The Chairman of Federal Board of Revenue (FBR) while attending a hearing before the Senate Standing Committee on Finance on May 13, 2014, in a shocking move and in utter contradiction to his earlier statements, criticised the Ministry of Finance for fixing what he called "unrealistic" revenue target of Rs 2,475 billion. He, however, did not tell the Committee that the real tax potential was not less than Rs 8,000 billion, and that FBR only managed to secure about 25% returns this year. Throughout the hearing, the Chairman continued lying and unjustly blaming others in an attempt to conceal his organisation's incompetence, inefficiency and corruption. He did the same a few days ago when he admitted before the Committee that refunds of Rs 97 billion were unpaid, but refused to give the details about all such claims which the Committee said were not less than Rs 450 billion.
Over the period of time, FBR has earned notoriety in all areas: from misreporting of figures to blocking of refunds, from corruption to high-handedness, from blame game to hiding facts, and from inefficiency to complete uselessness. FBR has not only failed to enforce tax laws, but has also been misreporting tax collection figures - in view of this fact who would believe the target of Rs 2,800 billion for the forthcoming budget. Time and again, the different chairmen of FBR have admitted before the Committee of Parliament that tax reforms funded by foreign donors since 2004 did not yield desired results.
At the end of the Tax Administration Reforms Programme (TARP) in 2011, there was unprecedented decline in tax-to-GDP ratio - from 12.5% in 2002-2003 to 8.2%. In the current year, it will go further down as FBR's Chairman told the Senate Committee, "I expect to receive Rs 2,270 to Rs 2,275 billion this year". The same Chairman until recently has been claiming that second revised figure of Rs 2,345 billion was achievable. He did not tell the Senate Committee that his political bosses gave exemptions and concessions that resulted in massive shortfall in revenue collection vis-à-vis original target of Rs 2475 billion fixed at the time of announcement of the budget 2013-14. He concealed the fact that the rich and mighty in Pakistan, instead of paying income tax, thrive on the national resources meant for the welfare of the weaker segments of society ['Ruling elite letting down FBR', Business Recorder, May 9, 2014].
Responding to a question put up by Senator Sughra Imam of the Pakistan People's Party, the Chairman was kind enough to admit that "cost of tax exemptions granted over the years to the affluent was Rs 480 billion per annum". Here too he failed to mention the correct figure that is Rs 800 billion per annum ['Onslaught of SROs continues', Business Recorder, October 11, 2013].
According to a Press report, the Chairman FBR said: "all of these exemptions cannot be withdrawn, as some are socially sensitive while others are protected under the constitution". He further revealed that "in the first seven months of the current fiscal year, Rs 320 billion worth of exemptions were given that included income tax exemption given to independent power projects (IPPs) for electricity producers that is protected through agreements and will not be easy to withdraw".
The Chairman was wrong on both the accounts. First of all, no exemption can be granted through any statutory regulatory order (SRO) as held by the Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak) as under:
"It is well settled proposition that levy of tax for the purpose of Federation is not permissible except by or under the authority of Act of Majlis-e-Shoora (Parliament). Reference in this behalf may be made to the case of Cyanamid Pakistan Ltd V. Collector of Customs (PLD 2005 SC 495), wherein it has also been held that such legislative powers cannot be delegated to the Executive Authorities. Also see Government of Pakistan v. Muhammad Ashraf (PLD 1993SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192)." [Page 18, Para 20]
As regards exemption granted to IPPs, it can also be withdrawn as held by the Lahore High Court in AES Pak Gen (Pvt) Company Lahore v Income Tax Tribunal Lahore (2006) 93 TAX 159 (H.C Lah.) and endorsed by the Supreme Court in Uch Power (Pvt) Ltd and others v Income Tax Appellate Tribunal and others 2010 SCMR 1236. It shows the level of competence of the Chairman FBR, who heads a very significant department of the government and is assisted by a number of high-ranking officers of Inland Revenue and Customs. This confirms collective intellectual bankruptcy prevailing in the FBR.
The Chairman FBR faced with tough questions about failure to achieve this year's original target of Rs 2,475 billion, declared (for the first time?) that "it was never the FBR's target, as during budget-making, it had proposed the figure of Rs 2,344 billion." In other words, he blamed the Finance Minister for overstating the target. When asked about the chances of achieving his own figure of Rs 2,344 (first revised target), the Chairman FBR said "the government has already revised the target downward twice to Rs 2.275 trillion, lower by Rs 200 billion." He said that he would achieve it or there might be shortfall of about Rs 5 billion. He blamed collection below Rs 2.344 trillion on decline of 10% in imports, "while the appreciating rupee also hurt collection at the import stage, about 41% of total revenues are received at the import stage". If FBR has to depend on withholding taxes and voluntary payments to the extent of 90% then what is the need to maintain a gigantic organisation? This question escaped the Senate's attention but one hopes the worthy Chairman would care to offer an explanation to the nation!
It is strange that despite holding regular meetings, the Standing Committees on Finance (Senate and National Assembly) have never recommended penal action against FBR's top notches even after established cases of blocking of refunds, corruption, over-stating of collection figures, making false statements and misleading the elected members and the entire nation. This is the real malady. The tax affairs of majority of elected members are not transparent. They help the bosses of FBR and in return get favours. This unholy alliance was discussed in detail in 'Legislators and tax delinquency, Business Recorder, March 7, 2014'.
Undoubtedly, the present tax system not only protects the rich and mighty but also imposes greater and undue incidence on the poor and middle-class people eg 17% sales tax (in fact 30% to 45% on finished imported goods after levy of all kinds of duties and taxes). Indirect regressive taxes take away larger portion of low-income groups compared to high-income groups. The rich and mighty enjoy tax exemptions and concessions in Pakistan through SROs and exemption in-built in tax codes. They make enormous wealth through rent-seeking and speculative transactions in stocks and real estate. Enforcing tax compliance vis-à-vis the rich has become number one challenge in Pakistan - Tax Directory published recently shows that only 890,000 returns/statements were filed. Why is the Finance Minister not asking FBR to take action against the non-filers and publish their names as well? This question is baffling everybody's mind especially when Ishaq Dar says he has clean chit from IMF as well. Perhaps Dar is of the view that when IMF is paying promised tranches and other donors like the World Bank and the Asian Development Bank are giving loans of billions, why we should tax the rich.
Taxation is viewed as unfair and counterproductive by the majority in Pakistan. There is general non-acceptance of tax obligations-it is like a situation of tax revolt against the State that is extracting money at source etc and most of the people even do not know about it eg mobile users paying 15% adjustable income tax. Many rich 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 do not care a damn about welfare of society.
The provincial governments and assemblies are also guilty of protecting the rich and mighty by not levying/collecting tax on "agricultural income". The rich and mighty in Pakistan are virtually outside the tax net. Since they are not paying direct tax according to their real incomes, the vast majority of citizens argue as to why they should be subjected to exorbitant and multiple indirect taxes even under the garb of income tax? They are especially annoyed with multiple indirect taxes at the import stage, the burden of which comes down heavily upon the end consumers, vast majority of which represents weaker sections of the society.
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 tax officials work with negative mindset and instead of facilitation irk the taxpayers. Success or failure of FBR matters a lot - the nation at present is heavily indebted due to unwise policies and lack of political will to collect taxes from the rich. Tax concessions and exemptions must be abolished forthwith as in their presence revenues cannot be generated especially from the mighty sections of the society. FBR has failed to promote voluntary tax compliance - in a population of more than 180 million as only 890,000 filed tax returns/statements for tax year 2013.
During the last six years, FBR has miserably failed to achieve the revised targets, what to speak of originally fixed ones in the budgets - it may also be noted that even collections shown included blocked refunds of billions and advances that were not due from banks and public sector enterprises. In the fiscal year 2012-13, FBR failed to collect the three times downward-revised budget. The massive shortfall of Rs 444 billion pushed fiscal deficit to 8% against the budgeted target of 4.7% of GDP. FBR collected only Rs 1,936 billion against the target of Rs 2,381 billion - at 3%, it was the lowest growth in 13 years. In fiscal year 2011-12, there was shortfall of Rs 75 billion, even though the target was revised downward to Rs 1,952 billion. In 2010-11, there was shortfall of Rs 38 billion, but the then Chairman FBR with his team made a false claim that they collected Rs 1,590.4 billion against the revised target of Rs 1,588 billion. The media exposed manipulation and later FBR retreated and admitted that actual collection was Rs 1,550 billion. Strangely, nobody was punished even after confession of cheating and fraud.
FBR has been misreporting the figures regarding income tax payers in Pakistan - there are not less than fifty million paying income tax under withholding tax system, though there were only about 890,000 return filers for tax year 2013. Failure is entirely that of FBR, as it remained unsuccessful in enforcing tax codes, compelling those having taxable income to file returns. Its performance is pathetically abysmal in achieving a satisfactory tax-to-GDP ratio and at 8.5% it is one of the lowest in the world. It is just thriving on withholding taxes and voluntary payments - constituting nearly 90% of total collection. The contribution of field officers [collection on demand through investigation or audit] is just 10% of total collection proving beyond any doubt how ineffective this organisation has become.
The repressive tax policies of successive governments have pushed millions of people below the poverty line. Whatever is collected, mainly from the poor, is spent for the luxuries of the rich and mighty who matter in this Land of Pure - the funds meant for masses are wasted ruthlessly or plundered with impunity by corrupt politicians and state functionaries. Just have a look how much money is spent for the luxuries of military-judicial-civil complex as compared to allocations for education and health. Collection of taxes does matter but the real importance lies in their spending. For strengthening democracy and economic progress, it is imperative to tax the rich, make powerful civil-military bureaucrats accountable to people and ensure equality to all. In governance, everything in interlinked and interdependent - nothing worthwhile can be achieved without law and order, efficient justice system ensuring rule of law, improving infrastructure, encouraging business environment and investment in human resource.
(The writers, lawyers and Adjunct Faculty at Lahore University of Management Sciences (LUMS), are partners in law firm, Huzaima & Ikram)
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