The quandary of tax collectors: inner story of 'wonderful performance' of CBR-I

In a Press release issued on May 9, 2006, the Central Board of Revenue (CBR) claimed that "it has paid sales tax refund amounting to Rs 29.2 billion till April 2006, clearing nearly all the backlog of cases, which were pending for the last so many years".
This clarification was in response to a news item published in the Business Recorder on May 8, 2006, wherein the following allegations from the exporters were highlighted:
-- "The Central Board of Revenue (CBR) has stopped payment of duty drawback and sales tax refund to the exporters on their consignments till June 30. The exporters, who approached CBR for sales tax refund due in May, were told to wait for payment till the closing of the current fiscal year."
-- "The move is basically meant to have maximum money available for CBR to help meet the revenue target for the outgoing fiscal year. The exporters have already been getting duty drawback and sales tax refunds on their consignments with a delay of three to four months".
-- "Duty drawback and sales tax refunds, which the exporters claimed in January last, are yet to be paid. One of the aggrieved exporters, who was told by the Peshawar Collectorate that he would be paid refunds on sales tax for December 2005 after June 30, termed CBR action uncalled for. He said that the CBR should improve its working and, instead of relying on refunds' money for revenue target, should take measures to plug tax evasion"
-- "The Collectorates have been asked by CBR to stop payments of refunds and duty drawback. The exporters file claims for refunds on sales tax paid on raw material, utility bills and other inputs for each consignment and, as per rules, payments become due within 60 days of filing the claims. The refunds involve huge money, and delay in payment by CBR creates liquidity crunch for exporters".
-- "It may be noted that CBR always takes credit for updating refund payments to the exporters and its officials termed it as an outcome of tax system reforms programme. However, the exporters have a different story to tell. They say that nothing has changed, and they get refunds with five to six months delay".
The CBR in its Press release went on to claim that "it has all along been following policies for reducing the business costs and improving the liquidity profiles of business through paying expeditiously their refunds.
The payment of sales tax refunds needs to be appreciated, as all major exporting sectors were zero-rated since June 2005. Consequently, no refund should have accrued, as all major taxable inputs, including utilities, have been zero-rated".
"The impression given in some sections of the Press that refunds have been stopped to show greater growth in revenue collection shows ignorance of the existing sales tax laws. Besides, the claim that artificial tools were deployed to jack up the revenue growth in sales tax is a closed chapter", says CBR's Press release.
The CBR claimed that "growth in sales tax collection has been registered due to prudent fiscal policies, having no locus vevindi with refunds. In the zero-rated regime, there are fewer taxable inputs. Even for their refunds, the Board has made tariff as well direction-free systems solutions. The board has exempted sales tax on gas and electricity of more that 1600 units upfront through notification. Similarly, for the refund of packing material, the fast track channel has been assigned the payment without any manual scrutiny.
As a result of special exercise to clear the backlog, sales tax refund of Rs 29.2 billion has been paid up till April 2006 for the refund claims which were pending for the last so many years. Similarly, the refund payments made though fast track channels involved in packing materials etc used in the supply of all zero-rated sectors have been more than Rs four billion.
There has been special emphasis on the sanctioning of refunds in transparent manner. The availability of data on CBR website regarding refunds status, dates of payment of refunds etc depicts the Board's trust in its transparent mode of payment of refunds. This information, shown on real time basis on CBR website, also portrays an efficient and trustworthy image of the sales tax set-up".
"At the same time, the need for extra vigil can never be denied as the refund can be paid only of the tax already collected.
The collectors of sales tax are accordingly taking precautions to verify the input tax claimed as refund through risk based computerised parameters, eliminating the staff discretion, in order to pre-empt any impropriety in processing and sanctioning of refunds claim. Thus, refunds shall be paid only if the refund claims are cross-matched with corresponding input invoices. This cross-matching may, at times, results in delays as exporters and their suppliers don't take necessary precaution while furnishing data relevant to their refund claims", the Press release added.
The Press release issued by the CBR is factually incorrect. It is a matter of record that growth in taxes is due to heavy imports [Pakistan has record current account and trade deficit this year] as sales tax and income tax are collected for all the commercial and some industrial imports. Blocking of income tax and sales tax refunds of various sectors is an undeniable reality.
In banking sector alone income tax refunds of billions of rupees are still stuck up. It is a matter of great concern that in the presence of these realities, the CBR is making tall claims of transparency and is hiding facts. It is not presenting the true picture to the public.
The persistent manipulation of revenue collection figures by CBR is a cause of grave concern. Time and again the independent analysts, the Finance Division and foreign donors have expressed their apprehensions, but neither the CBR nor the Auditor-General of Pakistan has ordered any inquiry into the matter. The accumulation of refunds is a permanent feature as it is being used to manipulate revenue collection targets.
Never ever CBR disclosed in its publications and publicly how much undisputed and established refunds were payable on the closing date ie 30th June, which needed to be subtracted from the gross revenue receipts to record the correct revenue collection. It only shows the actual refunds issued, whereas accrued and ascertainable liability of refunds should also be taken into account to reflect the true picture of net revenue realised during a financial year.
It is strange that Chairman CBR, who is a foreign qualified chartered accountant, has also ignored this established norm of accounting.
According to CBR's own admission [statement of Chairman CBR before the Public Accounts Committee on 16th November 2005] refunds due to the banks as on 30th June 2005 had not been paid and these would be settled by issuance of bonds. The withheld duty drawback claims of Rs 5.7 billion which were due on 30th June 2005 were paid in the first half of financial year 2005-06. In respect of other established and undisputed income tax, sales tax and customs refunds at least Rs 15 billion due on 30th June 2005 were delayed. It means that collection for the financial year 2004-05 was overstated to the extent of Rs 20 billion at least.
In fact undisputed refunds due to the banks to the tune of Rs 6 to 10 billion as on 30th June 2005 have yet not been paid. It exposes the claim of the CBR that it exceeded the revenue target for financial year 2004-05. Had it paid undisputed refunds of Rs 15 billion, the collection would have short by at least Rs 10-12 billion. This is the truth behind the so-called claim of "exceeding the targets" by the CBR.
The Public Accounts Committee, before whom the Chairman of CBR on 16th November 2005 claimed to have exceeded the targets, should take serious notice of this manipulation on the part of CBR and strict action should be taken against those who withheld the bona fide refunds to show "extraordinary performance" and receive awards.
Since the CBR has failed to clear the backlog of refunds due to banks, according to Chairman CBR, it has approached the Finance Division to issue bonds. In the past such an exercise was done with clear promise on the part of the CBR that in future such a situation would not happen and it would pay refunds, if any, from its collection. Once gain the CBR has failed to keep its promise.
In his meetings with Commissioners of Income Tax in recent months, the Chairman CBR directed them to clear all the refunds, except for banks which are "to be dealt by issuing bonds". It is a pity to note that banks have been deprived of refunds of billion of rupees by data manipulators of CBR, who by not issuing these refunds reported higher figures of collection for the last many years. And they were not treated at par with other taxpayers who received cash refunds during the financial year 2005-06.
These refunds are even pending till today and there in no hope that the same will be issued till June 30, 2006. The banks will have to wait for bonds, if at all these are issued. The issuance of bonds will increase the burden on State Exchequer, which is already facing difficult situation in the wake of devastation caused by earthquake of 8th October 2005 and rising price of POL products.
Why the nation should suffer financial burden due to blatant manipulations of CBR high-up. Had the CBR issued all the refunds due on 30th June 2005, This situation would not have happened. But then how "extraordinary" performance reward could have been claimed!
The CBR has a history of overstating the revenue collections by manipulating the figures. Gross misreporting of fiscal data to the International Monetary Fund (IMF) in December 1999 exposed our respected CBR stalwarts (sic). Subsequently, a commitment was made to the IMF to review the fiscal data from the financial year (FY) 1989-90 onwards.
The data compiled for FY 1994 to FY 2000 confirmed that tax revenues were inflated by Rs 5.2 billion. The tax collectors (data manipulators is a more appropriate term for them) tried to manipulate the figures to show higher tax collections and the nation had to pay a heavy cost for it (not only in terms of fine paid to the IMF) but by further tarnishing our image in the international community that nothing is transparent in our society.
An official document published in an English daily [Business Recorder] on 8th January 2002 unveiled a serious case of jugglery of figures on the part of the CBR stalwarts. It revealed that refunds of Rs 37 billion were taken into income tax collection to show total income tax receipts of Rs 127.445 billion for the financial year 2000-2001.
These refunds were due to only one sector that is banks sector; meaning by that actual collection figure was much lower than what was reported. This manipulation was done even after serious reprimand from the government which paid fine to IMF for such a lapse in the immediately preceding year.
It is well-established that the CBR has not learnt any lesson from above episodes and is bent upon to give a bad name to the country. The recent effort to show higher figure of tax collections by withholding refunds due to the exporters and banking sector is yet another episode. It is a sad reflection on our fiscal management.
The CBR data manipulators have even managed to hoodwink the government of General Pervez Musharraf by shifting the blame of low revenues on massive tax evasion on the part of 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.
It is an established fact that despite resorting to all kind of highhandedness, data manipulation, harsh tax policies and unjust withholding taxes, the CBR has failed to improve the tax-GDP ratio. It has dropped to the level of 9 per cent for the financial year 2004-05 after hovering in the range of 10.5 to 11.5 during the last decade.
The burden of ever-increasing presumptive taxes (which are nothing but indirect taxes), levied under the Income Tax regime, has been shifted from income earners to consumers and clients. It is pushing millions of middle-class people towards the poverty line. These presumptive taxes have distorted the whole tax system, destroyed the economic growth and made the consumer/client (specially poorer section of society) the ultimate sufferers. Moreover, these despotic, short-term, myopic and figure-oriented measures have even failed to bridge the fiscal deficit.
(To be concluded)