Just to highlight the difficulties involved let’s look at critical requirements for broadening of the tax base and controlling under-reporting and see how these functions have nothing to do with the proposed restructuring.
Section 114 enumerates the prospective return filers. The two most important categories are all those persons who have income above the taxable limit of Rs 400,000; and those who possess property in urban areas with 500 sq yards in area or more. Focusing on the taxable income category, one sees that that out of the five categories of incomes as per the Income Tax Ordinance 2001, the most important are: Income from Business and the Income from Property. What would in practice take to compel the all taxable income earners to file the returns? A few obvious requirements would be:
a. FBR needs to know who is earning the taxable income (of Rs 400,000 and above) from business and property. The answer is to first register and enlist all the business and property units on the ground, the units which has physical presence must be the first to be enlisted and reached out. This means that the FBR must first continuously and persistently be on ground to check and monitor every sizeable business or property unit that does exist on the ground.
FBR restructuring: a recipe for disaster–I
b. However, the FBR does not have enough resources, clout, power, and back support to reach out to each existing income earning unit-on-ground. It requires constant, systematic, honest, corruption-free, and continuous outreach to the units-on-ground.
b. Many factors hinder the practical implementation, as the FBR will have to deal with very forceful resistance of traders, businesses, and rent earners if they go out to check the units on-the-ground .The FRB force in its present state is deficient in credibility to be entrusted with the job of constant presence in the markets for identifying, guiding, monitoring, and convincing the non-filers to file the returns. Rather a constant refrain one hears here to be as less contact between the taxpayer and the tax collector, which is true in the present credibility level of the administration. However, until the force does not reach the ground level to check who is registered and filing, there is no real sorting out of this problem.
c. Obviously, what is needed is to further strengthen FBR as an institution; strong in accountability of its employees and effective in dealing with the resistance in the markets.
Similarly, the menace of under-reporting in the filed declarations is hard to curb and requires well thought-out measures. The reforms in this regard should begin with the best accounting practices, faithfulness in the preparation of financial statements, and maintenance of true books of accounts. In this regard, just as an example, the case of Enron Scandal of 2001 and resultant The Sarbanes-Oxley Act (commonly called “SOX”) could be cited.
The Sarbanes-Oxley Act (commonly called “SOX”) reformed corporate financial reporting and the accounting profession. Congress passed SOX in 2002 after a string of corporate scandals, most prominently at Enron and WorldCom, shocked the public and rattled markets. Sarbanes-Oxley made numerous reforms to corporate financial reporting and the accounting profession. SOX requires corporate executives to certify the accuracy of their company’s financial statements; maintain and assess internal controls to prevent wrong, misleading, or fraudulent financial data; and imposed criminal penalties for misleading shareholders and altering documents to impede an investigation. New criminal offences and enhanced penalties for corporate fraud and related misdeeds were enacted as well. Sarbanes-Oxley makes it a crime to defraud shareholders of publicly traded companies through the filing of misleading financial reports. Executives face fines of up to $1 million and 10 years imprisonment for knowingly certifying financial reports that don’t comply with the SOX’s requirements. Those penalties are enhanced for executives who “willfully” certify noncompliant financial reports: they face fines of up to $5 million and up to twenty years imprisonment.
The above narration about the SOX Act does not mean that it should be copied in Pakistan, which has its own social, business, and corporate world dynamics. However, it provides the lead for the types of reforms that are needed in Pakistan to handle the menace of under-reporting and falsification of the financial statements. Where does the bifurcation of the Board stand in achieving the above objectives?
A few words are needed about the separation of Tax Policy from the FBR. Going by the literature dealing with tax policy matters and tax administration matters, one finds that most of the tax policy functions are not in the domain of FBR. These are performed by the Parliament, and FBR only provides critical input. Generally, a tax policy function involves the following matters:
a. Setting the tax rates and changes to the tax rates, with decision on various exemptions, enhanced or reduced allowances and credits.
b. Change rates of taxes to discourage or encourage consumption of various commodities.
c. Enhance or reduce tax burdens on various sectors of the economy keeping in view the long-term objectives of economic growth, equity, and distribution.
d. To improve businesses’ liquidity situation, the options for deferring tax payments or speeding up the refunds, etc.
e. Introduce and suggest measures to simplify the procedures and improve compliance. Like increasing the eligibility criteria for SMEs which makes them subject to reduced rates.
f. Introduction of special taxes on special persons/institutions, like credit institutions to help support some specific funds, relief measures-in our case imposition of super tax in recent years.
g. Introduction of unique tax measures for certain sectors of the economy such as the real estate sector in our country for which the law has seen a lot of changes on how to tax this sector, but without much success.
The above list is just indicative. The FBR’s role has been to provide informed technical input, as it is the custodian of data and as it is the most relevant agency to make suggestions having impact on the state revenue and economy. As the policy matters are, effectively, already outside the domain of the FBR, establishing another office in the revenue division will be of no help to the ultimate decision makers in a democratic dispensation, the parliament. Further, this office will be constantly looking towards FBR for input, data, feedback, and briefing, thus putting a constant drag on its administrative functions. Still more important is the question: tax policy office or no tax policy office under revenue division, why FBR must break up and get dissolved in its present effective shape and become an impotent, weak organization in the process? Why an unnecessary intertwining office between FBR and Parliament can only be established by turning a statutory institution into a DG-ship with much reduced authority and clout for administrative maneuvering?
In fact, policy and administration in tax matters are intertwined in almost every clause of a tax statue. Behind even administrative procedures to levy and collect taxes there is a policy as to the level of tax charge and whom to charge it from. Administration itself is a domain of tax policy, as the way tax is levied, and the way it is collected, involve large number of unique and well defined policies with respect to registration of persons, the procedure regarding filing of returns, examination of taxpayers’ filings, initiation of proceedings through various kind of notices, various ways and procedures in which the proceedings are conducted and concluded, the appeals filed and decided, and the recovery of tax pursued and effected.
It is humbly requested to kindly align all the stated objectives with the proposed restructuring and show to all how the division of Board will bring about more return filing, less under reporting and a documented economy. Start from objectives and travel down to reforms and restructuring required to achieve them; not the other way round: first break-up a well-functioning organization on a repeated set of objectives, which are not shown to be linked at all.
(Concluded)
Copyright Business Recorder, 2024
The writer is presently working as Commissioner IR (Appeals) Sargodha
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