FBR: A divided house

We are now sick and tired of writing about the shenanigans of the Federal Board of Revenue (FBR), the apex authority, responsible for the administration of federal taxes in Pakistan. Our writings may give an impression to the FBR's top brass that criticism of their actions and policies is based on malice arising from some personal grievances. The fact is that we never repented our bidding farewell to the tax department, after serving it for 19 and 12 years respectively.
While writing about FBR's hopeless performance, there has never been any personal element or some old score to settle. Our sole aim has always been to highlight the fact that this important institution has become ineffective due to political interferences and maladministration. Many a time, we have suggested that FBR should be a truly autonomous authority, as is the case with many countries, with a foolproof system of checks and balances to ensure proper revenue collection.
Pakistan is in dire need of raising taxes to the level of Rs 4 trillion at least - though the real potential is Rs 8 trillion. In the wake of what happened at 4th Chief Commissioners' Conference, held in Islamabad on 4th August 2011 and thereafter in the meeting of Board-in-Council on 8th August 2011, we sincerely believe that FBR should be made autonomous authority without any further delay.
The autonomous FBR should be independent, efficient, well equipped, competent and fully automated. This is the only way to ensure that FBR performs its role of revenue generation at optimal level with justice and diligence. Unless it works justly, efficiently and proactively, Pakistan cannot come out of the debt prison - our total internal and external debt crossed the figure of Rs 13 trillion as on 30 June 2011.
Unfortunately, the FBR's stalwarts have always joined hands with the political elite of the day and played in their hands for getting lucrative posts and undue benefits. Instead of tightening the noose around tax evaders they concentrate more on extending full support to their political masters in looting wealth of the nation, transfer it outside and give them full protection from taxation.
The 4th Chief Commissioner's Conference was held in the wake of failed attempt of jugglery of figures that revenue target for fiscal year 2010-11 was surpassed. In the late hours of 30 June, the chairman with his "favourites" claimed that the FBR had collected Rs 1,590.4 billion against the revised target of Rs 1,588 billion. This false claim was exposed by the media in the wake of resignation of Governor State Bank. Shahid H. Kardar, a man of impeachable integrity, refused to participate in the dirty game.
He was not ready to accede to the kind of verification Ministry of Finance and the FBR wanted. Due to his bold stance and media's exposure, FBR retreated and admitted that actual collection was just Rs 1,550 billion. Even this claim is false. If independent auditors are appointed, they would expose this jugglery of figures by FBR stalwarts.
In any country, with rule of law, the Chairman FBR and his "team" could not have escaped punitive action, but in Pakistan, as we mentioned in our last week's column, nothing would happen. Our prediction has come true. Chairman FBR and his "favourites" even after admitting cheating and fraud are still there - it is possible they would even soon get rewards and awards for this "great achievement."
According to a report published in Business Recorder of 5 August 2011, after deliberate attempt to hoodwink the nation and foreign donors by claiming "exceeding of targets", the Chairman FBR, instead of resigning, had audacity to tell the Chief Commissioners:
"A mistake of gross or net revenue was committed in the past. It is matter of past as the figure reconciliation has been completed and net revenue has been finalised. But now we have to look forward for achieving the assigned revenue estimates. He further directed the field formations to submit the revenue potential of each LTU and RTO for fixation of revenue estimates for 2011-2012 on monthly basis. The field formations should focus on revenue estimates and it should not be called as revenue targets. These are revenue estimates like expenditures estimates. An effective mechanism should be developed for reporting of net figures by the field formations."
The report said that the Conference was stunned as soon after the inaugural speech of the FBR Chairman, the Member Inland Revenue (IR) Khawar Khurshid Butt categorically informed the participants that his powers of transfers and posting stood withdrawn since April 2, 2011. He was quoted in the report:
"My powers have been taken away and neither can I transfer any person nor post anyone in the field formations. If the FBR gives us revenue collection targets, the Board should also empower the concerned authority for completion of the job. Nobody in the field formations is ready to implement his orders."
What a tragedy that the conference, opened with an embarrassing situation of false revenue figures disaster, meant for devising strategy to collect revenue target of Rs 1952 billion for the current fiscal year, faced sharp but valid criticism from Member Inland Revenue. According to Press reports, he made the following points:
--- Powers relating to transfers and postings available to him were withdrawn by the Chairman without consulting the Board-in-Council.
--- The withdrawal of powers had serious implications on the efforts to achieve the assigned revenue collection targets.
--- Forum of the FBR's Board-in-Council had been used to get desirable approvals.
--- Only those issues had been discussed at the forum of the Board-in-Council on which the FBR wanted to take decisions and others were ignored.
--- A Sales Tax official hatched a conspiracy to weaken the Inland Revenue by proposing a separate post for Member Sales Tax.
FBR Chairman, Salman Siddique, according to the press report, patiently heard the viewpoint of the FBR Member IR and assured him to convene a special Board-in-Council meeting to discuss the matter. The response of Member IR as per report was:
"FBR Chairman has passed the orders and the same authority should withdraw such powers without taking the matter to the Board-in-Council. I have also written to the FBR Chairman in this regard, but no action has been taken on my report submitted to the tax authorities. Instead of strengthening the IR Service, the post of Member IR has been made powerless, which is unfortunate."
According to the press report, the FBR Member IR further shocked the Chief Commissioners when "he pointed out that a sales tax official has hatched a conspiracy against the Inland Revenue Service by proposing that the position of the FBR Member IR be divided among two different Members - Member Sales Tax and Member Income Tax, which is totally against the reforms in the tax administration". He continued to reveal that "It was argued in the report of the said sales tax official that the corruption has been increased following creation of the post of the FBR Member IR. Contrary to this, the FBR has shown remarkable performance in achieving revenue targets, recovery of arrears and broadening the tax-base. It is conspiracy against the Inland Revenue Service and question be asked to the concerned sales tax official, who has submitted such kind of forged report against the Inland Revenue Service".
If above reports are correct, one wonders how FBR can be trusted to meet the revenue target of Rs 1952 million fixed for the current fiscal year when the house is divided. It miserably failed to collect merely Rs 1,588 billion, revised target for just ended fiscal year - the target originally fixed was Rs 1,660 billion. FBR, a divided house in shambles, has become an epitome of inefficiency, corruption, indiscipline (infighting between various groups) and highhandedness. It has failed on all fronts: collection targets, widening of tax base, countering tax evasion and avoidance, recovery of arrears, voluntary compliance and reform process.
The FBR house remained divided when Board-in-Council meeting was held on 8 August 2011, according to a report published in Business Reorder on 9 August 2011. As warned by Member IR, the Chairman prevailed on the issue of transfer/posting as he found a "bureaucratic solution" - constitute a committee if you want delay the urgent matter. According to the report, "Members appreciated the strategy of Salman Siddique for constitution of a committee to ensure consultative process with all respective FBR wing for transfers and postings of tax officials".
The ineffectiveness of FBR once again emerged during the Board-in-Council meeting when it was revealed that around Rs 84 billion inadmissible tax adjustments were claimed by "unscrupulous elements". Nobody asked the question how these elements succeeded to get this unlawful adjustment. Was it possible without the connivance of tax officials? Is FBR system so pathetic that anybody can claim inadmissible tax adjustment? The FBR stalwarts instead of going for corrupt elements within FBR, according to the report, "decided to investigate and verify the amount of Rs 84 billion inadmissible tax adjustments claimed by the registered persons".
The above proves beyond any doubt that FBR as it exists now has become a useless entity. Its failure can be gauged from a single fact that at the end of US $100 million World Bank-funded Tax Administration Reform Project (TARP), the tax-to-GDP ratio dipped to 8.2 percent from 10.6 percent. The borrowed funds of millions of dollars were ruthlessly wasted and today FBR House is hub of internal strife.
The Parliamentary Standing Committee on Finance should conduct a thorough probe in the matter and seek the assistance of tax experts to determine the amount of loss caused to the national exchequer by FBR stalwarts during the last two decades, especially regarding non-collection of taxes where due and illegal exaction when nothing was payable.
It is admitted by FBR that even after "great efforts" (sic) less than 1.5 million Pakistanis filed income tax declarations for tax year 2011. FBR has failed to implement law even in Islamabad as out of 43000 commercial and residential rental properties in Islamabad, only 7,000 owners are filing returns. In Pakistan, the number of mobile users alone, who pay more than Rs 100,000 as annual bill, is about 1,500,000.
Why have they not been compelled to file returns? Does FBR need any further evidence to demonstrate its inefficiency and ineffectiveness? At least the FBR stalwarts cannot convince informed people of its "wonderful performance" by just manoeuvring and playing with figures.
FBR is guilty of criminal negligence in not taxing persons having taxable income, but extorting money from many who earn below taxable income-majority of the people subjected to withholding taxes have below taxable incomes. FBR has been misreporting the figures regarding income taxpayers in Pakistan-they are not less than twenty million paying income tax under withholding system, though return filers are less than 1.5 million.
Failure is entirely of FBR in not compelling those having taxable income to file returns. Its performance is pathetically abysmal in achieving a satisfactory tax-to-GDP ratio. It is just thriving on withholding taxes and voluntary payments-constituting 92% of total collection. The contribution of field officers [collection on demand through investigation or audit] is just 8% of total collection proving beyond any doubt how unproductive this organisation is becoming.
The inefficient and corrupt tax apparatus is the root cause of the present pathetic state of affairs. The tax officials persistently and ruthlessly squeeze and penalise existing taxpayers while collaborating with tax evaders-massive evasion is not possible without their abetment.
The small business houses and salaried persons, already heavily taxed through withholding tax mechanism, are victims of their highhandedness. It is high time that the FBR should put its own house in order and tax the rich and mighty tax evaders. It must tell the nation through media how many bureaucrats, parliamentarians and businessmen, including their dependants, are paying utility bills of over Rs 200,000 in a year, but not paying any income tax. They must be asked about the sources from which they enjoy a life of luxury whereas the poor are dying of starvation and untreated diseases. (The writers, tax lawyers, are Adjunct Professors at Lahore University of Management Sciences)