Revenue generation by a political government is always accompanied with issues and opposition, but a deeply rooted political system is capable of implementing policies successfully. The government achieves various economic and social goals and improves efficiency by introducing reforms in tax administration and the collection system.
When a government taxes people, it has to provide benefits in return, priorities to improve the socio-economic condition of the masses, welfare, health and education. Increased government revenue also support to improve infrastructure, which ultimately benefits domestic commerce. The first and most essential purpose of taxation is to share the burden of the state fairly among all individuals and families. Unless the allocation of the burden is generally accepted as fair, the social and political fabric of a country is weakened and can be destroyed.
In the World Bank's ICA surveys, tax rates were identified as a major constraint by 37 percent of businesses overall; 27 percent specifically identified the tax administration (TA) as a major constraint. Figure 1.1 shows that tax rates and administration are two of the top six constraints identified by businesses in nations outside the Organisation for Economic Co-operation and Development (OECD). This trend is consistent across all the regions of the world, as shown in figure 1.2. In order to improve the investment climate, it is essential that the burden imposed by tax policy and its administration be lightened.
The present government has to reform many things, including tax reform, as an assignment given by the donor agencies, especially the International Monetary Fund (IMF), the World Bank and Asian Development Bank (ADB). It is notable that whenever Pakistan goes for a bailout package or draws loans from these institutions, the priority task attached is the imposition of a certain type of tax or tax reforms.
In this regard, the government of Pakistan was previously trying to introduce the VAT system but due to opposition from almost all sectors of the economy, especially from the business community the idea of implementing VAT has been transformed and now the government on the conditionality of IMF, is struggling to introduce the RGST (Reform General Sales Tax).
According to rough estimates, revenue to the exchequer through the RGST would be approximately Rs 40 to 60 billion only, this is clear to the IMF also. But the structure of Pakistan's economy is complex and it fails to achieve the required targets either due to lack of political will or corruption in the government bureaucracy. Corruption is a major problem in the country. People from all walks of life are extremely worried about it, as it has played a major role in the tragic economic and social degradation of the country.
Corruption by tax officials often renders control of evasion difficult. Tax administrations resort to various means for plugging in the scope of evasion and increasing the level of enforcement. Corrupt tax officials cooperate with the taxpayers who intend to evade taxes. When they detect an instance of evasion, they refrain from reporting, in return for illegal gratification or bribes. Corruption by tax officials is a serious problem for the tax administration in a huge number of underdeveloped countries.
In the past, a Task Force on Tax Administration was constituted which investigated and recommended, in detail, measures to improve significantly the ability of Pakistan's tax machinery to collect taxes efficiently, with integrity and without undue compulsion of taxpayers. The Task Force focused on human resources, business process and organisation, corruption and information management. According to the Task Force report, a five-point scale was used where I stood for 'very little corruption' and 5 for 'extremely widespread corruption'.
The results are presented in Table-1 below
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Table-Corruption Ratings of Different Organisations
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Sr. No Organisations Rating
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1 Police 4.20
2 Lower Courts 3.30
3 WAPDA 3.21
4 Income Tax Dept. 3.17
5 Land Revenue Dept. 3.15
6 Customs Dept. 3.04
7 Passport/ID Card Depts. 3.04
8 Municipal Corporations/Development
Authorities 2.80
9 Sales Tax Dept. 2.75
10 PTCL 2.61
11 Government Hospitals 2.46
12 Government Schools 1.96
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Source: Report of the Task force on Reform of Tax administration
Pakistan also ranked at 143rd with a score of 2.3 in the Corruption Perception Index (CPI) 2010.The results in Table-2 indicating that a fairly significant part of revenue is lost due to corruption.
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Table-2: Perceived Revenue Lost by Departments
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Organisation Revenue Revenue
Earned Lost
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Income Tax Dept. 36% 64%
Customs Dept. 52% 48%
Sales Tax Dept. 55% 45%
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Source: Report of the Task force on Reform of Tax administration
If these estimates are taken as true, then the amount of revenue loss can go over Rs 1,519.433 billion (for the fiscal year 2009-10) in the three heads only, that is the Income Tax, Customs and Sales Tax departments.
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(Figures for 2009-2010 in Rs billion)
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Revenue Revenue Total
Organisation Earned Lost Revenue
% age Pak. Rs % age Pak. Rs could be
collected
Pak. Rs
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Income Tax Dept. 36 520.4 64 925.155 1445.556
Customs Dept. 52 164.9 48 152.215 317.115
Sales Tax Dept. 55 540.3 45 442.063 982.363
Total=Rs 1225.6 Total= Rs 1519.433 Total=Rs 2745.034
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Corruption is a major problem in the tax administration, leading to heavy loss of revenue, on the one hand, and harassment of the taxpayers, on the other. Major causes of corruption in the tax administration are poor compensation, vast discretionary powers, lack of accountability, and complex procedures. Apart from corruption, other factor causing revenue loss is smuggling, which is not only causing revenue loss but also hurting domestic industry.
On the other hand, only trade and industry contribute significantly in the total tax collection of the FBR, which will be the main victim of the RGST. Rising trend in POL products, along with inflation, will also put more pressure on the poor and fixed income group.
If the government takes austere measure and shows political will to improve governance and eliminate corruption in the tax administration it could easily raise revenue more than the amount expected to be collected, through the Reform General Sales Tax. Therefore, it would be appropriate to eliminate corruption, improve governance, and privatise the bleeding Public Sector Enterprises (PSEs), rather than forcing an imposition of the RGST.
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