Integrity management in tax administration

Similar to the socio-political culture of most public sector institutions in Pakistan, FBR is also in the 'integrity crises'. Given that the widespread publicity on this issue drives public opinion, it is incumbent upon the tax administrations to take proactive steps to ensure that they maintain a reputation of integrity. All failings, whether minor or serious, need to be addressed so that public confidence can be established and the good reputation of the service restored. This is particularly important as the confidence in the tax administration and faith in its dependability and integrity are factors that have a critical impact on the administration's ability to carry out its role. The administration can maintain public confidence only to the extent that its contacts with taxpayers and the general public consistently reflect the highest ethical and moral standards.
Against the aforesaid backdrop, it is important to define 'integrity' before one offers its 'management framework'. Integrity is internationally construed in the broad sense of honesty, moral correctness, respectability, fairness, equal treatment, and ethical behaviour across a range of operational and management issues. It also refers to the application of values, principles and norms in the daily operations of public sector organisations. As wrongly perceived, it is not about preventing corruption in a narrow sense, but rather about securing and maintaining public confidence. It is a core value and part of the organisational culture to prevent wrongdoing and reputational damage. For civil servants, in particular, integrity is about putting the public good above their own personal interests; and the cornerstone of good governance.
Globally, tax administrations are often regarded as lightning rods for corruption in public sectors around the world, notwithstanding that most tax administration staff is generally honest, industrious, and dedicated. Public and political confidence, along with operational effectiveness, is, however, adversely affected by the inappropriate behaviour of a small minority of staff. The sensational and disproportionate publicity arising from their actions overshadows the huge amount of good work carried out every day, often in difficult circumstances, by the vast majority of staff. It is therefore imperative for the tax administrations to have measures to assist in establishing integrity and maintaining it.
While the government and civil society in Pakistan is in know of the extremely low level of integrity, particularly at political and bureaucratic level, we have not seen proportionate efforts in restoring public confidence in recent years. At national level, there are only a few published studies on financial corruption - and those also by former civil servants. Of these studies, Khalid (1996) and Ehsan-ul-Haq (2000) are significant as they deal with the problem of corruption in tax administration; also partially dealing with integrity management in a narrow sense of the word.
Most of these studies suggest that "corruption in tax administration is only a reflection of the state of Pakistani society in general and the state of bureaucracy in particular; and that there has been incessant increase in the quantum of corruption in all aspects of life with serious ramifications of this increase. Also, that various efforts by the GOP (to resolve the relevant issues) have been insincere and flawed."
Ehsan-ul-Haq (2000) concludes that "corruption is a major problem in a tax administration, leading to a heavy loss of revenue, on the one hand and harassment of taxpayers, on the other. However,a significant majority of both tax collectors and taxpayers want an efficient and clean system. Both parties strongly resent being labelled as corrupt but feel helpless in current scenario. There is strong desire to support any sincere and comprehensive attempt at reducing corruption from the tax administration."
Khalid (1996) considers "Dwindling value system, political instability, corrupt leadership, and low wages with discretionary powers, and lack of accountability and insecurity of service as major causes of corruption in bureaucracy" as some of the reasons for corruption in the FBR. Ehsan-ul-Haq(2000)classifies causes of corruption broadly into two categories ie causes beyond the FBR domain and causes within its control. The first category of causes includes "antiquated state structure and systems and culture as the underlying causes of corruption in the GoP, which manifest themselves in other causes in the tax administration (or in any other GoP institution)". The category of major causes within the FBR ambit essentially relate to "human resource management and systems/relations with taxpayers."
Typical examples of corruption in the tax administration are reported: policy manipulation (ie overnight change in import duty structure via issuance of SROs), collusion (ie determination of duties and taxes with prior consultation between the concerned parties), extortion in the tax administration, and speed money. Put together, it is massive drain on the tax revenues.
The Task Force on Reform of Tax Administration (2000/2001) recommended a comprehensive strategy for the GoP and FBR to combat corruption. The recommendations to GoP encompassed "creating credibility of GoP with taxpayers (ie demonstrating genuine austerity at the top level, putting tax returns of elites on the web, earmarking some percentage of incremental revenues for specific social sectors, creating a demonstrable linkage between revenue generation and development expenditure for an area; giving FBR requisite legal and monetary support, realistic revenue targets, and demonstrating sustained commitment to change." The recommendations for tax administration included "improving organisational design and human resource management systems, business process re-engineering - minimising taxpayer/tax collector interaction, simplification of systems and rules, reduction in discretion, strengthening monitoring and accountability, and increasing transparency."
It is quite relevant to mention here that none of the recommendations made to the GoP as integral component of its fiscal policy has materialised. FBR to some degree has implemented these recommendations as part of its Tax Administration Reform Project. It is against the aforesaid backdrop that a fresh appraisal of the integrity issues and the broad approaches to instill the system integrity are required. Importantly, achieving a culture of integrity requires coherent efforts to update standards, provide guidance, and monitor and enforce them in daily practice. It also requires countries to anticipate risks and apply tailored countermeasures.
In general, integrity strategies comprise a variety of direct action measures against corrupt behaviour, while simultaneously pursuing reforms of policies and institutions. Such strategies, on the whole, combine three overarching approaches: fundamental approach; administrative and legal approach; transparency and standards approach as none of the three approaches is likely to be sufficient by itself.
The objective of 'fundamental approach' is to remove the conditions that give rise to corruption in the first place; and address weaknesses in policies and institutions by simplifying the tax system and reforming the tax policy and administration based on the principles of: simplicity, adequacy, equity and fairness, economic efficiency or neutrality, ease of administration, stability and certainty. Adhering to these principles goes a long way towards instituting a perception of fairness in the tax system as a whole, and in the government and the tax administration in particular.
A tax system is: (i) simple, clear, or transparent if it is easily understood by the taxpayer and the compliance cost is low not making the taxpayers vulnerable to coercion from corrupt tax officials; (ii) adequate, sufficient, or sustainable if it collects sufficient revenues to allow the government to deliver the requisite level of services; (iii) equitable and fair if taxpayers contribute according to their 'ability to pay'; (iv) efficient and neutral if it does not interfere with the economy; (v) easy to administer if it allows the government to collect the right revenues inexpensively; and (vi) stable if it generates predictable amounts of revenue year after year.
The objective of administrative and legal approach is to limit potential for corruption and to increase the probability of detection of corrupt practices. It introduces rules and regulations designed to specifically limit the discretion of public officials (which are intended to increase the probability of detection of corrupt practice) through strengthened monitoring and enforcement and timely and stiff punishment of offenders; establishment of internal monitoring units within organisations and the protection of whistleblowers; and adoption of a Code of Conduct or Code of Ethics along with appropriate sanctions for violations of the code.
While the Code of Conduct is the high level regulation, supplementary conduct policies cover significantly more detail concerning: (i) behavioural norms around issues such as: handling taxpayer complaints, confidentiality of information, falsification of official records, conflict of interest, interaction with taxpayers, and off-duty conduct; (ii) personal conduct relative to: accepting gifts, personal fund raising, lending and borrowing, private employment and outside interests, use of government accommodations, non-discrimination, and responsibility for personal finances; (iii) definitions of misconduct and conflict of interest, recommending attorneys and accountants, transactions with taxpayers or representatives, purchase of seized goods, and association with persons connected with illegal activities, etc; and (iv) enforcement for breaches of the Code, as well as grievance procedures.
Transparency and standards approach relies on good governance promoted through transparency and standards in the conduct of the administration's business as the success of a taxation system depends on public perception that it is being administered in a fair and an equitable manner. In broad terms, fairness in tax administration requires a balance between the rights of taxpayers and the powers of the administration, as well as consistency in the application of the taxation laws. The administration is, expected to provide the services and education taxpayers need to comply with their obligations - user-friendly guides, information brochures, inquiry services, seminars, and interpretation of the tax laws, etc.
Appeals and oversight: Given that the system can be manipulated to the advantage of a person or organisation, the work of the tax administration has to be subject to oversight; hence the role of the appellate function as it plays a major part in influencing the public image of the tax administration. These external functions are important because they: provide for public transparency, operational feedback, some measure of integrity, and opportunities to correct mistakes; identify potential wrongdoing and lessons to be learned; salvage public reputation; improve client service and integrity; and test operational accountability. While adequate 'appellate organisation' exists in Pakistan, FBR needs to have a 'research and analysis' wing to review the appellate orders and address the systemic issues through clearly stated policy and enforcement mechanism.
Public outreach activities: After the tax administration has sufficient systems and safeguards in place internally, it helps to communicate this fact to the public and get their buy-in for any anti-corruption including: the steps taken to reduce the scope for corruption and encouraging the public to report any instances of inappropriate behaviour by tax officials; and establishing a telephone number where taxpayers and tax officials can report violations of the Code of Conduct.
Enshrining in law the right of the citizen to information provides an incentive to the tax administration to maintain high standards of integrity. This effectively empowers citizens on the one hand and, on the other, instills fear in the minds of wayward tax administrations regarding any wrongdoing on their part. Many countries have now enacted or adopted something along the lines of a Freedom of Information Act. Such a law empowers citizens to demand information from the government about the details of any action taken or not taken which forces the tax administrations to promote greater transparency and accountability in their operations.
Citizen/taxpayer charters are meant to clearly articulate not only the powers and responsibilities of the tax administration, but also the rights and obligations of the taxpayer. The Charter spells out well-defined and objective criteria for various tax actions, which impact the public on a regular basis, so as to encourage fairness, accountability, and efficiency in the tax administration's operations. The Charter may also mandate that the tax administration adhere to time limits for certain actions eg responses to written communications, complaints and grievances redress, determination/issuance of tax refunds, etc. The existing 'Charter of Taxpayers Rights and Obligations' needs to be legislated rather than retaining it as a moral cover for the tax collectors and taxpayers with no consequences for departing therefrom.
(The writer is a former Member, FBR)