If government is really serious in tackling the issues of revenue, it must give due importance to the FBR as the most important earning hand of the country as an institution, instead of accommodating the vested interest and blue-eyed non-professionals. Right people for the right job must be a permanent feature with well-defined career-oriented expertise in the organisational hierarchy.
The officers with general experience, who develop the habit of tasting every department, are nothing more than jack of few traders, but master of none, and there should be no scope for them to taste a highly technical organisation like FBR. In areas like Reforms and Restructuring, the task must be left to the experienced and senior officers of the FBR, who after frequent consultation with field formations can re-visit every aspect of structural anomalies according to the actual requirements and ground realities. It must be emphasised that FBR needs to be strengthened as a stable nerve centre based on professional competence.
Following measures therefore need to be adopted in letter and spirit both for immediate and long-term stability and efficiency of the taxation system, which would also help expand the tax base and increase in revenue:
A- (1) The government lacks political will, having little consideration for good governance. FBR is traditionally plagued with political pressure and bureaucratic (vested interest) influence. The first step in the right direction would be selection of the chairman of FBR on merit. For this purpose, the post of chairman should be advertised through Public Service Commission for a fixed tenure of four years based on academic qualification and professional experience. Such a step would go a long way in stability and efficiency of the FBR with no apprehension of political influence or insecurity of service.
(2) Job classification with career planning must be clearly defined with strict application at all levels for postings and transfers. FBR, as the nerve centre of revenue organisation, must have highly experienced officers and efficient staff who may be due for next promotion. Job performance of various sections needs to be revamped for better co-ordination and only those officers should be posted in the FBR turn by turn for a fixed period who have sufficient field experience.
(3) A full-fledged research and development wing be established to guide the FBR in the tax policy matters and suggest practical ways for effective co-ordination between FBR and field formations in light of ever emerging new situations.
(4) System of appraisement of Customs Duty and PaCCS and system of Sales Tax processing and STARR should not be closed but revisited and upgraded for application in all the dry ports and seaports to make them transparent and less time consuming. Only fully trained honest and senior officers should be empowered to appraise and assess tax liabilities in accordance with best practices and principles.
(5) Smuggling is perhaps most lucrative and organised business in Pakistan and smuggled goods are sold openly everywhere, particularly due to misuse of ATT. Many departments including the FIA (Immigration), Commerce Ministry, Foreign Office and EAD (for vetting agreements) deal in anti-smuggling cases. Other agencies such as Coast Guards, Frontier Constabulary, Levies and even Police Department have been given anti-smuggling powers. It not only creates overlapping and delay in taking proper action but it has become a source of organised corruption which explains why smuggled goods are available not only in big cities but also in small towns. These agencies mostly run after tracing smuggled goods for corrupt practices and they do not focus on their own duties. Proper course for efficient system would be that one agency fully trained and equipped with relevant requirements at all places must be empowered in dealing with anti-smuggling in an effective and transparent manner.
(6) All exemptions from sales tax and income tax should be withdrawn. The Chief Commissioner should be empowered to allow exemption in genuine cases for a renewable specified period.
(7) At present, only one hundred taxpayers of corporate sector pay 90 percent of sales tax on imported and domestic items. This shows that sales tax has a very narrow tax base mainly due to its high rates. To make it acceptable in the business community, sales tax or RGST should be considerably reduced to 5 percent starting from a fixed rate of 1 percent or Rs 100 on specified monthly sales (gradually increasing up to 5 percent, which should be adjustable). Sales tax at the rate of 1 percent should also be imposed on defence purchases as well as on all medicines, which should be non-adjustable. International tenders should also be taxed at one percent non-adjustable sales tax.
(8) Federal excise duty should be merged with sales tax to reduce the number of taxes and hassle for the taxpayers. Sales tax system should not only be fully automated and computerised to minimise delays and corruption but correspondingly strict system of audit should be put in place to eliminate the misuse of the system.
(9) Claim of refunds on account of input cost has been a major source of fake claims, corruption and malpractices. This can be curbed by reducing the sales tax rate and abolishing exemption. Instead alternate incentives can be offered to the exporters including exemption of income tax and other taxes/levies on the exported goods.
B - (1) MEASURES TO INCREASE THE TAX BASE As indicated earlier, more than 80 percent income tax was paid by around 100 major taxpayers of the corporate sector during the year ending 30-06-2010. Credible data is not available with FBR to show the number of taxpayers who paid tax of Rs 100,000 (or more) or one million (or more). With number of return filers at 1,444,389 (as shown by FBR recently) the income tax base (like sales tax base) is quite limited. For expanding the tax base some provisions of law need to be amended/added to ensure that:
a) All property transactions involving plots of 2 kanals and above in the urban areas of big cities should be registered only after verification of NTN of seller and purchaser.
b) Similar method should be adopted for sale and purchase of commercial property of any size in the big cities.
c) All types of vehicles with market value of one million rupees or above should be registered/transferred after verification of NTN or NOC from tax officer.
d) Every person travelling abroad, except the students and foreign nationals should be required to obtain NTN or NOC from Income Tax Department. This should also include travel for Umrah, Hajj or Ziarat, medical treatment and personal visits.
e) Expenditure on lavish functions, including marriages and social/political gatherings and conferences should be taxed either at a fixed rate or booked for assessment of income after verification of NTN of the person concerned.
f) Services sector is highly under taxed, particularly the income of surgeons, physicians (specialists), advocates and professionals rendering consultancy services. The surgeons earn an average of Rs 0.5 million to Rs 20 million per month. Specialist's income ranges from Rs 0.2 million to Rs 1.5 million per month, whereas their annual declared incomes are generally even less than their monthly incomes. There is mushroom growth of private hospitals, clinics and labs that charge exorbitant fee from patients attended by specialists and surgeons. Fees of private professional colleges and schools are also very high. Their share in revenue is very nominal but no meaningful audit has ever been conducted. A mechanism needs to be adopted to properly tap this very important under taxed source of revenue.
g) Majority of non-corporate taxpayers wants to make compliance in Urdu. For better compliance tax returns should be prepared in Urdu together with pamphlets for proper guidance of taxpayers. As Regional Commissioner of AJ&K, I had introduced return form in Urdu (with adequate publicity), and despite substantial damage to business due to unprecedented earthquake, compliance of taxpayers increase by more than 30%.
(2) MAKING THE APPLICATION OF TAX LAWS EQUITABLE
a) The most frequently raised objection by the business community in particular and public in general is that politicians represent the people to safeguard their rights and are supposed to make law in public interest, but they violate the law themselves when it comes to payment of due tax liability. Statistics show that very few legislatures of National Assembly, Senate and Provincial Assemblies are on tax rolls; and those who have NTN - pay very meager amount compared to their expenses on political gathering, living standard, house hold expenses, personal foreign visits, medical treatments and expenditure on political campaign and publicity. It should there be made mandatory under the law for every person contesting election (at any level) to get NTN and file return of income and statement of expenditure. Any person found guilty of evasion of tax should stand disqualified. Such a step will give substantial boost to tax payment and expansion of tax base as leaders of the people will become a roll-model for enforcement of tax laws, dispelling the public perception that they consider themselves above the law.
b) The share of agriculture in GDP is 21% without contributing its share in the national revenues. Due to powerful traditional lobby of big landowners, agricultural income is exempt from income tax as it is a provincial subject under the Constitution. Tax exemption to such a large section of economy reflects a big distortion and tax laws appear inequitable, causing heart burning among the business community. Taxing agriculture income will make the taxation system not only equitable but it will greatly help expand the tax base and increase in revenues. Three steps should be taken in this direction to minimise the resistance:
i) Agriculture land up to 15 acres should be exempted from income tax.
ii) Rates of Income Tax should be reduced (even for other taxpayers) to make the tax acceptable and to reduce the tendency of evasion.
iii) Agriculturists can be compensated by provision of cheap fertilisers, electricity and irrigation water charges (about 70% water is consumed in irrigation in 23.80 million hectares of cropland).
c) At present FBR has not devised a worthwhile effective procedure of Audit both for Income Tax and Sales Tax. There is no practical deterrence against evasion of tax after introduction of Universal Self Assessment Scheme. As pointed out earlier, USIS system of tax law is one of the most concession-oriented system in the world and it requires equal vigilance and deterrence to safeguard the interest of revenues and enforce proper compliance. There should be a transparent provision in law that every case shall be audited on its turn after every third or fourth year (unless caught earlier on account of some definite evasion.
d) Typically traditional bureaucratic method for raising revenues is to increase the rate of tax and number of taxes which is always counter productive as such a method encourages theft (evasion) and makes the tax base shrink or stagnant. Not only minimum rate should start from the lowest slab but maximum rate of Income Tax should not be more than 20%, as no one would be willingly paying tax more than that, if one finds any possible foul or fair way. Higher rates also discourage documentation and expansion of tax base, and consequently black economy is strengthened. Instead of promoting short-term interests, the FBR must bring the tax rates to a reasonably acceptable level so that measures adopted for increasing the number of taxpayers and revenues become fruitful. Lower rates of tax can be a better tool of persuasion for taxing agriculture income. Moreover, another very important advantage of lower tax rates would be that it can help in introducing sales tax even at retail level (as mentioned earlier). The traders dislike documentation due to fear of income tax. If they can declare maximum receipts and incomes (due to low tax rates), the resistance to the imposition of sales tax would be minimised.
(3) IMPOSITION OF WEALTH TAX IN A NEW FORM
(a) Wealth tax was abolished in 2000 under the pressure of powerful lobby mostly comprising of civil and military bureaucracy who did not want to pay wealth tax on their properties and plots, although its rates were quite low. Tax on wealth is an important instrument of a fiscal policy, which endeavours to establish equitable economic justice. Due to rising trend of investment in non-productive sector like properties, it would be advisable to impose wealth tax on all immovable properties at a fixed rate to be paid at the time of purchase/transfer. Wealth tax on each property measuring 2 Kanals and above should also be charged annually. Other assets including costly vehicles can also be taxed accordingly.
(b) All the measures require the will of the Government to enforce law in letter and spirit. Successive governments have been bullied by apprehension of traders' strikes, and they have wrongly considered them their decisive political constituency. A few hundred thousands traders mostly in big cities can never change the fate of a government or political party if it remains more sensitive to the well being of the large population of 180 million people. Moreover, the ruling elite itself sometimes is the greatest hurdle in the enforcement of law. A collector sent his officials to monitor sales of one of the restaurants in Lahore, which incidentally belonged to the Minister of State for Finance. The Collector was immediately made OSD and the campaign resulted in a fiasco. The political leaders in general and party in power in particular consider themselves above the law. Such a mindset would never enable us to stand on our own feet.
C - SPECIAL INCENTIVES FOR THE TAXPAYERS The taxpayers frequently complain that they derive no direct benefit from payment of any amount of tax. Our present system has not envisaged any provision of incentives of even social or psychological nature for the taxpayers. To promote tax culture, the Government must provide some special incentives for them. For instance, certain limit of payment of tax (say Rs 200,000) can be fixed for an individual taxpayer for one year, and if a taxpayer pays tax (of that amount or above), then he should be allowed some privileges for that year. For instance:
i) Power to attest certain documents.
ii) Recommendation to issue specified number of armed licences.
iii) Recommendation to issue National Identity Cards and Domicile Certificates etc.
iv) Status of Honorary Magistrate and power to check and challan the traffic violators for one year by fixing a threshold of tax payment for this purpose. This will ensure additional advantage of effective control to regulate otherwise quite unwieldy traffic throughout the country.
v) Priority in obtaining telephone, electricity, Sui gas connections.
vi) VIP treatment in hospitals and in the courts of law.
vii) Some social security system should be introduced for regular taxpayers and in case of old age or disability, they should be paid some percentage of amount out of the tax already paid by them over the years.
viii) Highest taxpayers should be offered honorary seats in legislation and government corporations. They should be guest of honour in certain local, provincial or national ceremonies/functions.
(Concluded) (The writer is a former Director General (Tax Audit) FBR)
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