FISCAL REVIEW 2011 - Why FBR's facilitation didn't work?

The country's tax administration is often perceived as inefficient, vexatious and corrupt by the general public. The political and financial leaders complain of a static tax base, inelastic revenues, arbitrariness of policies & procedures, lack of measurable performance indicators, excessive administrative tiers and absence of connectivity of information.
In order to remove these weaknesses and to create a model and efficient client responsive tax administration, tax reform committees, task forces and Revenue Advisory Committees have assisted FBR over the years. Committee reports and various other studies recommend a tax system, which has simpler laws, promotes self-assessment, reduces physical controls and creates reliance on audit and risk assessment.
The experience of last reform effort indicates that tax revenue increased in absolute terms from Rs 300 billion in 2002-03 to Rs 1550 billion in 2010-11. However, the tax-to-GDP ratio shrank from 14 percent recorded in late eighties and early nineties to 8.6 percent in 2010-11.
It is contended that with a 14 percent tax-to-GDP ratio, FBR could have collected additional revenues of Rs 600-700 billion. So what went wrong? It is true that in terms of revenue collection, the reforms failed to deliver. The recent administrative reforms of the FBR remained focused on tax payers' facilitation. For instance, the Universal Self Assessment scheme was introduced where-under tax collectors were restrained from assessing tax returns without third party evidence. Subsequently, tax audit was also considered a source of harassment to taxpayers, and as such, powers of tax collectors to conduct audit were withdrawn.
Resultantly, the Universal Self Assessment without effective audit, eroded the tax base. The documentation that had slowly started taking roots in the late nineties under general sales tax in VAT mode, received a serious setback due to zero rating of domestic sales of five sectors including textiles. The supply chain concept, which is the backbone of documentation under GST, with zero rating of domestic sales of textiles and other sectors, practically got wiped out.
The new tax culture propagated in the name of simplification and taxpayers' facilitation, turned out to be hugely popular with business community. They were allowed to pay or not to pay tax. The tax collection machinery was directed not to interfere but rather facilitate by simplification of tax laws and providing a conducive environment. It is argued that this new approach under FBR reforms proved catastrophic as far as tax compliance and the tax-to-GDP ratio were concerned.
Consequently, upon policy announcement of Universal Self Assessment scheme without any audit, tax compliance concerning the filing of income tax returns declined from 85.4 percent in 2000-01 to 54 percent in 2004-05.
DECLINING COMPLIANCE RATE
The present situation is not very different. For instance out of 45,000 companies available on N.T.N Master Index, around 23,000 filed their income tax returns last year. Similarly out of a total of 3.1 million NTN holders; only around 2.2 million filed their returns/statements in 2010.
The expectation of FBR that tax facilitation will encourage new taxpayers, didn't work. Neither did it help in broadening the tax base nor in encouraging existing tax payers to pay according to their potential. The high GDP growth rate of over 6 percent during 2004-2007 didn't contribute to tax collection. The graph here shows that the tax-to-GDP ratio of 9.1 percent of Pakistan is far less than the 12.7 percent of India, 14 percent of Sri Lanka and 29.3 percent of Turkey.
Therefore, one can conclude that the policy to pursue Universal Self Assessment without audit was not in line with best international practices. Similarly, the notion that a taxpayer-friendly environment in FBR field offices will help in widening the tax base failed to pay dividends.
A decision for strategic change seems to have been taken by the government. The FBR is now looking forward to ensuring that tax compliance is ensured. The process of adding new taxpayers has already commenced. Initially, seven hundred thousand potential taxpayers have been identified with the help of PRAL and NADRA databases. The FBR field formations have already started to chasing tax evaders. The frozen enforcement arm of the FBR is being activated .There is visible political will to make sure that those with the ability to pay are taxed through a transparent and legally sustainable process.
Another factor which is expected to help in the documentation of the economy is withdrawal of zero rating of five sectors. Domestic sales of textile, carpets, sports goods, surgical instruments and leather products are now chargeable to GST levy. Taxpayers' audit has been restored. The time for the tax collectors to deliver has arrived. The reorganisation and merger of three domestic taxes into inland revenue service has set a stage to proceed with the enforcement strategy. The new approach will bring a balance to the Universal Self Assessment and is expected to raise the tax-to-GDP ratio. Godspeed!
The writer is Commissioner Inland Revenue, FBR. He can be reached at [email protected]

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DECLINING COMPLIANCE RATE

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              No  of NTN         Return     Compliance

                 Holders         Filers       Rate (%)

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FY00           1,142,373    972,87385.2

FY01           1,230,199     1, 050,602           85,4

FY02           1,359,778     973,638716

FY03           1,521,939      1,019,108             67

FY04           2,099,638      1,029,279             49

FY0            2,276,395      1,229,952             54

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