Tax evaders and tax officials

Tax evasion is not unique to Pakistan. Western countries including the United States and Western Europe are increasingly engaged in proactively identifying tax evaders and levying heavy penalties on not only those who evade taxes by placing their wealth in countries beyond the jurisdiction of their country of citizenship but also against banks/offshore financial companies who abet the tax evaders.
That tax evasion is illegal and a crime is not in question. It entails deliberate misrepresentation of one's income or profits and is normally associated with the informal economy. Tax avoidance, tax experts maintain, is not illegal as tax loopholes are employed to legally defraud the government. Neither tax evasion nor tax avoidance requires the tax official to be complicit though his/her complicity would certainly facilitate the evader/avoider. In this context it is relevant to note that tax officials in the West exhibit low corruption levels and few cases of complicity with the evaders/avoiders have been registered. The problem in the West is therefore not internal; but instead the problem is external given that their wealthy nationals' who bank abroad to avoid paying tax on their income are assisted by the laws (or lack thereof) in countries that allow their banks/financial institutions to benefit from the inflow of tax evaded wealth. This accounts for the reluctance of these countries to change their laws to enable them to inform the tax officials of the depositors' country of residence of the extent of their wealth.
Perhaps the country most criticised for hiding behind secrecy laws that over time began to be equated with ill gotten wealth is Switzerland - be it the illegally-gained corruption riddled money secreted away by dictators or politicians of developing countries, or money secreted away by those in the West who deliberately understate their incomes. The Swiss banking secrecy laws have been effectively challenged by Western countries, including the US, and with threats of heavy penalties as well as shutting down their branches has compelled many a Swiss bank to not only give the necessary information but also to pay a heavy penalty for not doing so sooner.
Data suggests that Pakistanis' combined wealth in Swiss banks is considerably more than the Indians' and part of the reason could well be that the non-political Indians do not find it necessary to secrete their wealth abroad given the state of their economy. Thus it is all the more imperative for the government of Pakistan to begin negotiations with Swiss authorities. Unfortunately though to succeed with Switzerland a country must have clout or be part of an international effort to compel Switzerland as well as other countries where offshore accounts are accepted, to enact laws that would allow any country access to data pertaining to its nationals. A solution under consideration by the OECD is to improve information sharing between tax authorities and corporations/individuals/trusts of different countries and proposals as to the kind of information that would be exchanged as well as proposals for common legal and technological standards have been discussed. It is unfortunate that OECD (Pakistan is not a member country), is the forum where this is being discussed. One would hope that the United Nations takes up this issue and gets its member countries to agree to a proposal that would include all member countries.
Also relevant in this context is to ensure that only a tax official who passes the strict standards of integrity be promoted and any charge of complicity with a tax evader should automatically lead to suspension till the end of the independent inquiry. If the official is found innocent he should be reinstated and given compensation by the accuser while if found guilty his/her services should be terminated. Granted that civil service rules make termination a cumbersome exercise and many an accused civil servant has gone to court to get a stay order when dismissed therefore the best option would be for the Federal Board of Revenue to hire people on contract.
Pakistan's tax system however, is estimated to account for 500 billion rupee annual leakage. The reasons are varied and include: (i) our income tax collections are low, partly because farm income-however high-remains exempt from income tax and partly due to exemptions granted as political favours, (ii) customs collections are held hostage by over and under invoicing and may well account for large deposits by Pakistani nationals in Swiss accounts, (iii) tax rebates to exporters are also a major source of corruption and reflect complicity between the tax official and the individual/company seeking rebate, (iv) all Pakistani governments must be held guilty of large scale capital flight by their political opponents because of instigating tax cases against those out of power which even if accurate are routinely dismissed as victimisation, (v) the government has like its predecessors backed down from its budgetary measure to impose a 17 percent tax on unregistered persons and has instead announced a one percent tax - a withdrawal that many argue is for political reasons; and last but not least (vi) the statutory regulatory orders that grant exemptions for a limited time at great cost to the exchequer for example the car amnesty scheme effective March 5 during the very short tenure of Salim Mandviwala as the country's Finance Minister (19 February to 16 March) which was granted an extension by caretaker Prime Minister for six days till 6 April.
So what is the way forward? That the task is very challenging and has been during the tenure of several if not all of our former governments has been evident and includes those governments that have proactively tried to reform the tax system and those who have been lackadaisical about reforms. The opposition to reforms is simply too strong and ranges from beneficiaries consisting of extremely wealthy individuals (who employ any means to not only not pay tax but also to keep their wealth stashed abroad as they have little confidence in the country's financial sector) to politicians and influentials linked to political parties to senior civilian and military personnel.
The level of evasion is a function of the amount of money involved (with corruption big business in this country) and the efficiency of the tax administration. But first the government needs to develop and then implement a fair and equitable tax structure. Second all tax officials must be held accountable. Rigorous anti-corruption bureaus must be established in each and every department and their bonus linked to successful investigations that should lead to a return of the money to the ministry/department concerned. The federal ombudsman must be apolitical and he should vigorously pursue complaints against all evaders. Taxes must be rationalised to ensure that domestic capital does not seek markets where taxes are lower. And protection of capital must be provided to ensure that it becomes more profitable to invest and save here. Sadly I cannot drop any of these recommendations even after one budget and five months after the present government took over power.