Broadening the tax net — I: A solution to taxation woes?

In recent years the word “narratives’ and the phrase “narrative building” have come to occupy a prominent place in political, social and strategic discourses.

Narrative was previously a concept confined to literature and an equivalent to a story, but has evolved beyond literature and branched out into social sciences. To a considerable extent retaining the original meaning of being a story that has to be told effectively, having varying degrees of fiction as opposed to reality or truth.

Vikram Sood, a former chief of India’s Research and Analysis Wing (R&AW), in his book “The Ultimate Goal” explained how during most of the twentieth century intelligence agencies helped shape narratives favorable to their countries’ agendas through literature, history, drama, art, music and cinema.

He asserts that a “narrative” may not necessarily be based on truth, but it does need to be plausible, have a meaning and create a desired perception.

According to Sood, “Real power comes not from the barrel of a gun, but from those who control the narrative. Building narratives and sustaining them is part of the effort to control storylines, which in turn help control the world. Narratives are not the truth, rather they nudge you to understand the truth in a particular way. They are never neutral or innocent, they are always strategic.”

Narrative building and shaping of perceptions have been an important part of national strategy at the domestic and international levels.

Powerful and influential nations have managed to camouflage the truth and harsh realities assiduously by invoking selected information, propaganda, disinformation or manipulation of facts.

Realizing the effectiveness of narratives, powerful interest groups also started using them to protect and advance their interests by building public opinion for swaying policymakers to take actions having ostensibly praiseworthy objectives but actually strengthening the domination of national resources by the powerful.

Policymakers are now much more concerned with the general mood of the public than what ground realities demand.

Selective and tactical use of information can influence the decision-making of the target. The target can make decisions or policies against the interests of a state even without realizing it.

Neo-liberal narratives of self-correcting markets, ‘harmful’ effects of government regulations, importance of eliminating price controls, deregulating capital markets, increase of productivity through minimizing tax burden on the affluent, etc., are almost treated as self-evident truths throughout the world due to powerful narratives built by the influential lobbies with the support of willing partners from the academia.

Pakistan is no exception to these global trends either. However, instead of having a broader canvas involving all economic and industrial policies we will focus on and critically examine the narratives relating to the field of taxation.

There are multiple (and to a great extent mutually reinforcing) narratives that attempt to shape tax policy and administration in Pakistan, but in this article we will focus on only one such narrative, namely that the chronic shortfall of revenues in Pakistan is due to the fact that the tax net is not wide enough and that increasing the number of taxpayers (read tax filers) is the elixir that will make all the problems go away.

This narrative has become so strong over the years that, according to grapevine, under the previous government top policymakers were made to believe that if FBR (Federal Board of Revenue) is collecting, say Rs 5,000 billion with 3 million taxpayers or tax filers, the tax revenue will be automatically enhanced to Rs 10,000 billion if the number of tax filers grows to 6 million.

Before critically examining the importance or otherwise of casting the tax net wider, it would be appropriate to explain why the emphasis on this objective is being described as a narrative in the context of the connotations of the term “narrative” as discussed above. It is being labelled as a narrative because it helps divert attention from failures to adequately tax more privileged taxpayers and larger enterprises already in the tax net.

It conveniently and deliberately suppresses the fact that there is massive underreporting of incomes and taxable turnovers by existing taxpayers.

It also obscures the fact that the persons who are earning large taxable incomes are mostly already in the tax net but are paying miniscule percentage of the due taxes and thus are primarily responsible for the less than optimal collection of revenues in Pakistan. The informal and untaxed sector narrative locates the apparent cause of revenue scarcity in the alleged non-taxation of small enterprises and poorer people.

Despite already having large chunks of unproductive taxpayers, these narratives compel the tax administration to suffer from what some studies have termed the “registration obsession” or a tendency to devote considerable resources to registering even more taxpayers who similarly will provide little additional revenue.

Tax administrations waste precious resources by maintaining a large number of unproductive taxpayers and continually seek to expand these numbers through new registrations because this fits the narrative about under-taxation or non-taxation of the so-called “informal sector.”

This tendency and the narrative collectively work to the advantage of more privileged groups. They help the people who run the tax machinery and their political superiors to appear to be working harder than they actually are, to raise more revenue. The undertaxed rich and wealthy benefit from this narrative and the actions that logically flow from this narrative.

In the last few years, FBR boasted of enhancing the number of tax filers significantly but conveniently omits to quantify the additional revenue from these new taxpayers.

Recalling some news reports on the subject, the additional revenue is on an average less than Rs.1 billion for every two hundred or three hundred thousand new taxpayers. Whereas, proper attention devoted to a single case of a medium to large enterprise can result in multiples of this amount in additional revenue.

To support this assertion one can easily refer to the work of Tax Justice Network (TJN), which is a coalition of researchers and activists with a shared concern about tax avoidance, tax competition, and tax havens. In its 2019 report, TJN estimated the annual tax loss to Pakistan due to tax avoidance by multinationals, through profit shifting and transfer pricing, at upward of 10 billion US dollars.

Even if the estimate is treated as an exaggeration, the dividend from focusing on this single element would be far more rewarding for a perpetually revenue constrained Pakistan, but the false narratives and misplaced priorities obliterate the focus of FBR.

Irrespective of the actual quantum of revenues lost due to the tax avoidance strategies carefully crafted by the multinationals, the absence of this important source of tax revenues from the public discourse about FBR’s performance is intriguing and tells a lot about how narratives are built to cushion the powerful lobbies. Here it needs to be realized that Pakistan is a signatory to OECD’s (Organization for Economic Development’s) initiatives to act against Base Erosion and Profit Shifting.

All the necessary legislation was done by 2018 and Pakistan also made agreements with OECD’s Tax Inspectors without Borders (TIWB), with the specific aim of building capacity for busting the tax avoidance schemes by multinationals.

The initiative fizzled out thereafter and not a single case was assigned to the audit panels, including foreign auditors. Instead an ill-conceived and poorly implemented new organization was created to handle the cases of transfer pricing and other aspects of cross-border transactions.

Just as quantum physicists who believe that sub-atomic particles have a dual nature, behaving at times like energy, and at other times like particles; similarly, the new field organization is in some aspects a part of the respective large taxpayers’ office and at other times is part of a Directorate General.

But subatomic particles have learnt to exist in this twin state, whereas officers manning these Zones/Directorates find it challenging, to say the least.

Resultantly, not only no meaningful transfer pricing audits have been conducted but also all hopes of realizing any worthwhile revenue from the information received from more than 50 countries from the automatic exchange of information under the OECD have been laid to rest.

(To be continued on Thursday)

Copyright Business Recorder, 2023