“If the government has no plans to reform the Federal Board of Revenue (FBR), then it might as well privatise it.” So began a satirical piece on Pakistan’s tax machinery published in this space in March 2016. Who would have thought that “privatising FBR” would become the hallmark of tax administration reforms in the ensuing years?
In an interview published in this newspaper’s Brief Recording section yesterday, the Finance Minister hopeful Dr. Miftah Ismail, said if his party wins the upcoming general elections, he will privatise various functions of the tax department.
Under the recently amended law, the FBR will now share its data to Nadra, and Nadra will run its analytics for the FBR to analyse the spending pattern of taxpayers and non-taxpayers, and based on that the tax department will (hopefully) expand the tax base.
“Notices should not be sent by the FBR. It should be sent by private company or another agency. And once the person becomes a tax payer, the file should be transferred to the FBR. Eventually I think, the FBR’s audit should also be privatised. You can also privatise customs at some stage,” Miftah said with an undertone that screamed: FBR is beyond reforms.
Miftah isn’t the first one to express disappointment over Pakistan’s biggest white elephant. Even as early as mid-80s, the report of the Tax Reforms Commission (TRC) headed by Qamar ul Islam had called the then Central Board of Revenue - FBR’s predecessor – a hotbed of corruption and rent seeking.
To reduce the opportunities of rent seeking, the revenue administration was later asked to resort to the principles of self-assessment, because it allowed for an arm’s length functional administration with minimal contact with taxpayers.
The self-assessment scheme was also thought to be business friendly, and hence won even more hearts during the General Musharraf era who also found it an appropriate measure to legitimise his position by wooing the business community. “Even the audit function was effectively abandoned in 2005,” recalls Ehtisham Ahmed of London School of Economics in a 2015 paper published in the book titled Pakistan: Moving the Economy Forward (eds Amjad R. & Burki S.J)
But as Ehtisham notes in an earlier 2010 paper, “the no-questions asked self-assessment system operating in Pakistan generated widespread gains for the taxpayers, to the detriment of revenue collection.” It is therefore natural to doubt the stop-gap reform measures often termed ‘practical’ by the accountants’ community who have historically been advising the government on taxation affairs.
Miftah and the current TRC members are very optimistic about the once in three year composite audit. But given the quality of FBR’s audit wing, the three-year lag, and alternate dispute resolution mechanisms (where a small group of people will get to negotiate tax liabilities), there is a risk that history will repeat itself and in ten years historians will again write that Pakistan tax policy in 2018 “generated widespread gains for the taxpayers, to the detriment of revenue collection.”
The notion that privatising the audit function will help resolve these issues is also a misplaced stop-gap measure. It is stop gap because privatisation of such key functions can and will erode the organisational wisdom and memory of the revenue department.
Moreover, unless the tax department is unchained from the vested interest and if not ideally replaced with a new tax administration department altogether – as Peru did in early 1990s – the privatisation of audit will reap little fruits. The tax department has outsourced audits to private sector audit companies, and the measure has not resulted in higher revenues. Without wholescale reforms, the privatisation of audit may reduce corruption in direct-mode but will increase corruption in indirect-mode via a third party.
Instead of resorting to stop-gap measures, the government, whoever takes the reins next, should think of how to start fresh. Perhaps, the VAT could be brought to the fore again, and given to a new agency altogether created just to collect (initially) VAT, and later all taxes at some stage. The agency should have adequate representation from the provinces as well. The success of Sindh and Punjab revenue board/authority shows that new administrations can progress quickly if they are given clear direction and kept free from vested interests amongst other facets of institution building.
Lastly, the notion of creating a separate minister for revenue - as is the case in China – should be explored further. In the post-Dar era, Haroon Akhtar Khan was first given the status of PM’s Special Assistant on Revenue and later elevated to the position of a federal minister. This segregation of duties should be explored further by whoever forms the next cabinet; the revenue minister can be given the sole responsibility and made accountable for the performance of tax policy and administration. This can reduce the load on the finance minister, and create a dedicated focal to focus on the most important economic reform that this country needs.
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