Malice Towards None & All: Budget Makers’ Challenges

Malice Towards None & All: Budget Makers’ Challenges
The main challenge of budget makers is to devise a comprehensive strategy to tap the real tax potential of the country, which is not less than Rs 14 trillion at the federal level alone, and around Rs. 4 trillion at the provincial level. The Federal Board of Revenue (FBR) is using, as in the past, negative tactics and highhandedness to collect the current target of Rs. 7,470 billion, originally fixed for the current fiscal year. It was later revised upwards to Rs. 7,640 billion on the dictates of the International Monetary Fund (IMF) in the wake of Finance (Supplementary) Act, 2023, the mini-budget, levying further taxes of nearly Rs. 170 billion with effect from February 25, 2023.

For years, the FBR’s main reliance has been on indirect taxes, levied even under the garb of income tax, shifting the burden on the poor and favoring the rich. In the wake of an ill-advised and prolonged embargo on imports, the FBR has suffered a setback, not getting enormous advance taxes at the import stage. Resultantly, the shortfall in revenue collection during the first nine months of the current fiscal year is over Rs. 440 billion. It is bound to further increase in May and June 2023.

The FBR, despite imposing all kinds of regressive taxes, blocking genuine refunds, raising fictitious demands and fudging with figures by taking credit of the next year’s advance tax in the current year has miserably failed to improve the tax-to-GDP ratio to a satisfactory level. It has even gone down to 8% now.

There is a consensus between official and independent quarters that Pakistan needs to strive very hard to become at par with many developing countries in achieving a desirable tax-to-GDP ratio of over 15%. Some radical changes like the reduction in the exorbitant sales tax rate, the equitable tax base and simpler and fairer tax procedures are required to encourage investments and savings. The incumbent government, in its second budget, for which it lacks a full year’s mandate, cannot be expected to reprioritize its tax goals in the budget for the fiscal year 2023-24. Since assuming power in April 2022, it remained oblivious to improving the tax-to-GDP ratio, attain better compliance and collections, coupled with rapid industrial and business growth.

No strategy is yet in sight to tackle prevalent massive sales tax evasion coupled with under-reporting and non-reporting of incomes. The challenge of broadening of tax base is not met on urgent basis. No serious measures have been taken that can help documentation and better collection of taxes without much hue and cry from any segment of society. In the second budget of the present regime, no action plan is prepared that is capable of checking leakages in tax collection and at the same time encourages the people to file their income tax and sale tax returns. A successful tax reforms program will be one that aims at achieving the twin goals of expanding the tax base and combating tax evasion simultaneously.

Present massive evasion in customs, income tax and sales tax can only be tackled through implementing an integrated Tax Intelligence System (TIS), which is capable of recording, storing and cross-matching all inflows and outflows. Its design and implementation strategy, explained back in 2011, as usual, fell on deaf ears of the FBR. For expanding the tax base, the following measures are inevitable.

All in-bound and out-bound containers should be scanned/x-rayed to counter evasion of customs duties. Anybody who pays sales tax and reports the same to FBR should be entitled to refun10% of the amount paid. The procedure for claiming refund should be simple, i.e. payer of tax should send invoices to the Central Tax and Refund Depository, which will authorize refund from a nearest branch of the National Bank, after verification of genuineness of the invoice (by checking sellers' registration number).

In this way, the FBR can develop a data base about the sales of all registered persons and then can cross verify the same with the particulars declared by them in their sales/income tax returns; or alternately;

Any person who pays the sales tax may be allowed to claim credit of part of the sales tax paid say 10% against income tax liability by producing all sales tax invoices obtained throughout the year. A detailed mechanism can be devised to cater to the situation where income tax liability is less than the amount of credit of sales tax.

In this scheme, the people may choose not to claim full credit of sales tax paid by them since they could not justify the sources of their full expenses. To overcome this situation the government can announce immunity for 3 years from scrutiny of their expenses declared through sales tax invoices alone-it will go a long way to document the economy yielding more and more revenues in the coming years.

This scheme will encourage people to obtain sales tax invoice for each transaction, which is presently not being insisted. The evasion of sales tax is mutually beneficial. If sales tax payers are given the above incentive, they will insist for sales tax invoice and the government without expending any money or making extra efforts will be able to expand the tax net.

Such schemes were successfully implemented in Taiwan, Turkey and Venezuela. In India, the government of Kerala introduced 5% sales tax for all retail sales with incentives to both the shopkeepers and buyers. The shopkeepers got a 10-15% refund of tax collected paid to the government and the buyers retrieved VAT coupon of Rs. 5 for every purchase of Rs. 100. Every week a draw was held and coupons-holders won lucrative prizes. This scheme boosted retail sales of shopkeepers who were willing to get registered with the government. There has been tremendous increase in government revenues with the introduction of this scheme.

A similar scheme, presented way back in 2007 before the budget announcement in Pakistan. However, the FBR stalwarts and bureaucrats sitting in the Ministry of Finance did not even bother to study it. Their apathy showed that certain vested interests that wanted to keep the system complex so that their corrupt practices keep on flourishing. The same mindset prevails even in 2023.

The government must remember that if taxation is viewed as being unfair or favoring some chosen ones, no reform program can succeed and voluntary compliance will never improve. We need special efforts and rational policies to restructure the tax system and restore public confidence in the tax officials. Even a good tax system will not work if the prevalent negative mindset of the tax official persists. There is an immediate need to improve both the system and the human fabric that controls it.

The tax system needs to provide a Taxpayers' Bill of Rights, a comprehensive case study of USA and UK and complete text of law for Pakistan already published, taxation of all incomes exceeding Rs, 1,200,000 irrespective of its sources (agricultural or non-agricultural), a broad-based Value Added Tax (VAT) covering all goods and services but at a low rate of 8 to 10 percent.

The FBR instead of performing its prime duty of collecting revenues—where due but avoided—is busy in constituting or working with commissions/committees to ponder over many issues relating to tax policy and administrative reforms, which are in fact the domain of the sovereign Parliament under the 1973 Constitution of Islamic Republic of Pakistan.

It appears that the FBR is more eager to do the job of legislators. Recently, some committees, formed on the recommendation of the Advisory Board, to suggest measures for improvement in the taxation structure and codes, besides the work assigned to Reforms and Resource Mobilization Commission (RRMC). None of the committees formed even under RRMC has come up with any meaningful plan of changes—generalized proposals have been made by copying from here and there. These committees are not capable of suggesting result-oriented changes in the tax system—they   are devoid of critical thinking let alone to suggest innovations.

Tax bureaucrats—both sitting and retired—suffer from the all-knowing syndrome. They are, in fact, responsible for the existing pathetic state of affairs. They, being defenders of the status quo, can never bring positive, pro-growth and people-friendly changes in the existing oppressive tax system. They thrive on this rotten system and want to exert complete control through complicated laws and cumbersome procedures.

Nowhere in the world, delegated power is available to an executive authority to undo laws passed by Parliament through a Statutory Regulatory Order (SRO)—this unconstitutional, undesirable, undemocratic and notorious practice should stop once for all as it offends Article 77 and 162 of the Constitution.

The need of the hour is a low-rate but across-the-board harmonized sales tax coupled with automated, speedy tax refund system. The system should be fair and transparent and at the same time its enforcement should be strict and stringent—there should be no sacred cows. The tax base cannot be broadened unless all the goods and services—barring a few essential eatables, books, children garments, education tools—are brought into the net of sales tax and all persons having income of Rs 1,200,000 or more are taxed and forced to file returns electronically with declaration of assets and liabilities.

The FBR should restore publishing tax directories, discontinued since tax year 2019, of taxpayers so it can be seen how much tax is paid by high-ranking civil-military officials, judges, politicians, public office holders, rich professionals and businessmen and how much wealth is owned by them. The existing tax system, with an exorbitant 18% to 25% sales tax rate (add 3% in case of supplies to non-registered persons), excessive withholding taxes, presumptive taxes and non-taxation of agricultural income has created distortions—the system has failed to create equity, besides not being able to generate the desired tax-to-GDP ratio. For improving the tax-to-GDP ratio substantially, all kinds of exemptions and concessions must be withdrawn. Any person earning income of Rs 1,200,000 or more—from whatever source—should be taxed.

If the FBR wants to implement the reforms agenda sincerely, it must study the case of the Mauritius Revenue Authority (MRA), which within the last many years has earned the worldwide recognition of efficient and modern tax machinery. Not only revenues have been increased by 300% by bringing all potential persons into the tax net, but also service to the people has improved beyond expectations. In surveys conducted by independent bodies, MRA has got an approval rate of 95% from the people—a feat not even achieved by many Western countries till today.

It is worthwhile mentioning that Mr. Sudhamu Lal, once Member Reforms in the FBR, heads the MRA since 2005. He was not allowed to work freely by certain vested interests and on retirement was selected as Director General by independent MRA Board—a great honor for Pakistan which nobody has ever acknowledged or even noticed. In Mauritius, he is a public hero who helped the economy to grow with rational tax policies and transparent operations—FBR stalwarts can see what marvelous results a revenue authority headed by their ex-colleague has achieved.

The MRA has been established as an agent of the State under the Mauritius Revenge Authority Act of 2004 for the management, operation and administration of revenue laws. MRA became fully operational with effect from 1st July 2006. The MRA is a body corporate and is administered and managed by a Revenue Board.

The MRA is responsible for the administration of tax policy, and the collection and accounting of all revenues arising under the revenue laws, with Income Tax, VAT, Customs, Excise and Gaming. It administers and collects taxes due in Mauritius within an integrated organizational structure.

The MRA Board has more representation from the public than from the government— this autonomous body selects senior officials of the MRA who implement laws without any political interference. They work without any fear of victimization, but face tough accountability from an independent Board.

The success of the MRA in a short span of time confirms that the tax reform agenda can be implemented if work is done professionally and honestly. One wonders if the Board-in-Council of the FBR or Advisory Board or RRMC has even bothered to study the MRA model and its great success—perhaps they are not even aware of it. This shows how isolated they are from the global experiences and success stories in other tax jurisdictions.

The FBR, though established under an act of Parliament, Federal Board of Revenue Act, 2007, is not an autonomous body. It should be given this status and be insulated from outside political, financial and administrative pressures. However, in no way should it assume the role of legislature, which under the Constitution is the sole prerogative of the people of Pakistan through their democratically-elected representatives. The Parliament should devise, through a democratic process, a rationale and acceptable tax policy after taking an input from all the stakeholders and experts in the field. This alone can help in broadening the tax base and improving the tax-to-GDP ratio in the country to a respectable level—India and Iran have achieved the level of 17% and 16% respectively.

The government must remember that excessive and extractive taxation can prevent many individuals and businesses from taking full advantage of the opportunities of the new knowledge-based economies. Taxpayers, including businesses, should share the burden of protecting those who are vulnerable as a result of change, either through well-designed social protection measures or retraining, not through excessively rigid job protection measures and inflexible labor regimes that penalize productivity. That is why a fair and transparent tax system is so essential for maximizing economic growth.

Politicians must have the courage to achieve a sensible balance between income, capital and consumption taxes. And they must also have the courage to spend, not on ill-designed social programs introduced more to collect votes than social returns, but on important investments in creating human capital (e.g. education, training and health), and necessary public infrastructure to increase the productivity of the economy.

It is by no means an easy task in Pakistan. However, one expects that the public has been increasingly suspicious of political motivations and better informed about the impacts of undisciplined public finance. At least, one hopes so! We must all pay our taxes honestly and diligently rather than just criticizing the system alone—at the same time we must demand that the revenues collected should be spent for the welfare of the masses and not for the luxuries of the rulers and the civil-military bureaucrats. Their perquisites and privileges should be monetized forthwith—they should be made to live amongst the masses rather than behind iron curtains in palatial houses, remnants of colonial masters.

Independent observers should monitor the tax data and survey the costs and benefits of various approaches to taxation that have been adopted, changed, abandoned and reinvented over many years; they should give frank advice on reforms and best practice, and help the government reach consensus on tax matters. They should also explore new challenges, such as the taxation of e-commerce, and the problems of harmful tax competition and transfer pricing within large corporations. Simply put, the government must unshackle the constituent elements of economic growth by letting market forces play their respective roles. In addition, governments must transfer the benefits of economic growth to enhance social well-being and cohesion through transparent and well-designed taxation. If this paradigm is allowed to work, then Colbert’s geese would barely hiss at all.

The present and future governments at federal and provincial levels must learn from the experience of others and should immediately take due cognizance of disparities and dichotomies existing in prevalent tax system, remove them and ensure redistribution of wealth through progressive taxation rather than thriving on indirect taxes. Taxes collected should be spent for the well-being of public and not for mere comforts of rulers. Taxes if spend for wellbeing of the public at large can make the state invincible and if squandered for the luxuries of rulers and state functionaries are bound to lead to national disintegration, social unrest and economic disaster.

Successive governments' onerous tax and regulatory policies have pushed millions of people below the poverty line. Whatever is collected from the poor – the rich and mighty do not pay taxes in this land of the pure—is being wasted ruthlessly or plundered with impunity by incompetent politicians and corrupt officials. More money is spent for the luxuries of military-judicial civil complex than for education, health and justice system. If as a nation we have to survive and progress, all state institutions and stakeholders need to move quickly and decisively to reverse this trend. Our survival lies in broadening and making our tax base equitable and improving the tax-to-GDP ratio, making the mighty civil-military bureaucrats accountable and compel them to live like ordinary citizens, and restoring Pakistan's undeniable geostrategic and business competitive position in the region by investing money in infrastructure and human resource development.

The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)