Khoso's tasks

The Federal Board of Revenue (FBR) is facing huge shortage in revenue collection despite resorting to all sorts of negative tactics and highhandedness, destroying the already fragile economy. The FBR on July 11 last year made the tall claim of surpassing the revenue target of Rs 2381 billion by "using extraordinary managerial skills, innovative IT tools and meaningful amnesty schemes".
However, a few weeks before the exit of the government, the revenue target was reduced to Rs 2190 billion without any debate in the Parliament that approved this figure during the budget presentation in June 2012. During the eight months of the current fiscal year, FBR collected only Rs 1107 billion, requiring further Rs 1087 billion in the remaining four months to achieve the revised target of Rs 2190 billion.
There are reports that even this substantially reduced target will not be met-the expected shortfall would be around Rs 400-500 billion. Such a shortfall will certainly cripple the new government financially, starting its tenure just before one month of the end of the fiscal year 2012-13 with a collossal fiscal deficit (more than 8% of GDP) and an almost collapsed economy with debt-to-GDP ratio going as high as 65% and inflation over 10-12%.
The caretaker government under former Justice Mir Hazar Khan Khoso, installed for just two months, besides holding fair and free elections on 11 May 2013, is faced with tough challenge of stemming the never-receding tide of reckless borrowings and printing of notes-two favourite pastimes of PPP-led government for five years that destroyed economy and skyrocketed inflation making life misery for the overwhelming majority of Pakistanis.
One of the reasons for monstrous revenue and fiscal deficits was irresponsible spending as well as FBR's failure to meet budgetary targets what to talk of tapping the real tax potential of the country - conservatively estimated at Rs 8 trillion. Can caretaker premier and finance minister turn FBR's failures into success and generate sufficient revenues to run the day-to-day affairs without further borrowings and money printing? It is a difficult but not an impossible task provided a dedicated and professional team is appointed to manage the affairs of FBR.
A few days back, the Federal Tax Ombudsman (FTO), Dr Muhammad Shoaib Suddle, warned FBR "to refrain from making any attempt of withholding refunds to show higher tax collection in the remaining period of 2012-13". He revealed that recently his office called a team of FBR "to ensure timely payment of sales tax refunds particularly in the last months of the current fiscal year." The FTO categorically conveyed to the present FBR team, "be careful and do not resort to blockade of refunds." He claimed to have informed FBR that "if it tries to withhold refunds, taxpayers would react and then FTO Office would certainly take immediately cognisance of the wrong doings of the tax department". He assured the taxpayers that the cases of maladministration eg delay in refund payments would be taken up by the FTO Office and prompt action would be taken on the complaints of the taxpayers."
In 2011, the FTO took a suo motu notice [complaint number 982/2011] of figure fudging by FBR through unlawful "borrowing of funds" in July 2011 by the Large Taxpayer Units (LTUs) from some companies to show higher collection. This undesirable act of showing higher figures of collection on the part of FBR still continues as it has no will to crack down on tax evaders. On the contrary it is as usual, preoccupied with extending full support to tax evaders and smugglers.
Take the example of ongoing amnesty scheme for smuggled, non-duty paid vehicles. It has led to a daily inflow of thousands of vehicles through porous borders. Legal cover given to criminals is encouraging further smuggling resulting in a loss of billions of rupees to the national exchequer-the main beneficiaries of this scheme are smugglers of vehicles as more and more luxury vehicles are being cleared by charging nominal duty. In the past, similar tax amnesty schemes were abused by tax evaders to launder their untaxed money through state patronage and, under all such amnesty schemes so far, the government has failed to collect even a fraction of the black money.
Shamelessly in the last days, members of Sindh Assembly and the Speaker of National Assembly were busy adopting laws to secure life-long benefits, perks and privileges - creating a class of Lords in the Land of Pure where millions are undernourished and forced to live below the poverty line.
According to a news item, "the Pakistan People's Party-led government has left behind a multibillion tax refund scam - one of the biggest scandals in the Federal Board of Revenue - to be dealt with by its successor interim set-up." The revelation came a day after Premier Raja Pervaiz Ashraf celebrated the 'victory of democratic forces' as the PPP-led coalition government completed its five-year term. The Press report stated: "The FBR added Rs 190 billion as sales tax in the exchequer but then also gave Rs 600 billion worth of refunds to influential people which amounts to a big fraud", Saleem H Mandviwalla, the former finance minister told this to journalists on 17 March 2013 adding that "this trickery of over refunds in the FBR was unearthed during my 24-day tenure as finance minister".
We are all aware about massive sales tax evasion coupled with under-reporting and non-reporting of incomes in Pakistan. The challenge is how to bridge the tax gap of billions of rupees. Issue of documentation is lingering on for years. During its five year rule, the PPP-led government did not take any action to check leakages in tax collection. On the contrary, unprecedented amnesties and concessions were given to tax evaders and looters of national wealth.
After failing to get Tax Amnesty Bill passed from the National Assembly, despite all out efforts till the last day, FBR is now planning to get it promulgated through a presidential Ordinance - if it is done, it will be a suicidal step for the PPP in the election year.
Tax evasion is so rampant in Pakistan that the size of informal economy is twice that of documented one, if not more. In Pakistan's peculiar milieu, innovative measures would have to be employed to restructure the tax system and restore public confidence in tax system. A State that has miserably failed to protect the life and property of the citizens, people say, lacks moral authority to collect taxes. Thus, even a good tax system will not work unless the prevalent situation-restoration of writ of state-is not established. This is an important prerequisite for any kind of reforms that political parties in election times are talking about.
The new government, after taking charge, should first of all introduce Taxpayers' Bill of Rights containing provisions that money collected from the citizens would be spent on their welfare and not for the benefit of a few. Secondly, there should be taxation of all incomes irrespective of their source (agricultural or non-agricultural). Thirdly, broad-based and harmonised VAT, covering all goods and services, at a low rate of 6% to 8% should be implemented.
Tax collection and compliance cannot be improved without the implementation of integrated Tax Intelligence System (TIS) that can correlate VAT collections with income tax returns and monitor all transactions. It should be coupled with a speedy refund system, which is fair and transparent - while enforcement should be strict and stringent, refunds should be paid expeditiously. There must be no sacred cows, amnesties, exemptions or concessions. Tax compliance cannot be enforced unless all the goods and services - barring a few essential eatables, books, children's garments, education tools - are brought into the VAT net and all persons having income of Rs 500,000 or more are taxed and compelled to file returns (electronically or manually) with declaration of assets and liabilities and personal expenses.
Law should be passed requiring mandatory publishing of directory of taxpayers every year so it can be seen how much tax is paid by high-ranking civil-military officials, judges, politicians, public office holders, rich professionals and businessmen and how much wealth is owned by them. The existing taxes, sales tax at exorbitant rate of 16% to 19.5% with lots of exemptions, excessive withholding taxes, presumptive and minimum taxes and non-taxation of agricultural income has created distortions - the system has failed to create equity, besides not being able to generate the desired tax-to-GDP ratio. To improve the tax-to-GDP ratio, all kinds of exemptions and concessions must be withdrawn. All persons earning income of Rs 500,000 or more - from whatever source - should be taxed.
At the same time, FBR should be made an autonomous body insulated from outside political, financial and administrative pressures. Parliament should devise, through a democratic process, a rational and consensual tax policy after taking input from all the stakeholders and experts in the field. This alone can help in improving tax compliance and improving tax-to-GDP ratio to a respectable level - India and Iran have achieved the level of 17% and 16% respectively by adopting the same measures in recent times.
It is by no means an easy task in Pakistan. But now the public is becoming increasingly critical of political motives behind so-called 'reform agendas' and getting better informed about the impact of undisciplined public finance. Unless all of us start paying our taxes honestly and diligently, rather than just criticising the government, there can be no hope for change. After fulfilling this obligation, people should demand that the revenues collected must be spent for the welfare of the masses and not for the luxuries of the rulers and the civil-military bureaucrats - their perks and privileges should be monetized forthwith. The ruling elites - political and bureaucratic - should be compelled to live like ordinary mortals rather than thriving on taxpayers' money shielded behind iron curtains in palatial houses.
(The writers, tax lawyers, are Adjunct Faculty at Lahore University of Management Sciences (LUMS))