flight of untaxed money. Wealth management specialists estimate that the world's wealthy entrust around $16.5 trillion to private bankers. According to them, the share of Pakistanis is to the tune of US$ 200 billion and Indians have a mind-boggling figure of US$ 1.4 trillion. According to the World Bank's Stolen Asset Recovery initiative estimates, the cross-border flow of proceeds from criminal activities, corruption and tax evasion is between $1 trillion and $1.6 trillion per year, about half of which comes from the developing and transitional economies.
In 2009 and 2010, Europe and the United States forced Switzerland to give up its age-old bank secrecy. They extracted promises from the placid Alpine nation to help fight tax evasion. That, together with a bitter US tax fraud probe into the wealth management giant UBS, opened cracks in the rock-solid reputation of the $2 trillion Swiss wealth management industry. UBS paid a hefty $780 million fine to settle the US tax fraud charges and agreed, in accordance with the Swiss government, to disclose Swiss bank data belonging to around 4,500 of its US clients. The FBR tax officials till today have not followed the footsteps of their counterparts in the IRS.
Pakistan is facing a grim challenge of measuring and countering enormous black money - the size of it is estimated to be three times the regular economy. Till today, no effort appears to have been made by the National Accountability Bureau (NAB), the Federal Board of Revenue (FBR), the Federal Investigating Agency (FIA), the Anti-Narcotics Force (AFN) to constitute a joint task force to unearth and counter the outflow and inflow of dirty money. Pakistani policy-makers must realise that a sound development strategy seeks to reduce the size of the informal economy and bring into the open, resources that lie in the form of black money. Apart from such mechanisms as foreign exchange and tax amnesties; and exercises such as demonetisations, taxation, is used as a tool to tap the resources inherent in these areas. According to a conservative estimate, tax evaders in Pakistan annually deprive the country of revenue of over US $10 billion.
It is heartening to note that at last the government has decided to take tax dodgers to task, instead of encouraging their unlawful activities. If Hafeez Shaikh and his team at the FBR demonstrate firmness, we can easily collect revenue of Rs 4-5 trillion. Mobilisation of resources to such a level would create fiscal space and dependence on loans would be eliminated. This would lead to self-reliance - a prerequisite for making Pakistan a true democratic and egalitarian society.
How to enforce tax compliance is the main challenge before the FBR. The crisis with Pakistan is massive defiance of tax system. In addition to present the initiative taken by the FBR, special efforts and rational policies are needed to restructure and reform the entire tax system to restore public confidence in the tax officials. The present campaign against tax dodgers will not succeed unless the prevalent negative mindset of the tax official is reversed. There is an immediate need to improve operational efficacy of the tax apparatus and quality of the human fabric that controls it. The majority of officials lack professional competence and integrity.
The need of the hour is to create a tax system that provides:
-- Rule of law and predictability of the authority to tax
-- Principles of proportionality, efficiency, effectiveness, flexibility, continuity, reciprocity, fairness and equity
-- Tax harmonisation
-- No double taxation or intentional non-taxation
-- Non-discrimination
-- Strict anti-tax evasion rules
-- FBR needs to introduce Tax Intelligent System (TIS) to support a new audit initiative. Unreported income represents the largest component of the tax gap (non-tackling of this issue has made Pakistan one of the lowest tax-to-GDP ratio countries in the world). The FBR must develop a new tool - Unreported Income Discriminate Index Formula (UI DIF) for identifying returns with a high probability of unreported income. UI DIF would give the FBR the ability to systematically identify returns at high-risk for unreported income.
National Research Programme (NRP) is the need of the hour if the FBR really wants to improve the return examination and selection process. The FBR has never conducted research to detect errors on returns. Without this information that needs to be gathered through the NRP, the FBR will never be able to develop the capacity to direct examinations and other compliance activities with accuracy and precision.
No effective mechanism has so far been evolved to check any unfair practices on the part of the tax administrators. They are not made liable to punitive actions and/or pecuniary damages, even after the final fact-finding authority adjudges their actions arbitrary, excessive and beyond their assigned powers. The Federal Tax Ombudsman should be given the statutory power of awarding damages in such instances.
Taxpayers must be given adequate rights before the State justifies strict actions for enforcing tax obligations. For restoring the confidence of the taxpayers the government should immediately table the Taxpayers' Bill of Rights in the coming budget that must:-
1. safeguard and strengthen the rights of taxpayers;
2. ensure equality of treatment;
3. guarantee privacy and confidentiality of their declaration;
4. provide right to assistance by the State in tax matters;
5. guarantee unfettered right of appeal through an independent tax appellate system; and provide facilities for independent review of disputes with the tax authorities
The present tax system imposes greater and undue incidence on the poor and middle-class people e.g. 17% sales tax (in fact 40% on finished imported goods after the levy of all kinds of taxes) takes larger portion of the low-income groups compared to the high-income groups). The rich and mighty absentee landowners are not paying personal income tax on their colossal agricultural income and enormous profits made through transactions in real estate and on the money/share market. Since they are not paying a single penny as tax, the vast majority of citizens argue as to why they should be subjected to exorbitant and multiple taxes?
From 2003 to 2010, the FBR miserably failed to improve universal tax compliance under the World Bank-funded Tax Administration Reforms Programme (TARP). In 2011, a positive change has occurred with the crackdown on non-filers. But real tax potential of Rs 4-5 trillion cannot be realised unless the government takes some concrete and positive steps in taxing capital employed in unproductive areas ensuring its shift to the productive sectors that generate more goods and services, leading to greater employment possibilities. Taxation should not retard economic growth; rather help in giving it a boost. Tax revenues are by-products of growth and productivity. If we manage to accelerate rapid industrialisation, infrastructure improvements and overall high, sustained economic growth, taxes will automatically improve. By levying progressive taxes we can achieve the goal of redistribution of wealth and socio-economic equity. FBR's campaign against tax evaders is laudable, but more taxes alone will not serve any useful purpose unless their utilisation for the general welfare of public is also ensured.
(The writers, tax lawyers and authors of many books on Pakistani tax laws, are adjunct professors at the Lahore University of Management Sciences (LUMS)