From bad to worse?

Frequent replacements of the head of Federal Board of Revenue (FBR) in recent years - from Suhail Ahmad to Salman Siddique to Mumtaz Haider Rizvi - have made things from bad to worse. The unceremonious exit of Mumtaz Haider Rizvi, holding dual charge of Chairman FBR and Member Customs, and now posting of Ali Arshad Hakeem as Chairman on 11th July 2012 has raised many eyebrows.
There are apprehensions that Ali Arshad, a former Civil Servant from 16th Common Training Programme, is a bad choice for two reasons: all senior officers may feel "humiliated" (sic) working under him and he, being allegedly the President's man, would never go for a real crackdown on tax-evaders and plunderers of national wealth. However, time will tell whether he restores the image of FBR or tarnishes it further to the level of no return.
Over the period of time, FBR, like many other public institutions, has earned notoriety in all areas: from misreporting of figures to bungling of funds, from corruption to highhandedness and from inefficiency to worthlessness. It has utterly failed to enforce tax laws. Time and again, different chairmen of the apex revenue authority admitted before the Standing Committee of Parliament on Finance that tax reforms, suggested and funded by foreign donors since 2004, have failed to yield desired results. At the end of the five-year Tax Administration Reforms Programme (TARP), extended for another year, there was an unprecedented decline in tax-to-GDP ratio - from 12.5% in 2002-03 to 8.2% in 2010-11. This was one of the lowest in the world - confirming shamelessness on the part of ruling classes who instead of paying income tax thrive on the national resources meant for the welfare of the weaker segments of society.
On March 3, 2012, the then Chairman FBR made a tall claim that "we will generate an additional Rs 100 billion by curbing evasion of taxes and duties, which remains rampant in the country." He claimed: "traders, industrialists and businesspeople evade billions every year by under-reporting their invoices, submitting incorrect declarations of imported goods and misuse of the transit trade facility with Afghanistan." This statement was an open admission on the part of FBR's head that his subordinates were a complete failure - tax evasion is not possible without the connivance of tax collectors. Instead of taking any action against the culprits - both corrupt tax officials and tax cheats - the Chairman was busy pleasing his political masters and "serving them well". It is alleged that in the process, he made a "fortune" for his post-retirement days. Critics say that no action would be taken against Mumtaz Rizvi for bungling of revenues and his foiled attempt of waiving Rs 47 billion of certain companies - even National Accountability Bureau (NAB) has no inclination to start investigations against "missing containers mafia".
It is strange that the House Standing Committee of Finance has never penalised FBR's top notches even after established cases of corruption, over-stating of collection figures, making false statements and misleading the elected members and the entire nation.
It is an irrefutable fact that FBR has never taken serious measures to tax the rich and mighty. Massive tax evasion and criminal culpability of tax officials in the entire process poses a tough challenge to the new Chairman of FBR. The first statement of Ali Arshad Hakeem on assuming charge was: "Tax compliance will be achieved by enhancing facilitation of the business community". This was sheer naivety, rather ignorance, as FBR has already been subservient to the interests of tax evaders, most of whom are obviously powerful politician-cum-unscrupulous-businessmen who thrive on bank loans and get them written off under one pretext or the other.
Tall claims made by FBR of cracking down on tax evaders in the past have proved false. In the last Senate elections many members were beneficiaries of millions of rupees, but still FBR did not issue notice to even a single person. One Senate seat went for Rs 60.5 million proving beyond any doubt that the most profitable business in Pakistan is politics. Would Ali Arshad Hakeem issue notices to the President, Prime Minister, Ministers, Advisers, members of national and provincial assemblies for not disclosing their assets inside and outside the country-most of them kept benami? Would he start the much needed national tax collection campaign convincing all Pakistanis to pay taxes due from them? Would he commence this campaign from generals, judges and bureaucrats or will his wrath also befall on the already stifled poor people of this country? Would the public be made aware of their assets and tax declarations?
During the period of TARP, instead of curbing tax evasion and forcing voluntary compliance, tax concessions were generously being doled out to the rich and mighty. In May and June 2012 alone all kinds of tax amnesties and concessions were announced, yet there was lukewarm attitude from the business community. FBR, despite all such schemes missed the target of Rs 1952 billion by a wide margin. Now the new Chairman has promised further concessions to businessmen!.
Since 1977, tax incidence on the rich has decreased drastically whereas on the poor it has increased unbearably. The rich classes, especially absentee landlords that now include mighty generals who have received lands as grants and awards, have not paid even a single penny as income tax on their colossal incomes or wealth. One hopes that Ali Arshad Hakeem, son of a retired general, is not beneficiary of any state land as legal heir or otherwise. Crooked businessmen - many of whom are beneficiaries of loan write-offs - unscrupulous traders and corrupt ruling classes continue to defy tax obligations with the result that the nation has been indebted to an extent that more loans are required only to pay interest on the existing ones - debt servicing is now consuming 70% of our total tax revenues.
From 2004 to 2010 - when TARP (many call it TRAP) was in progress - FBR just paid lip service to slogans under its amended motto of 'vision, mission and value' (previously 'value' was missing!). The "mission" of broadening tax base suffered numerous setbacks in the last eight years - mighty generals and civil servants, politicians, traders and big absentee landlords were and still are reluctant to pay income tax according to their ability. Lack of political will to tax the rich and wastage of taxpayers' money by the rulers is the root cause for the absence of tax culture. People justify non-payment of taxes by saying why should they bear the burden for the luxuries of the corrupt rulers and government officials.
Enforcing tax compliance on the rich has become our number one national challenge. The new Chairman must remember that if taxation is viewed as being unfair or favouring a few taxpayers, it proves counterproductive in the long run. Our crisis is general non-acceptance of tax obligations. People openly defy tax laws, but pay generously in charity. Their refusal to pay taxes based on the argument that corrupt rulers do not deserve their money as they care a damn about the welfare of masses.
The present tax system, undoubtedly, imposes greater and undue incidence on the poor and middle-class people eg 16% sales tax (in fact 30% on finished imported goods after levy of all kinds of taxes), takes larger portion of low-income groups compared to high-income groups). The rich and mighty enjoy tax exemptions and concessions on their colossal assets and "agricultural income" (sic). They make enormous profits through rent-seeking, speculative transactions in stocks and real estate and luckily for them, there is no taxation for these activities.
The provincial governments and assemblies are also guilty of protecting the rich and mighty by not levying/collecting tax on "agricultural income" in the true sense of the term. The rich and mighty in Pakistan are virtually outside the tax net. Since they are not paying a single rupee as direct tax, the vast majority of citizens argue as to why they should be subjected to exorbitant and multiple taxes? They are especially annoyed with indirect taxes, the burden of which comes heavily down on the weak sections of society. From 2004 to 2011, FBR miserably failed to improve universal tax compliance under the TARP and the situation in 2012 or beyond cannot improve unless the government takes some concrete and positive steps in taxing capital employed in unproductive areas thus ensuring its shift to productive sectors that generate more goods and services, leading to greater employment possibilities.
Special efforts and rational policies are needed to restructure the tax system and restore public confidence in tax officials. Even a good tax system will not work if the prevalent negative mindset of the tax officials persists. The new Chairman faces challenges on all fronts. His success or failure matters as the nation, heavily indebted due to unwise policies and lack of political will to collect taxes, is in dire need of funds which cannot be generated unless tax obligations are forced, especially for the mighty sections of society. If we fail to promote voluntary tax compliance - in the population of 180 million less than 2 million file tax returns or statements - democratic culture will never take it roots.
(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Professors at Lahore University of Management Sciences)