"Certainty? In this world nothing is certain but death and taxes" - Benjamin Franklin. I am sure that Corporate Pakistan (CorPak) will vehemently disagree with Mr Franklin; taxes are never certain, you keep disputing them with the Federal Board of Revenue (FBR) forever. Then again, in Mr Franklin's times, FBR did not exist.
What is certain is that all major corporations in Pakistan are or have been in litigation against the taxation authorities on charging of taxes. Agreed, no one in the world wants to pay taxes and won't if he can get away with it - this is a universal truth. People in rich nations are not more honest, it's only efficient tax administration that poses a credible threat for them to pay their taxes. Accordingly, disputes between the collector and the payer are imminent; this however does not justify protracted litigations.
Governments, whether for optics, or truly mindful of wasted time, effort and resources, did bring in dispute resolution mechanisms. Amazingly disputes arose on the elucidation of those very legislations. Interpretation of language is the bread and butter of the legal fraternity but is there no one who can draft a legislation which can only have one meaning!
Utopia aside, disputes over language and "spirit" or intent of the legislation have achieved epidemic proportions, such that even when an incentive is proposed tax lawyers remind CorPak to "beware of Greeks bearing gifts". Take the recent proposal in the budget to allow tax credit for 100 percent equity based industrial units. This appears to be an excellent incentive to spur economic growth and increase employment. Unfortunately, however, the swords have been drawn, and the general view is that the enactment is poorly drafted and rules explaining various reservations are required and awaited.
If the "intent" really is to incentivise the private sector, then clear and well drafted rules should be around the corner. Curiously, if the intent was never there, why commit in the first place? Trust deficit between CorPak and FBR is insufficient justification for cumbersome "rules" that purport to insulate against the wily schemes of dishonest businessmen. Incentives should not be tainted by unachievable pre-conditions. This leaves a bad taste in the mouth and further aggravates the trust deficit.
Unless the entire country is afflicted with poor drafters, there is a visible disconnect between stated policy and its implementation. Admittedly, tax collectors across the world are rightfully not, and should not be, concerned with any related economic impact. The singular purpose of the tax collector to meet his target was probably what caused Mark Twain to quip, "What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin".
Consequently, the responsibility to effectively utilise the FBR's (tax collector) time and resources vests only with the leadership. If those charged with governance believe that time and resources are better spent in prolonging historic disputes with key taxpayers, then so be it. The conundrum is whether the opportunity cost of this strategy has actually been considered: refund of a few billion rupees compared with economic growth and employment.
Consider for a minute that direct taxes constitute only about 40 percent of total tax revenue. Of these, 53 percent are collected and deposited by withholding agents, almost exclusively CorPak. Between indirect and withholding taxes, almost 70 percent of budgeted revenue is collected and deposited in the government treasury by CorPak and not FBR!
Interestingly as opposed to acknowledging this effort, FBR pursues penal action against withholding agents who err in collection. Strangely, there is no respite if you make an error but those who completely ignore this forced labour are offered amnesty. A stick and stick policy of governance!
It is ridiculous to imagine that if the government sincerely wants positive change it is powerless to do so. While veracity of vision and commitment are convincing drivers of change, short sightedness and ad-hoc initiatives fuel inefficiency and corruption.
Beset by political, security and economic calamities, successive governments over the past decades opted for the easier route, resorting to policies professing short term gains for enhancing revenues. Lacking resources to strengthen FBR, the role of the withholding agent was successively amplified.
Unable to tax larger interest groups such as agriculturists, indirect taxes became the growth engine. Presumptive tax regime was introduced, which, in substance, is also indirect taxation. Regressive taxation, which is also inflationary, defeats a fundamental objective of taxation of addressing income inequalities.
With limited options and only one goose in sight, CorPak was tasked with the responsibility of not only collecting taxes from the masses but to make up the shortfall from its own pocket, by hook or by crook. While privileged sectors refuse to pay taxes on their income, CorPak has to pay a tax even when it incurs a loss. There are those who will point numerous incentives and exemptions available in the tax legislations, and correctly so. However, there would hardly be an instance when invoking any such option did not directly or indirectly instigate a legal dispute with the tax collector. And while there are various appeal forums, the general perception is that depending upon the materiality of the tax amount; most of the appeal forums are conflicted.
Even in the power sector, where the country is facing a severe shortage and policy after policy advertised tax exemption, almost all companies faced litigation. Consider that for a developing country, there are no clear provisions of taxing profits of real estate sector - a free for all. Banking and oil exploration, two key sectors, have been in perpetual tax litigation on basic business issues.
Contractors prefer the Presumptive Tax Regime (PTR) since it offers a semblance of certainty and for FBR it is a straightforward and manageable way to collect taxes. Regrettably, it is indirect taxation which is passed on the consumer. On the other hand, why discriminate? broaden PTR to include the manufacturing sector. The government could than save money by abolishing FBR!
Pragmatically speaking, these hasty legislations and disputes emanated out of the government's and FBR's desperation to raise revenues. In recent history, taxation reforms and budget suggestions have only been geared towards increasing the quantum of tax collection and never towards the quality, nature and impact of tax policies. Perhaps, as Thomas Sowell said, "you will never understand bureaucracies until you understand that for bureaucrats procedure is everything and outcomes are nothing".
Economic history abounds with nations utilising tax policies for nudging economic growth; unfortunately we have used taxation to reduce our budget deficit only. In this exclusive and desperate quest also lies the origin of corruption in our country. If the system denies justice, by necessity it will be bought in the free market.
The question is whether our leadership remembers the moral of the story; you can't cut up the goose and get more eggs! It is not only about taxing agricultural income, it is also about taxing profits on a progressive basis.
FBR can continue its restless pursuit to wring more taxes out of CorPak and the poor masses via indirect taxes. Or the government can step in acknowledging CorPak as partners in growth. Unswerving sincerity and commitment, in spirit and letter, will be needed for bridging the trust deficit. In the short term, the government will have to cede more for incentivising the private sector to adopt its natural role in economic growth. Let us also not forget that while FDI follows a growing economy, it is the local businessman who jump starts growth.
Resources released within FBR can preferably be utilised in monitoring and analysing sectors to ensure completeness of tax revenues. This change of direction can result in framing qualitative tax legislation and even rethinking free trade tariff policies to enhance revenues.
Well conceived incentives can once again be the catalyst for specific sector growth. A more robust and proactive taxation framework geared towards economic growth may finally excite CorPak to play the role it has been shying away from. Understandably, what is being suggested will require a complete about-turn in mindset and a complete revamp of policies and taxation framework. The key drivers for this change should only be the phrase "economic growth through taxing profits on progressive basis". The critics will say that this is a pipe dream, unfortunately; in reality, it is the need of the hour, and we better wake up before the dream turns to a nightmare. You never know, the golden eggs might just increase!
The writer is a chartered accountant based in Islamabad. He can be reached at [email protected]
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