Issues in tax reforms

The complete failure in every sphere of governance in Pakistan has led to a near breakdown of all State institutions which, inflicted with inefficiency and corruption, are now the root cause of the perpetual crises in the society. People working in these institutions have no regard or respect for the rights of the public - paid from the taxpayers' money to serve the people, they instead create problems for them.
Remedy lies in radical restructuring of all these institutions - no meaningful reform has been undertaken during the last 60 years. Besides, appointing competent and dedicated personnel, rule of law should be strictly implemented - no lapse should go unnoticed and unpunished.
All State functionaries should be made accountable - their performance should be monitored regularly. While they should have full protection of law, any abuse of authority should be punished suitably. The case study of one institution, Federal Board of Revenue (FBR), is an eye-opener, where in the name of reforms huge funds (externally borrowed and allocations made from taxpayers' money) have been criminally wasted. The Public Accounts Committee should take it as a test case and punish the culprits so that all other institutions get a clear warning of consequences for misdeeds and plundering of public funds - unless it is done we can never reform our State apparatus.
The FBR has been paying hefty amounts to local and foreign consultants in the name of tax reforms under the foreign funded Tax Administration Reform Project (TARP). It is shameful that the Government of Pakistan wasted huge amounts of borrowed money on hiring foreign/local consultants at exorbitant fees, whereas they failed to deliver. At the end of TARP our tax-to-GDP ratio nose-dived to 8.2% from 13.5%. In all democratic countries of the world, experts are selected for such important assignments after detailed scrutiny by specialised committees of the Parliament. In the FBR, such appointments under TARP were made randomly by the Parliament and without adopting a transparent process.
It may be recalled that the World Bank extended to Pakistan $125.9 million grant, including IDA credit of $102.9 million, and a UK DFID grant of $23 million, for TARP - many call it 'TRAP'. The objective of the project was to reshape the "integrity and fairness of tax administration by improving organisational efficiency and effectiveness of the revenue administration". It was a national shame that for this task we agreed to such heavy borrowing from the World Bank and other donors even though a part of revenue collection by the FBR could have been annually earmarked for this purpose, but the Government was bent upon borrowing funds. It was obvious that the actual aim behind the project was to force Pakistan to implement the agenda of foreign donors. The donors, as usual, redeemed a huge chunk of money through their approved consultants. This is a well-known modus operandi of donors through which they favour Western economies and make countries like Pakistan prisoners of their 'debt trap'. But instead of criticising their agenda and motives, we must condemn our rulers who succumb to their pressure for personal benefits perpetuating their rule.
According to various Press reports, the FBR hired and paid some of the following so-called experts (local as well foreigners):
1. One local lawyer at Rs 3 million per year to guide the FBR's Legal Wing on interpretation of tax laws to handle court cases. Did the FBR's Legal Wing lack expert officials having command on legal matters to effectively plead the cases? Legal Wing of the FBR is headed by a Grade 21 Member and many officers in the department possess L.L.M from Harvard and other prestigious institutions.
2. Hugo Hanisch hired for two years as programme manager of TARP at US $660,000.
3. Foreign tax consultants from USA, UK and Germany were paid an amount of $13,649, £ 2,425.50 and $30,000, respectively for assisting in the implementation of TARP.
4. Dr James P. Mcgee, USA was hired for 3-4 weeks to help in purchase of ITMS, software to integrate all the taxes. The FBR paid an amount of US $13,649 on completion of his task.
5. Allan Gilmour from UK was paid £2,425.50 for giving one-week consultancy on human resource management.
6. A German tax consultant Dietmore Jost hired for 30 days to evaluate the PACCs on the recommendations of the World Bank (WB) was paid US $30,000.
The above list is not exhaustive. It is just illustrative. It is the duty of the Parliament, especially the Standing Committee on Finance or the Public Accounts Committee, to requisite the full details regarding the hiring of foreign and local experts (sic) by the FBR under TARP and find out what results were achieved by them.
The credentials of these so-called experts were never made public. Their selection was not approved by the National Assembly's Standing Committee on Finance. The FBR, with the approval of the World Bank decided to appoint Hugo Hanisch as Program Manager for TARP for a period of two years. It was revealed in a Press report that that the World Bank "has given no objection certificate to the FBR for signing the contract with Hugo Hanisch." It confirmed that "beggars cannot be choosers" - the government needed an NOC from the World Bank to appoint a consultant for tax reform! At the time of signing the agreement with the World Bank for over a 100 million dollar loan for tax reforms, did the Government of Pakistan agree to such shameful conditionality? If so, why did the Government not bother to seek approval from the Parliament? Our future generations would have to pay back this loan, yet consent of the masses was not considered necessary through their elected representatives in Parliament. This confirms nonobservance of democratic values and non-existence of representative governance.
It is worthwhile to note that the FBR under the TARP also hired for 5 years many members from the private sector (enjoying extraordinary wages and privileges compared to members from the regular cadre) and yet they needed consultants from abroad. The FBR, in February 2002 hired a chartered accountant at market wages (MP-II) as Member Audit. He was later replaced with another chartered accountant with MP-I package. Despite this costly appointment a foreign consultant was hired at around US $15,000 per month to devise an audit plan and strategy for us! If she had to execute this assignment, what was the justification of hiring a Member Audit from the private sector?
Initially, members from private sector were appointed for a two years term to help the tax officials in devising a tax strategy. They were given another two years extension, which expired in February 2006, for they could not come up with their targets and goals. Following expiry of their contract in February 2006, another extension for an indefinite period and elevation from MP-2 to MP-1 was awarded to them with additional perks and privileges despite the unsatisfactory performance and failure to achieve goals. They were rewarded for their inefficiency! However, in 2008, after the removal of Chairman Abdullah Yousaf, their contracts were not renewed and/or cancelled by the PPP government.
Since 2001, in the name of simplification of tax laws and reform project, the FBR is imposing more and more obligations on the citizens of Pakistan without conferring corresponding tax rights - Taxpayers' Bill of Right proposed by Federal Tax Ombudsman in 2003 was completely ignored. Citizens have been burdened with cumbersome obligations of withholding taxes without any compensation. Under TARP, money was given to hand-picked consultants without taking the Parliament into picture. Even after the end of TARP no pragmatic tax policy and efficient tax administration is in sight. Workshops, foreign tours in the name of training were what were "reforms" for the FBR, ruthlessly wasting colossal money. After TARP, the nation has been gifted with more well-equipped tax dacoits who are playing havoc with their peace and tranquillity. This entire process, carried out under the umbrella of World Bank, IMF and other donors, has left us poorer - increasing our economic subjugation manifold.
Under TARP nobody addressed the real problems faced by the Pakistan tax system under which the burden of taxes is less on the rich and more on the poor. Instead of removing this inequity, the FBR has been resorting to regressive taxation like presumptive taxes in income tax and turnover taxes in the shape of multi-point sales tax. Pakistan's real tax potential is much higher than targets set and achieved by FBR; mere collection of US $15-18 billion by FBR is shameful, as many comparable economies of the developing countries have managed to collect four times higher.
We can collect much higher taxes if the present tax incidence is rationalised, and incompetent, inefficient and corrupt tax machinery is overhauled. Tax policies implemented on the dictates of foreign donors have led to abject poverty for a vast majority of people. The FBR is showing "record" collection by imposing unprecedented taxes and duties on POL products. These policies are not making us self-reliant but on the contrary are destroying our industrial and business foundations. If we manage to formulate a rational tax policy through public debate and parliamentary process and implement it through consensus and not coercive measures, we can liberate ourselves from World Bank and other donors in a short span of time by paying off all our foreign loans and generating enough funds for future projects. However, if we persistently follow their prescription, we will neither realise real tax potential, nor achieve the cherished goal of self-reliance through rapid industrial growth.
Our present tax revenue potential, if the monstrous black economy is dealt with an iron hand rather than offering incentives for its growth, is not less than US $60-80 billion provided that the existing tax base is made wider and equitable, the black economy is discouraged, asset-seizure legislation is passed for untaxed and undeclared foreign assets held by Pakistanis, the tax machinery is completely overhauled and exemptions and concessions available to some privileged sections of society are withdrawn [money laundering through facility provided under section 111(4) of the Income Tax Ordinance, 2001 should immediately be abolished]. To achieve these goals we do not need any loan from the World Bank or other donors. If we take money from them then we are bound to follow their conditions, as beggars cannot be choosers. Many local experts can do the reform work either voluntarily or at much less cost than what we intend to or have already wasted on foreign consultants at the commands of the World Bank and others.
This is the story (sordid and disgusting) of tax reforms so far. The so-called experts invited from abroad (who cannot even drive themselves home on Pakistani roads) are not capable of understanding the ground realities prevailing in Pakistan. Even if they are competent and sincere, the task of tax reform in Pakistan cannot be successfully carried out by them or the tax bureaucrats sitting in the FBR as public backing is essential.
In all democratic countries, special house committees are formed by elected parliaments for conducting tax reform exercises. Here in Pakistan we are doing it through bureaucratic structures, which are outdated, inefficient, incompetent and corrupt. This is asking troublemakers to do trouble-shooting. It reminds us of the great Urdu poet Mir Taqi Mir who aptly said for such situations:
Mir kya sada hain, beemar huay jis ke subub
Usi attar kay londay say dawa laity hain
(What a simple soul is Mir who seeks cure from the one who made him sick)
Pakistan's tragedy is that things are always being done by people who are not eligible for that job. Military governments play havoc with Constitution and devise foreign policy for the elected governments, and tax reforms are undertaken by tax baboos that have a proven track record of inefficiency, incompetence and corrupt practices.
It is high time that a National Commission on Tax Reforms, under the supervision of a Judge of Supreme Court, is constituted to achieve national consensus for resource mobilisation, elimination of wasteful expenditures and debt enslavement after consulting all the parties involved. Bureaucratic leadership for any tax reform processes is highly undesirable as they are the people who are responsible for the present messy situation. They are merely the executive arm of the State and should not be given the task of legislative work or policy-making. Serving and retired bureaucrats dominate the bodies formed by the Finance Ministry and the FBR to recommend and monitor tax reforms. This is where the fault lies. Unless these tax administrators are made accountable before public representatives and independent appellate/judicial set-up, no meaningful tax reforms can be implemented.
In these columns, we have presented many times a detailed tax reform agenda along with step-by-step implementation strategy for generating Rs 6-8 trillion through the FBR. The prerequisite for success of this plan is restructuring of the FBR, making it an autonomous authority, run by an independent Board representing at least 50% members from the public. The main hurdle is the bureaucracy, which would never give up control of an organisation that is not only the financial lifeline of Pakistan but also the goose that lays golden eggs for them and their political masters.
(The writers, tax lawyers and authors of many books on Pakistani tax laws, are Visiting Professors at Lahore University of Management Sciences)