Unlike many other countries of the world, Pakistan's apex revenue authority Central Board of Revenue (CBR) has never bothered to launch a well-designed Voluntary Compliance Programme.
Resultantly, the number of persons filing income tax returns in Pakistan is pathetically low and during the last many years, CBR has miserably failed to broaden the tax base, increase the number of return-filers and tap the real tax potential.
The failure of the CBR is on two counts; firstly it has failed to collect taxes from where these are actually due thus paving the way for enormous black economy and secondly could not persuade the people for voluntary tax compliance.
This has created a malevolent social malady ie social injustice where the rich and mighty are enjoying life and others are being pushed below poverty line.
This year despite spending huge money on "public awareness campaign" and extending the deadline for filing income tax returns upto October 15, 2004, the CBR received only 1,092,620 returns against the desired target of 1.2 million under Universal Self-Assessment scheme (USAS).
On the contrary we have example of UK where the Inland Revenue is doing this work successfully through community participation. Methodology and brief review of their voluntary compliance programme [see box] can be an eye-openers for CBR.
Last year CBR received 1,005,504 income tax returns by October 31, 2003. It shows that the CBR only managed to increase tax returns by 88,000 even after spending enormous money on media campaign.
The situation has certainly annoyed the CBR high-up. In a Press report one CBR officer issued a warning: "Now the tax collection machinery is forced to issue notices to NTN holders who have not come up with filing their tax returns during the current financial year".
The CBR has collected Rs 6.196 billion along with tax returns this year as compared to Rs 2.4 billion in the last fiscal year, registering an increase of over 100 per cent, which according to CBR, is a "great achievement". This "great achievement" needs to be revaluated from the perspective of what has not been collected.
The real tax potential of the country is much higher but the CBR is over jubilant by just collecting Rs 6 billion with returns.
The collection through advance tax/voluntary payments (32.8%) and withholding taxes (51.7%) is the main source of CBR's revenue collection (84.5% as per page 33 of CBR'S YEAR BOOK-2002-03. The collection by own efforts during the fiscal year 2002-2003 was just 15.5%.
The share of direct tax in total tax collection has been declined to 31.6% in fiscal year 2002-03 from 33.4% in 1988-99 [see page 32 of CBR'S YEAR BOOK-2002-03].
VOLUNTARY COMPLIANCE: A developing and important aspect of our relationship with the businesses for which we are responsible is the support we can provide to help them to comply with their responsibility to submit accurate returns.
Where businesses or partners experience compliance problems, for instance the need for repeated, and maybe extensive, enquiries and amendments to their tax computations, we want to work with them to correct the problems.
This sort of co-operative work can be extremely beneficial to businesses, partners and the Inland Revenue alike by limiting the number of enquiries raised, reducing the risk of unexpected and possibly significant extra tax liability and ensuring that attention is properly focussed on the most complex and significant issues.
By working with groups in this way we aim to foster a more positive working relationship and reduce the areas of disagreement between business and the Inland Revenue.
We wish to encourage businesses and partners to raise and discuss with us any area where they wish to develop their compliance performance. We aim for our part to let businesses know when we see compliance problems we think can be solved by working together.
OUR COMPLIANCE REVIEW PROCESS: In 2003/2004 we built on the success of our pilot programme which promoted real-time working and was based on establishing open and co-operative working methods between groups and the LBO case teams by agreeing timetables and protocols with over 50 more groups.
We now work with around 75 groups in this way. We aim to continue to put in place this type of approach with appropriate groups as it is clear there are real benefits to both parties. If you would like to explore whether this approach is right for your business contact your case team who will be able to provide more details.
In addition LBO case teams will be looking at how groups approach the various aspects of tax compliance and discussing their conclusions with the groups to see if it is possible to agree areas for improvement, by either the group, or the case team as appropriate.
This may in some cases lead to working arrangements on a more real-time basis along the lines discussed above, but may also be the catalyst for both sides tackling a specific area of difficulty or dispute that has not been resolved by the normal exchanges-source http://www.inlandrevenue.gov.uk/lbo/custserve.htm.
It shows that collection of personal taxes in real terms is not improving, rather declining. The main reason for this decline is CBR's inability to tax the rich and mighty and encourage voluntary compliance.
It reflects sadly on the wealthy and ruling classes who are not fulfilling their duty of filing returns and paying taxes honestly and diligently. Who is to be blamed? What are the causes? Is CBR a worthwhile institution? Can CBR enforce tax compliance and win the confidence of taxpayers? Why Pakistani people refrain from paying taxes? On the on hand mighty sections of society are evading or avoiding taxes and on the other the poor people are paying 15% GST even on commodities of daily use eg iodised salt sold under brand names.
The CBR instead of bringing the real tax evaders to tax net (real estate, currency, stock exchange mafias and people involved in massive tax and corporate fraud) is reacting strongly on its failure to meet the target of soliciting at least 1.2 million tax returns this year.
Although, CBR has been achieving its revenue targets for the last 10 consecutive quarters (according to official version "a remarkable record in the whole history of tax collection in Pakistan") but it has so far failed to materialise broadening of its tax base up to the desired level.
At the start of current fiscal year, the CBR high-ups were pointing out that they wanted to make an increase of 50 per cent in tax returns during this financial year.
Later on they revised downward the target and the return target under USAS was set at 1.2 million, which they have missed by a wide margin.
The CBR, according to Press reports, is "now considering stern action against non-filers of tax returns and it will utilise the existing data to apprehend big fishes".
According to CBR's data, there are 2.2 million NTN holders and around 1.7 million are considered to be genuine out of total NTN holders but the number of return filers are hovering around one million despite tax collection machinery's desperate efforts to broaden the tax base from last so many years.
"Now it has been proved that without showing deterrence, it is not possible to increase return filers in our country," was the angry reaction of a CBR high-up who added that "the CBR has done what it can do for voluntary compliance during the current fiscal year".
The CBR high-up revealed that during the second phase, the CBR had also started its efforts to put in place Income Tax Information Tracking (ITIT) system in order to apprehend potential tax dodgers and ITIT would provide an effective data base to tax collection machinery to ensure counter checking of income earned by non-filers and under-filers in years to come.
The ITIT system is being developed with the data gathered through PTCL, mobile phones, credit cards, WAPDA bills, hotels, clubs, car registrations, and other sources.
However CBR's ability for effective utilisation of available data poses a big question mark for the success of this scheme. According to the strategy devised by the CBR high-ups, the tax machinery is equipped with the data information in shape of ITIT to apprehend non-filers and under-filers with the help of adopting stern measures against them.
In the past CBR could not ensure an effective utilisation of such information and it's claims to do so now is highly doubtful.
The issue of voluntary compliance cannot be seen in isolation. The CBR's inability to enforce proper tax compliance has many reasons. The income tax code itself promotes tax evasion eg section 111(4) that gives a free licence to all to not pay a single penny of tax by just arranging remittance of their own untaxed money through normal banking channel at a nominal fee to be paid to a money exchanger in Pakistan.
Then there is widespread corruption in society which is antithesis of transparency a basis condition for voluntary compliance. A society where State itself encourages money laundering and routes to ill-gotten wealth voluntary compliance can never be achieved.
It is a curious paradox of our situation that while money for worthwhile industrial and business growth and public benefits is scarce, there is colossal unaccounted cash supply circulating in the economy in search of further undercover gains.
What is more tragic is that this social evil inherent in our tax system gets doubly compounded as it necessitates greater and greater tax burden on those who are law-abiding.
The most crucial problem faced by us in a fiscal reform programme is that of devising astute and stringent measures to curb tax evasion so that we can distribute the burden of taxes fairly and justly between different persons in the same or similar walks of life.
Honest taxpayers need to be safeguarded as day by day they are being disillusioned by the fact that tax evaders are paying nothing in connivance with their friends and mentors in the tax machinery.
This unholy alliance between tax evaders and corrupt tax officials has to be eliminated as a first and foremost step if we want to initiate any meaningful change in the tax system and encourage voluntary tax compliance.
The CBR, according to available data and indicators, is one of the most inefficient, incompetent and corrupt arms of the Government. Responsible for the collection of federal taxes, the CBR has miserably failed to introduce any tax intelligent computerised system, despite the fact that it has a market-wage oriented company, Pakistan Revenue Automation Limited (PRAL), at its disposal, to monitor the economic activities of corporate/business sectors.
This failure, coupled with corrupt practices (according to some estimates the national exchequer is deprived of at least Rs 200-250 billion annually due to unholy alliance between tax evaders and tax officials) has contributed to generation of enormous black money in Pakistan.
Large-scale tax evasion and the existence of a large black economy while resulting in colossal loss of revenue to the State, tends to reduce the built-in elasticity of a fiscal system to the extent that the tax evaded income is spent on goods and services that help to generate inflationary pressures and raise prices of real property.
In the context of the prevailing grave challenge to combat terrorism, together with money laundering crises, and the problem of ever-growing black money, (which according to official and independent experts is around Rs 1.8 trillion: about 70 % of the total economy), there is an urgent need to launch a well-thought for anti-money laundering law to prevent this huge money from becoming a lethal weapon in the hands of mafias who now in control of economy as well as the government.
Before launching such a law it is important to identify the sources generating black money. If such sources are not blocked, black money will keep on thriving notwithstanding the existence of stringent laws.
We will not be able to promote voluntary tax compliance unless sources leading to black money are eliminated.
A conservative estimate is that Rs 600 billion is generated every year in Pakistan by the parallel economy. Add to this, the black money generated through smuggling in goods and narcotics trade that is between Rs 300 billion and Rs 500 billion.
This amounts to a whooping Rs 1000 billion. When the presence of black money is so apparent, why its criminal accumulation and generation not revealed and the offenders punished, is a question which has been baffling the minds of honest citizens.
They ask, whether it is on account of lack of political will, or rampant corruption, or collusion of tax dodgers and the tax administrators at defrauding the revenue, or the political system or the ineffectiveness and defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties?
The tax evaders in connivance with corrupt tax officials have been causing colossal loss to the national exchequer. The recent convictions of some tax officials and/or their plea bargain with the NAB are ample evidence of this fact. This is only a tip of iceberg.
The rampant corruption still goes on unabated. In these circumstances voluntary tax compliance is a cliché. If a person knows that his competitor in the business is thriving by joining hands with corrupt tax officials, can he conduct business honestly? Soon he will be out of business. If one outlet is collecting sales tax on behalf of the government and instead of depositing it in treasury is sharing it with tax officials, windfall is enormous, much higher than meager profits in business.
This sales tax evasion is yielding personal gains to both the businessman and the sales tax officials. Can we talk about voluntary compliance in this milieu? The CBR will have to think and react realistically if it really wants to encourage and improve voluntary compliance.
Since the days of late General Ziaul Haq, money launderers in Pakistan hardly needed any international channel for money laundering. All support from the State was available at home. Even today, if anybody brings money (earned from drug trade or any illicit activity or even one's own untaxed money, hiring services of local money exchangers to depict it as remittance) in Pakistan through normal banking channels, the State Bank and tax authorities do not pose any question about the "source".
Drug traffickers and terrorist apparatus remit millions of rupees into the country every year from bank accounts maintained in various countries in fictitious names.
This money, in the hands of terrorist networks has made them invincible, besides making life harder and harder for those who earn from legitimate sources.
The recurrent appearance of amnesty schemes and money whitening instruments/modes show that the State has conceded the failure of its tax machinery in performing its main function of collection of taxes.
This nation has become addicted to easy money and such schemes/instruments have become a routine matter for them.
The people hooked on ill-gotten wealth/income for the last many years know for certain that after every two or three years, there will be an amnesty scheme giving them a chance to get their income/assets whitened by paying far less an amount than what they would have been required to pay under the normal income tax/wealth tax regime.
It is a tragic situation where the entire State apparatus is subservient to those who blatantly manage to hide their income and wealth. It is an ugly joke with those who are paying their taxes honestly at much higher rates than those offered to tax evaders (ranging between 5% to 10%) under such schemes. Can we think of voluntary tax compliance in the face of these ugly realities?
Even today when the Pakistani Government, under tremendous pressure from the United States and other States, is introducing anti-money- laundering law, the CBR is committed to giving a free hand to money launderers assuring them that no question would be asked if they remit their ill gotten-money from outside through banking channels and surrender the foreign currency to the State and get Pakistani rupees as encashment.
The CBR in its Letter No F.4(34)/ITP/2002 dated 29-02-2002 reaffirmed that "the Department would adhere to its policy of not probing the foreign remittance" brought into Pakistan by any "person".
In the Income Tax Ordinance 2001, promulgated on the dictates of IMF on 13 September 2001, a special provision [section 111(4)] has been inserted giving a free hand to money launderers that no question will be asked to them if they remit their ill-gotten money from outside through normal banking channels surrendering the foreign currency to the State Bank and getting Pakistani rupees as encashment.
This scheme presumably announced as a measure to bring huge foreign funds to Pakistani economy succeeded immensely as foreign reserves of Pakistan crossed the US $12 billion mark on 31st December 2003.
This scheme has been used liberally and cleverly by the Pakistani drug syndicates and tax dodgers to launder their money through State patronage.
The ugliest face of black money emerges in the corridors of power, political as well as administrative. No country other than Pakistan knows better the dangers of allowing money launderers and drug traffickers to get an upper hand.
We are at present not only facing a drug-abusing population of nearly 4 million, mostly young, but also many terrorist organisations, which by themselves are a threat to the government.
The fact is that a cartel or a group of cartels have become so powerful that they can work out agreements with terrorists and saboteurs to undermine the authority of the State.
Pakistan has been facing a perpetual crisis of fiscal deficit for the last many decades. Amongst many causes for this malady is the ever-growing size of the underground economy.
No serious effort has been made by successive governments, both military and civil, to determine the loss of revenue due to the existence of underground economy, not to talk of devising concrete counter measures to bring enormous untaxed money into the mainstream of economy.
Rampant corruption and unprecedented tolerance towards black money has made Pakistan a State where the very survival of public institutions is at stake at the hands of ruthless forces representing money power.
One of the worst consequences of black money and tax evasion is their pernicious effect on the general moral fabric of society. They put integrity at a discount and place a premium on vulgar and ostentatious display of wealth.
This shatters the faith of the common man in the dignity of honest labour and virtuous living. It is, therefore, no exaggeration to say that ill-gotten wealth is like a cancerous growth in the country's economy, which if not checked in time, is certain to culminate in its death.
There is a need for a wider plan to document the entire economy once and for all. The present government must remember that half-hearted measures, typical of tax bureaucracy, will not yield the desired results.
Firmness, consistence and steadfastness must be shown to counter money launderers, terrorists and tax evaders. Our survival now lies in freeing the society from the clutches of the corrupt.
It is not possible to determine the precise amount of revenue loss and size of black money or informal economy in Pakistan. According to an estimate by the World Bank, the country suffered a revenue loss amounting to 15.08 billion dollars in 1992-93 because of smuggling.
In 2003 its quantum was estimated at over 200 billion dollars. Another report estimates revenue loss, because of distortionary tax regulations and administrations, at Rs 40 to Rs 45 billion in 1989-90 and Rs 104 billion in 1995-96. Apart from direct monetary costs of corruption, other significant costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment, are destroying the very fibre of civil society in Pakistan.
According to figures released by CBR on 30 May 2000, the parallel economy is growing at an alarming rate of 22.93% per annum. Every fifth rupee transacted in Pakistan is black, according to the volume of black money generated in the year 1997-98 at Rs 600 billion or 15 per cent of Gross National Product meaning by that everyday tax fraud exceeds Rs 1.64 million.
This is not the final count. We have yet not accounted for kickbacks in foreign trade, smuggling (eg huge tax evasion in the name of Afghan Transit Trade) and foreign exchange racketeering, apart from narcotic trade and other criminal traffic.
Dr Aqdas Ali Kazmi, Joint Chief Economist, Planning Commission of Pakistan has stated in his research paper Tax Policy and Resource Mobilisation in Pakistan that 70 percent part of the economy consists of 36 percent 'pure' black economy, 18 percent exempted economy, 9 percent illegal economy, 4.5 percent unrecorded economy and 2.5 percent informal economy (unreported economy).
His study shows that the problem in low resource mobilisation is the rigid system of taxation, and emphasis of the government to increase revenue, ignoring the details of long-term policy measures.
Every now and then the State announces a tax amnesty scheme that favours tax evaders, smugglers, corrupt, extortionists, drug barons and criminals [presently it is available in permanent form in the shape of section 111(4) of the Income tax Ordinance 2004].
Such schemes are a spank for the honest taxpayers [making them appear as a foolish lot for paying taxes]. An extortionist in Karachi or Lahore can decriminalise his ill gotten money through such a scheme but the poor businessman who paid that extortionist due to shameless failure or connivance of law enforcement apparatus cannot even claim it as an expense in his tax return!
The situation needs to be corrected. The facilitation of whitening untaxed money should be restricted ONLY to genuine business investors so as to bring the capital back into formal sector by paying some percentage as tax (kuffara) and not for the criminals, corrupt and unscrupulous elements in society.
The Government, if really sincere to promote voluntary tax compliance, must announce Compulsory Public Disclosure of Assets Scheme requiring the following to make their assets and liabilities public:
-- High ranking civil and military officials
-- All the MNAs and MPAs
-- Judges of the superior and subordinate courts/members of Tribunals
-- Businessmen/Directors of all the companies who availed loans exceeding Rs 10 million from any financial institution
-- Professionals like lawyers, doctors, chartered accountants, engineers, journalists, consultants etc
The above privileged classes of society should act as examples for others. Their declarations can inspire the common people to pay their taxes honestly and it will help encourage voluntary compliance.
The State needs to wage an all-out war against burgeoning black economy, money power and corrupt politico-administrative structures. This war must start from the mighty classes, as suggested above, which alone can ensure proper and voluntary tax compliance in the country.
Pakistan needs to develop a permanent structure in all the institutions specifically CBR, Federal Investigation Agency (FIA), Securities and Exchange Commission of Pakistan (SECP) and State Bank so that the money laundering issue can be effectively tackled.
Special courts should be established and judges having expertise in financial and banking matters should be appointed, to hear money-laundering cases. The judges of such courts must be especially trained in the fields of accountancy, and money laundering.
There is an urgent need for introducing policy and structural changes in the banks. It is unfortunate that 'Benami accounts' are widely accepted in the public and private sector banks.
Presently, there are 28.8 million accounts with the Pakistani banks, out of which 14.8 million were opened against personal names whereas only 432,916 are liable to pay taxes.
The State cannot tap the real potential of revenue potential unless stringent measures are taken to combat money laundering and eliminating parallel economy through proper documentation. This will automatically broaden the tax base, besides freeing the society of many evils.
(To be continued)
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