The CBR, in the past, was brutally politicised by the successive civilian governments in Pakistan. The high-ranking postings in CBR were made to serve as handmaid of the political masters. In return, CBR's high-ups served the "interests" of their political masters even beyond their expectations! They proved more loyal than the King.
The case of awarding contracts to Cotecna, (a Swiss company) for kickbacks using the Chairman CBR's office, during the Benazir government, presents a classic study of "close connections" between the political rulers and tax administrators. It shows how CBR's high-ups deprived the nation of billions of rupees to please their political masters. In the process they made a "fortune" for themselves as well.
It is a matter of record that one ex-Chairman CBR was declared a proclaimed offender in a criminal case. Yet another Chairman joined hands with the rulers of the day. He issued numerous beneficial notifications for the benefit of the industrial units of his mentors. On his daughter's marriage the businessmen and high-ranking officials of CBR gave "gifts" worth million of rupees. Another mighty tax man, who owns (through family) a number of steel re-rolling mills, during his tenure as Chairman CBR his mills, supplied defective products to a foreign investors' power plant. Due to this act, the image of the country was badly tarnished in the eyes of foreign investors.
There were numerous cases to confirm the fact that due to CBR's policies of favouritism under his command, national exchequer suffered losses of billions of rupees, yet the mighty NAB released him just for few million of rupees and gave him free hand to continue his business empire. The so-called process of accountability proved yet another farce in Pakistan vis-à-vis the episode of the arrest and release of ex-Chairman CBR, who was equally popular with both Benazir Bhutto and Nawaz Sharif! He loyally served both the regimes. Many others got lucrative consultancy assignments from CBR after retirement from the post of chairmanship.
This is the story of CBR in a nutshell. This body is nothing but synonymous of mismanagement, corruption and inefficiency. A political connection was the name of the game in this organisation during the civilian rules of Benazir and Nawaz Sharif. The purpose was dual; one to get lucrative postings and second to make "huge money" in the process of pleasing the rulers of the day.
REVAMPING OF TAX MACHINERY: It is a sad reflection on our fiscal management. On taking over power by the military under General Pervez Musharraf, it was hoped that the CBR would be free of outside pressures, but unfortunately even during the last five years the inefficient and resourceful are still holding key posts in the CBR, especially where the so-called reform process is being controlled [it involves colossal funds as recently US $ 123 million procured from foreign donors). They have even managed to hoodwink all the regimes, civil and military like, by shifting the blame of low revenues and massive tax evasion to the traders and businessmen. In fact, they are the real culprits. They have been encouraging the profit-hungry traders and businessmen not to pay taxes but just give them their due "share". The mass scale evasion of taxes is not possible without the connivance of tax administrators.
The tax-evaders and tax administrators together constitute a mafia that has made Pakistan a haven for tax dodgers and plunderers of national wealth. The tax administrators have been encouraging drug traffickers and criminals to bring as much money as they want to Pakistan through normal banking channels and no question about their "source" would be asked. This facility, they claim, is necessary to revive the economy.
Such a lethal prescription for revival of economy has destroyed the entire social fabric of the society. The inner story is that the mafia-like operations and collaborations exist between the tax administrators and the drug barons, criminals and tax evaders. Some of CBR's high-ups are directly connected with these people and policies designed and implemented by them are to protect such elements.
The outcome is total destruction of our socio-economic system. The mighty comprising unscrupulous politicians, tax evaders, drug barons, plunderer of national wealth, money launderers and corrupt officials in civil-military bureaucracy are ruling Pakistan while the rest of the people are a helpless lot. The policies of appeasement towards unscrupulous traders and businessmen and tax evaders in the past were not without any personal interest. The policy-makers in CBR were properly "compensated" for this kindness.
Things have not changed even under the Musharraf regime and so-called civilian rule which is working under the shadow of military uniform. A well-designed conspiracy is being hatched to distort the image of the present regime in the eyes of people through harsh, illogical and unfriendly tax measures e.g. 15% sales tax on commodities of common use and unprecedented concessions and encouragements to foreign companies to dump their consumer goods in Pakistan at the cost of domestic industry.
Behind the scene, unprecedented benefits are secured for the tax dodgers, criminals, plunderers of national wealth and drug barons in the name of tax reforms. The honest taxpayers are discriminated when these undesirable elements are allowed not to pay even single money by remitting their ill-gotten money through banking system (sic).
They first send their untaxed money outside through hawala and then get it back through normal banking wire transfers, perfectly white and immune from any tax inquiry. This is what voluntary compliance means in Pakistan. The CBR has been instrumental in encouraging black money in Pakistan. It has been a tool in the hands of trio of corrupt politicians, unscrupulous businessmen and power-hungry civil military bureaucrats. It has been serving their vested interests to extend enormous tax benefits through the infamous SRO system.
It has been an organisation of the incompetent, corrupt and inefficient to serve the rich, mighty, drug barons, plunderers of national wealth and money launderers.
There is an urgent need to revamp the CBR. It should be an autonomous body free of any outside interference/pressures. It has to be ensured that taxes wherever due are collected without any exception. The Government should scrupulously respect CBR's autonomy and the Board should be insulated from political pressures.
Delegation of full financial powers to the CBR on the lines of the State Bank of Pakistan is the need of the hour. Such powers are absolutely necessary if the Board is to discharge adequately its responsibility of running the tax apparatus efficiently. The time is now ripe for making CBR as autonomous and independent body free from its secretarial workings.
The Government while scrupulously respecting its autonomy and independence may enjoy powers to issue directions of a general nature in writing, wherever necessary. Our economic survival now depends upon forming efficient tax collection machinery, manned by skilled personnel, professionals and headed by thoroughly scrupulous persons. The process of depolitisation should be a simultaneous exercise making CBR a truly independent and financially autonomous organisation.
No meaningful change can be brought in the prevalent tax culture unless CBR is converted into a politically insulated institution with complete autonomy and structural changes and accountable to an independent judiciary. The prerequisite for any tax reform in Pakistan is first setting the house in order ie revamping of the entire tax machinery making CBR as autonomous body like SBP.
TAX INTERLLIGENCE SYSTEM (TIS): Taxation requires pragmatic thinking and is most effective when developed from the practical and possible agenda for building a sound tax administration, it is necessary to start its foundation from a Tax Intelligence System (TIS).
The widest possible taxpayer base has to be identified for any tax to be equitably spread across the whole taxpayer population. Even a small tax at a lower rate spread over a wide taxpayer base will invariably yield more revenue than a higher tax on a narrow base. How Pakistan can succeed to raise the number of return filers and encourage voluntary compliance when it has no information/intelligence system/unit to maintain the taxpayer roll? The efforts through National Document Survey to build a taxpayer roll are theoretically sound, but the strategy to implement them are totally illogical and not in conformity with the ground realities of Pakistan.
TIS is the area that should be given the first priority in improving tax administration. As far back as 1958, Professor Stanley S. Surrey of the Harvard Law School pointed out the advantages of building up a comprehensive taxpayer roll:
The beginning of tax administration lies in seeing that the taxpayers are on the tax rolls. Unless the tax authorities know who are the individuals or units subject to the tax, the whole machinery of administration must necessarily function with incomplete coverage of the taxable area... The important tasks are to select among the various sources only those which promise to be productive of names likely to be taxpayers under the tax in question (thus in some places telephone books may be very useful, while elsewhere these lists may contain only more non-taxpayers than taxpayers); to gather only so much information as can be efficiently processed; and to devise an efficient system for correlating the selected information in a continuously current form usable for enforcement purposes.
Note: The CBR has realised the importance of preparing taxpayer roll in 2000! It confirms that we are at lease 40 years behind from the rest of the world in tax administration reforms.
The CBR, responsible for the collection of federal taxes, has miserably failed to introduce any Tax Intelligent computerised system, despite the fact that it has a market-wage oriented company, PRAL, at its disposal, to monitor the economic activities of corporate/business sectors. A TI, a computer-based system, has been proved useful in a number of countries as it:
-- monitors the "large taxpayers" that is all the companies registered in a tax jurisdiction.
-- identifies the most productive centers of information from which significant data can be extracted.
-- uses simple computer technology and can be set up quickly. [In Pakistan CBR and PRAL have made very effort to make it complicated and difficult to work]
-- avoids any tax specific and can be adopted to any type of tax.
-- easily extendable to all types of taxpayers.
Tax Intelligence System (TIS) is not a new idea. It was implemented even in the countries like Botswana in the 1980s and helped in its rapid increase of diamond revenue as well as proved extremely beneficial for other areas of the economy to expand simultaneously. The Tax Intelligence System concentrates on third-party information that continuously originates from different areas of the government and quasi-governmental institutions to the tax department.
The Tax Department of Botswana in 1983, on the advice of IMF, revived its investigation division and the Intelligence Unit that specialised in gathering information on corporate activity. Previously all information received was maintained manually in the form of registers, as is the case in Pakistan. The problem faced by the Tax Department of Botswana was the same as is now faced by the CBR; the flood of information it was trying to process was too great and the system became to slow, prone to errors. They found an efficient way to handle it through computerisation. Did IMF forget its advice to Botswana in 1980s whiled dealing with Pakistan in 2000? We have better human resource in Information Technology (IT) and yet even could not achieve what a small African State managed as early as in 1985! It is indeed shameful and eye-opener for the CBR stalwarts and wizards sitting in the Ministry of Finance.
There is an urgent need to set up TIS in Pakistan to promote voluntary compliance and maximise the scope the revenue collection. Its salient features inter alia to cater for:
-- a computer network for intelligence work. It should be able to record and process a large volume of information.
-- it must increase dramatically the number of new persons that should be registered as active taxpayers and who start filing tax returns and paying taxes.
-- it must expose registered taxpayers who need to be investigated.
-- its impact should reflect in the increased amount of taxes collected.
However, it should be kept in mind that the introduction of computers ipso facto will not drastically change the way present system operates. The computer system merely imitates the manual system. In Pakistan, we are still keeping record manually. The CBR never thought to devise an integrated programme for computerisation in the tax departments. The result is that registers are still maintained, in tax circles/ departments in shabby ways.
To exploit the capabilities of the computer network fully, a completely fresh conceptualisation is required in CBR and preferably not by the tax officials, but by system analysts. The knowledge of the tax officials in respect of the user requirements is to be successfully fused with the skills of the computer programmers. Independent professional programmers should be contacted and given the task of building a relational database ie a database in which the data relationships could be established electronically.
The tax officials should be left with the task of defining the scope of the project and the method of selecting, collecting and processing the data. The main purpose of the project should be of creating a database that could record and process significant information in respect of taxpayers, both existing and prospective. It is necessary to determine what is significant and to devise a selective basis for gathering data. This approach will make the work of the CBR proactive rather than reactive.
SIGNIFICANT INFORMATION: The problem encountered by CBR is not how to gather information or the lack of it but its abundance. Information can be gathered from many sources, e.g. the telephone directory, the list of electricity consumes, the government gazette and endless other sources including Internet.
The question is: How useful are these sources? The mere fact that a person has a telephone or pays electricity or has been issued with a trading licence does not in itself determine whether that person may eventually become a taxpayer. Information should be processed on the basis of its usefulness. The information collected through National Survey for Documentation of Economy in certain areas of selected cities can be useful if processed from this perspective. Otherwise it will remain bulk of paper trash without any useful purpose. Therefore, several factors, including the following, are to be considered in order to consider it as significant:
-- Information would be most useful it if related directly to expenditure or income.
-- If it related to the ownership of commercial property, like farms, commercial vehicles, etc, there has to be an expectation that these assets would eventually produce assessable income.
-- Information would be considered significant if the time lag is short between its receipt and the consequential registration of the new taxpayer. Statutory provisions placed time limits on the power of the assessing/tax officials to impose additional liabilities on taxpayers and this meant that old information soon loses its usefulness.
-- Information collected is also needed to have at least the following components:
1. a name (and if possible the address) of a person;
2. a description of the type of transaction ie whether purchase or sale or a record of the ownership of property;
3. the date of the transaction;
4. a description of the property or the service that was transacted e.g., house property, contract payments;
5. a monetary value above a stipulated threshold, depending on the type of property or service.
The objective
The objectives in setting up the database should be:
-- to record the "significant" financial transactions that are entered into by companies during a tax year;
-- to consolidate into one record all the information from different sources relating to one taxpayer/person according to tax years;
-- to send a consolidated report to the field officer in the tax division at the end of the tax year or during the relevant period.
-- to provide quarterly and annual reports to senior managers (e.g. commissioners/collectors of the data recorded and processed;
-- to be flexible enough to provide special reports on an ad hoc basis.
(TO BE CONCLUDED)
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