'No low hanging fruits in taxation reforms,' Shabbar Zaidi, Caretaker Finance Minister Sindh

Earlier this week, BR Research had a morning meeting with Shabbar Zaidi to discuss the revenue position of the federal and provincial government in the current fiscal year and beyond.
Instead, the conversation took an interesting turn, and we ended up talking about the prospects of successfully using NADRA records, role of media in bringing taxation reforms and lack of seriousness on the part of local economics academia. Here are some of the many interesting parts of the conversation. Starting the discussion with FBR targets, Zaidi said the original target of Rs 2,300 billion plus was not achievable given current circumstances.
"It was an ambitious target and the measures that FBR had identified were not enough to achieve the target," Zaidi said, pointing to his earlier statements in the media that the full-year FY12 target could not be achieved. He added that budget deficit would eventually have to be curtailed by slashing development expenditure or by borrowing further. "Under the caretaker government the FBR should not do any tweaking to tax rates to meet their shortfall," the tax expert said.
Zaidi explained that as a caretaker set-up the government cannot take policy decisions unless there is some kind of emergency. "However in the meantime if they find out something very glaring where fundamentals reforms are needed then they can highlight it so that the next government can take it up," he said.
NADRA FACTOR Responding to a question on gaining possible synergies by linking FBR with NADRA and other kinds of records, Zaidi pointed to a number of technical lacunas in the actual process.
"The concept is right that NADRA records should be used. But at the moment our system is such that linking NADRA with FBR to net-in tax evasion is a herculean task," he said, adding the design of current taxation system is such that there will be many legal, practical and procedural hurdles in linking NADRA with FBR. "There are so many exemptions; then there is presumptive tax regime; there are immunities; there is zero-rating. So technically, I can spend the money, and that may be tracked using NADRA records or other means, but I do not need to pay taxes," Zaidi explained.
Elaborating his argument, Zaidi gave the example of agriculture income tax. "Agriculture income tax is not being implemented. I may have 10 million rupees of farming income but I don't have to pay taxes on them. So I can spend money, and I can travel to foreign countries 10 times a year, and FBR finds out through NADRA, I can always say that I have agricultural income," he said.
Zaidi says unless hurdles like these are not removed, the whole process of making use of NADRA will be a futile exercise. Given that there so many sectors that are either not taxed or under taxed, where does one start from and how do we justify that we are starting from sector XYZ and not sector ABC, asked BR Research.
"The problem is nobody wants to implement reforms," says Zaidi. "One party does not want to hurt the agriculturalists, other party will not like to tax businessmen and retailers," so how can there be taxation reforms in the country. "The question is how nationalistic, patriotic and deep rooted our tax policies are. The political mandate is confused and when people ask, politicians do not give them a complete picture," he added.
Zaidi said tax evaders whether they are from businesses involved in Afghan transit, or wholesalers and retailers, or exporters who under invoice their proceeds, they all have a vested interest in politicising about the whole tax issues without doing a single thing to resolve the problem.
"Political parties are not financed by corruption; they are being financed by donations from businessmen across the economy who in turn influence tax policy for their own benefit," he said. Zaidi also opined that agriculture tax is not a subject of any political party. "When political parties have almost collectively decided to keep farming sector out of taxes, then how can one expect a turn around? Has any manifesto or political party really walked the talk about agri and real estate taxation?" he said. "So it is not a question of low hanging fruits; the question is from where we are collecting Rs 2300 billion and where we are spending it," Zaidi said stressing on transparency and access to information.
MEDIA Zaidi laments the absence of serious economic journalism in the country. "There is intellectual corruption on the part of media. Media has politicised the economic and taxation issues," he said. Explaining his stance, he said the core issue of this country is not terrorism, nor is it army or politics; it's the failure to make economics and economic distribution a subject of discussion.
"Instead, the media should inform the public that these are the sectors that pay taxes and these are the sectors that do not. It should also inform the public of geographical distribution of tax collection and its spending," he added. The caretaker Minister stressed that the media needs to create public pressure for taxation. "Has the media ever gone to a cloth market, mobile market or a wholesale market or shopping plaza to raise hue and cry about their failure to pay their taxes," Zaidi said.
He pointed out that media firms are either happy digging out news related to politicians - as in which politician has paid how many taxes - or it is busy raiding Sheesha bars and parks for moral policing. But media has hardly ever joined hands with relevant tax authorities and raided any major market, which are one of the major hubs of tax evasion.
LAZY ACADEMIA The tax expert also blasted on the local academia, saying that they are also to be blamed for this failure.
"Academics run the economies world over. Pakistani academics are more interested in researching on McDonalds and KFCs, but our academia hardly ever talks about Student Biryani which is quite possibly an equally big local brand," said Zaidi. "Tell me how many Pakistani academics released their papers on The State Bank of Pakistan's quarterly reports," he asked rhetorically. He added that Pakistani universities are happy teaching international success stories and copy-paste international policy matters on local issues instead of understanding local economy and developing home-grown solutions.
"Do regulators and government officials ever cross the roads and personally visit the markets and try figure out the intricacies of the problems at hand and their solutions? Our corporate, taxation, and other regulators are divorced of the market, and so is our academia, many of whom only read IMF reports to arrive at conclusions," he said. Zaidi ended the conversation with a dangerous warning. "All major political parties are under a conceptual alliance to keep the taxation system as it is. But this won't last for long. It will be a disaster," he said.