It comes as no surprise that the Federal Board of Revenue (FBR) is in need of serious reform. However, the means of going about the said reform require pondering and speculation. Pakistan's tax problems are often lamented, but without attempting to truly understand their root cause, the process is tantamount to beating a dead horse. The problem lies in a lack of transparency, disclosure, standards and reporting.
There was a decline in revenue collection paired with an increase in current expenditures over the fiscal year 18-19, leading to a fiscal deterioration in all major indicators. A letter to the finance ministry from the FBR painted over these dismal numbers, with claims that the reasons for the shortfall include "reduced tax rate on salary, restriction of the Supreme Court on telecom tax, reduction in public sector spending, and import compression."
The answer lies in the perfunctory attitude of the FBR officials towards actually doing their jobs, and their knack for finding ways to make a quick buck. The corruption amongst FBR is so deep-rooted and blatant that they reside in sprawling mansions under the nose of a nation that curses corruption. Meanwhile, the cost of doing business continues to rise and exports continue to fall. The small shop owner, the young widow struggling to make ends meet and the honest, hardworking laborer all pay taxes via highly bureaucratic and complicated procedures, and are presented with complicated forms that the layman cannot fill without hired help.
The inefficiency in collection arises from a lack of technological upgradation. The process of tax collection is largely automated across the globe, and has been that way for several years. A lack of automation at this stage gives way to more human interaction than is necessary, and thereby increases the potential for corruption as highlighted above.
The most disconcerting fact in terms of a lack of automation is that the FBR is still running on a single-entry accounting system. This system is archaic and no longer used anywhere in the world due to its incomplete and inaccurate method of book-keeping. Whilst running on these outdated methods, the FBR has been unable to report its collection of tax as the net of the refundable amount. There has also been a tendency of the FBR to delay or avoid issuing refunds by deferring admissibility, in order to depict a higher collection figure than what has actually been collected. This has widespread consequences to which the attitude of the FBR appears nonchalant.
The FBR is expected to broaden the tax base and ensure timely refunds, but this is proving difficult to establish. One factor hindering this procedure is a lack of transparency, which can also be rectified with the efficient use of relevant technology. The Adviser to Prime Minister on Finance Dr Hafeez Shaikh asked the FBR management on Wednesday to implement an "integrated media and communication plan" to maintain contact with the public, frequently share results of efforts on revenue collection and tax facilitation, focusing on agreements with traders. He particularly emphasized the crucial matter of updating the relevant bodies on the release of tax refunds, changes in Form H and the result of other reforms undertaken so far by the FBR.
Many textile export companies have not received any refunds since June 2019, and when the FBR is confronted with the facts, they claim that there is a glitch in the computer program. It is evident that there is no empathy among those at FBR, who remain unresponsive while workers are being laid off, production has been partially shut down in many companies across the country, BOP support has been lost and livelihoods are being uprooted due to their unwillingness to issue timely refunds.
According to a 2016 report on the delay in issuance of sales tax refunds, the committee constituted by the Federal Tax Ombudsman lamented that the tendency to delay refunds "not only causes inconvenience to the tax payers, especially the Business Community, but also plays counterproductive role in the economic development." The recommendations of the committee were as follows:
1. For good governance and transparency, data relating to unpaid refunds should be made available on the websites of FBR as early as possible but not later than 31 August 2016. It should be updated every month so that public knows how much tax is collected under various heads and what is payable to the taxpayers.
2. FBR should expeditiously pay all the outstanding refunds for which E-RPOs issued and wherever there is delay compensation should be paid.
Three years have passed since this report was released, and FBR's insensitivity towards export refunds is still not being given the attention it requires. The spiraling outcomes of their attitude needs to be drilled into the psyche of the officers so that the requisite action can be taken. In our estimation, this would be one of the top reforms that would yield far-reaching dividends.
There is a need for the FBR to refocus itself towards taxing profitability, while objectively considering the GDP to tax ratio and its implications. In 2019 the tax-to-GDP ratio sank to the lowest in five years at 9.9%.Meanwhile, the worldwide average statutory corporate income tax rate, when weighted by GDP, is 26.30 percent. The rate is as high as 55% in the UAE. (Tax Foundation). In general, large industrialized nations tend to have higher statutory corporate income tax rates than developing countries. Meanwhile, Pakistan's case is riddled with the high pressure on indirect taxes, which have consistently been higher than direct taxes. This tends to skew the economy to the disadvantage of the less privileged class and make the country tax-uncompetitive in the global market.
The tax-to-GDP ratio of other countries at our level of development is however likely to be relatively similar. A World Bank blog from 2018 states that many developing countries have a low tax-to-GDP ratio. The data indicates that about 60 countries fall below the 15 percent threshold, and emphasizes that "there is no universal policy prescription for taxation. Each country faces a unique set of circumstances."
Therefore, it is essential to implement reforms that are best suited to Pakistan's unique case. The prevailing disproportionality in taxes can be addressed via allowing for a more progressive tax regime. This would entail higher direct taxes on salaries, big businesses and incomes so that the tax burden is more evenly spread out based on the wealth inequality that prevails. Indirect taxes on basic utilities, such as telephones, power and electricity to name a few, are being applied across the country and at all salary levels, in a highly anti-public regime. The readjustment of indirect taxes, which are proportionately higher, is essential so that the less privileged do not continue to carry the greater burden.
In terms of inefficient collection, the tax process should ideally be automated and technologically administered, so as to minimize human contact and thereby limit the potential for corruption. This should be an intuitive process so that it isn't burdensome for small shop owners who can't fill out complex forms. The issue must be catered to by means of a modern and effective data portal system, at par with international systems, creating a provision for deferred sales tax/income tax. Knowing the refundable amount in accurate figures would aid in painting a far clearer picture for all stakeholders.
When the news of corruption in the FBR is so pervasive, most people remain reluctant to pay taxes because all that can be heard on the news is that taxpayer money is being looted. This fosters a lack of incentive to pay taxes, so unless this issue is fundamentally uprooted via FBR reform, tax collection will remain inconsistent.
When it comes to the ease of doing business, firms whether small or big have not been facilitated in their attempts to grow, but have ironically been restricted by none other than high costs: burdensome taxes, duties, lack of information on refunds, and other charges. They have little incentive to address long term concerns such as human resource development and recruitment of highly skilled individuals. Top graduates of the country prefer to seek employment abroad and the country greatly suffers from brain drain. This problem will persist for as long as tax credits and incentives are not allocated for investment in human resource, training and recruitment. It is essential to retain entrepreneurs and accommodate them so that the economy can benefit.
Past governments had often emphasized their objective to broaden the tax base and raise revenues. Had this been achieved, it would have gone a long way towards addressing many of the problems of governance Pakistan continues to face, such as the reliance on aid to fund deficits, and the lack of accountability of the state to its citizens.
However, even with the marginal increases in the country's tax-to-GDP ratio during PML-N's time in office, it is pertinent to remember that the improvement had been made possible through greater amounts of indirect taxation, and by increasing the tax burden on those forced by circumstances to actually pay their taxes and file returns. In terms of actually broadening the tax base, or taxing the privileged, propertied elite that still continues to evade scrutiny, past governments failed to accomplish much.
It was recently revealed that the incumbent government has targeted an overhaul of the FBR by June 2020, aiming to replace the board with the newly formed Pakistan Revenue Authority (PRA), under a World Bank programme. A single revenue collection body, the new PRA will be responsible for collection of all tax liabilities. This is an attempt to rewrite the story of tax collection in Pakistan from scratch, rather than attempting to reform the existing FBR.
The reformed body is set to be less bureaucratic, with fewer posts/ranks and less of a hierarchical structure. Corrupt officers will no longer be harbored within the structure. According to Prime Minister Imran Khan, the corrupt mafia is "the biggest impediment to the country's progress" and that 2020 would prove to be "tough on the plunderers of the national exchequer."
Alternative sources suggest that the existing FBR workforce will be drastically reduced. There has also been word of a combined "vigilance and integrity wing" to be established "to bring to the book to the money makers in both Customs and Inland Revenue Service (IRS)."
In a recent meeting, the FBR chairman pointed to a very low number of Lahore-based traders who filed their tax returns, and asked the taxmen to justify the poor performance and explain their desire to maintain the status quo when things were not running smoothly. The proposed upheaval of the FBR is evidently facing resistance from taxmen, particularly those who were benefiting most from the prevailing system. It is likely that further proposals for reform will receive a backlash as well, but this is part of the struggle against resistance to change. Past attempts at reform were evidently in vain, given that the corruption was deep enough to have taken root at every level of the organization.
One of the fundamental reforms required is the opening up to competition of all positions over Grade 20 and absorbing trained accountants and tax lawyers, in order to upgrade the skill set available to the FBR. This would necessarily change the remuneration levels, which must be market based in order to attract the best and the brightest. The same salary scheme should also be extended to promotees within the FBR, to encourage them to aspire for the higher positions, thus preventing any misgivings between them and the latteral entrants.
A crucial aspect of these proposed reforms is that they give credence to the concept of a technology driven tax administration system, as has been implemented in nearly all parts of the developed world, and can have a great bearing on improving efficiency and accountability in Pakistan. Paired with an overarching approach that tackles corruption, disproportionality and inefficiency, the automation of taxation in Pakistan is the prime reform that is required for the country to progress.