Chairman Federal Board of Revenue Shabbar Zaidi referred to the tax system as 'extortionist' while acknowledging that voluntary compliance has had limited success (accounting for only 5 to 10 percent of total revenue collected), an observation that applies to taxpayers in developed and developing countries alike; he added that the tax system relies up to 90 percent of all collections on withholding taxes and deductions. Disturbingly, withholding taxes are mainly imposed on services and products in the sales tax mode and not on income (though they are credited under the head of direct taxes whose incidence on the rich is greater than on the poor) which has further burdened the average householder.
Shabbar Zaidi's solution to FBR problems/lacunae is greater automation; undoubtedly, it is an absolutely essential tool to collate and also analyse data as well as documentation of the economy. However, a tax collection system or for that matter any system, cannot totally take away the role of the collector and therefore there is a need to change the culture of the FBR which is easier said than done as successive administrations have failed in this regard, in spite of being fully aware of the problem. One way could be to raise the salaries of FBR officials, currently being paid according to government pay-scale, which is considerably lower than the market rate. In this context, it is relevant to note that the Motorway police get paid higher salaries than their colleagues working in cities, with charges of accepting bribes by the former rare in marked contrast to the latter. It is therefore quite conceivable that salaries prevalent in the market may reduce corruption within the FBR.
Zaidi argued that the burden on the four main sectors notably manufacturing, agriculture, services and retail trade should be according to their contribution to Gross Domestic Product, adding that manufacturing bears the major brunt of the taxes which is leading to de-industrialisation. While not agreeing with this principle as taxes are levied on a range of factors including which sector/sub-sector contributes the most to a stipulated objective, e.g., a raise in exports, obviously Zaidi's reference was to the fact that the constitution bars the FBR from collecting tax on farm income as it is a provincial subject while in the case of retailers (especially small and medium sized) the FBR is hamstrung as they are bereft of proper documentation. With respect to farm income tax, the solution lies in incentivizing provinces to charge the same tax rate on farm income as that payable by other sectors and the government can begin this exercise in the two provinces it controls notably Punjab and Khyber Pakhtunkhwa. While Sindh may not follow suit at present, however, it must be borne in mind that Sindh has been the most successful in raising its collections from a tax on services, which is again a provincial subject and one would hope other provinces too would exhibit such stellar performance soon.
The FBR failed to meet the unrealistic targets set by the economic team leaders with the International Monetary Fund because (i) historically imports contributed nearly 50 percent towards FBR tax collection and the targeted decline in imports to conserve and build forex reserves resulted in loss of massive revenue for the FBR; and (ii) with the economy shrinking any attempt to raise tax collections would necessarily entail raising existing taxes. To maintain that the tax collections have risen because the hitherto leaked income has been brought into the tax net is unfortunately not borne out by facts as the onus remains on existing taxpayers and the new tax return filers have not yielded significant revenue.
The way forward, apart from automation, is to reform the tax structure, raise the remuneration of tax officials and tweak existing fiscal and monetary policies to jump-start the economy.
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