'All our systems should be linked together to promote information sharing and increase transparency,' says Chairman, Punjab Revenue Authority

BR Research recently sat down with the Chairman of the Punjab Revenue Authority, Dr Raheal Ahmed Siddiqui. Being a career bureaucrat, Dr Raheal has previously been working as Secretary Excise & Taxation in K.P heading the Khyber Pakhtunkhwa Authority (KPRA) and is now the force behind the turnaround at the PRA. We discuss with him the functioning of the tax system in Pakistan's largest province as well as various issues pertaining to tax collection and co-ordination.

<B>BR Research: Can you provide an introduction about how the Punjab Revenue Authority came into existence and its scope as well as mandate?</B>

<B>Raheal Ahmed:</B> This is all post 18th amendment where sales tax and services became a provincial subject. Though it was put in the concurrent list, as far as the collection of sales tax and services is concerned, it was done through the Federal Board of Revenue. After the 18th amendment it was decided that the provinces should form their own authorities and start collecting themselves.

So in July, 2011 Sindh Revenue Board (SRB) came into being which was followed by Punjab Revenue Authority (PRA) and Khyber Pakhtunkhwa Revenue Authority (KPRA). As far as PRA is concerned, while the federal government was collecting these taxes they used to charge about 14-15 services only, though the list of taxable services was much more than that. The last time when they collected taxes, FBR remitted only Rs 22 billion to the province.

When PRA was formed, things suddenly picked up pace and the number of taxes also started increasing along with the revenues. Next two years it jumped from Rs 22 billion Rs 33 billion and Rs 44 billion, respectively and then during 2014-15 it came slightly down to Rs 43.7 billion. That was the time when I was brought from KPRA to head this organisation in April 2015. When I joined the total collection was about Rs 28 billion against a target of Rs 95 billion with nine months gone. So I had to do a lot of national cleaning and do soul searching also as to what went wrong.

The first thing that I identified was the absence of a baseline survey, to forecast the figures and revenue projections. Anyways, we ended up at Rs 43.7 billion, which was the maximum we could achieve against the target of Rs 95 billion. One other problem I identified was administrative failure within the organisation. Secondly, nobody thought about the true potential of the market and how to capitalise on that. Another factor was a lack of strategy and the working was paced as a legacy of FBR. A newly formed organisation had to be more vibrant.

We decided to come up with new strategies and do something about the baseline also. The strategies we developed were multi-faceted. One, nobody knew about PRA till the last financial year, and there was a lot of confusion amongst the taxpayers as well. Some of them were still paying sales tax on services but they were putting it in the accounts of FBR because they were unaware about the existence of PRA.

Therefore, the first thing we created was our communications strategy so that people should be aware of our scope and services. Some of the donor agencies wanted to help us out in this, but their timelines did not match ours as we wanted to get it off the ground sooner. In less than three months, we managed to roll out an effective communications campaign which led to PRA gaining significant presence.

The other thing that was required was a reliable baseline for setting next year's revenue targets. Many people thought that a survey related to taxation in Pakistan was not possible. Because the last time a survey was done in June-July 2000, it was done when a military government was in power. At that time there were people in uniform who were hired to help out in conducting that survey. There were a lot of demonstrations throughout the country and markets remained closed for almost a week, which ultimately led to the suspension of the survey.

So naturally when we started the process there was apprehension from all quarters about its possible implications. I believe it is how you conduct the survey that matters, and there is no need to be aggressive. After much hassle, it became obvious that without a reasonable survey we will not be able to do our work properly.

This financial year along with the closing of our accounts we also completed our surveys. We have identified 24000 new taxable entities which are providing taxable services. At least, for the current financial year we now have a baseline to base our projections on.

The total number of taxpayers that were registered with us in May 2015 was 8700. Though the number had considerably increased since the time it was taken from the FBR when the number ranged from around 1-2 thousand taxpayers, it was still dismally low. By the end of June 2016 we have increased it considerably to 22700 registered taxpayers and most of them are paying taxes as well. Now, we have identified another 24000 out which we will certainly be able to add around 15000 this year as some of them are too small to come into the taxable net. So this is one of our success stories having increased the tax base from around 2000 to almost 40000 by the end of June 2017.

Another problem was that we were just focusing on a few sectors with the biggest one being telecom. Till about two years ago, the PRA was getting almost 70 percent of its revenue from the telecom sector. By the end Jun 2015, we have diversified and now the telecom share is less than about 35 percent. We have increased the number of taxable services to 59 and this year we have added two small services and redefined the third one. All this was possible because I got the complete support of the Chief Minister, Muhammad Shahbaz Sharif and Dr Ayesha Ghous Pasha, the Finance Minister of Punjab.

<B>BRR: How much is your tax collection?</B>

<B>RA:</B> From Rs 43.7 billion in the last financial year (2014-15) we closed at Rs 61.7 billion this year, which is about 41 percent more than last year.

<B>BRR: Which sectors are you increasing your presence in and what sort of innovations are you coming up with?</B>

<B>RA:</B> Let's talk about the restaurant services in which we also came up with an IT intervention called Restaurant Invoice Monitoring System (RIMS). Last year only 450 restaurants were registered with us in entire Punjab, and out of them 240 were registered in Lahore. There was a court order against us in the last week of January, on some point of legalities which we failed to fulfil. In those days we were a bit dysfunctional as we had to have the proper legal cover to proceed.

However, we continued with our general survey of restaurants in throughout Lahore with our partner DFID. We sent out our teams in Lahore and identified 2500 restaurants that fell within our sales tax on services purview. The restaurant services have been defined in our regulations with our criteria of the restaurant.

<B>BRR: When it comes to these informal restaurants then, how do you accurately measure their turnover?</B>

<B>RA: </B>Another thing you have to realise that there is a lot of resistance. People don't share and that is why our survey and questionnaires were not very intrusive. So it is a good question as to how they are assessed. We make a rough assessment and then send them a notice saying we think you fall within our purview of services that are taxable. We ask them to get registered with us and start filing. Once they start filing we start assessing them also.

But there is another part in it also, and that is the audit which we hope to start in the future after building up the necessary expertise and capability. We have been conducting on the job training in partnership with the World Bank for our officers. We also asked the Tax Bar Association, ICAP and other institutions to join as panellists and in discussion forums for training and learning purposes. All of our officials have undergone training in audits, and this year we plan to start selective audits.

There are two or three things we looked at with respect to restaurants and generally as well. One, we are trying to develop a culture amongst the taxpayers to ask for an invoice, which is generally not the mind set when it comes to any sector. So we realised most of these restaurants were charging sales tax but weren't registered with any tax authority.

Now with RIMS, we see a lot of restaurants joining because of social pressure because customers demand invoices for their purchases which they then send to us through WhatsApp. This allows for cross verification of the data the vendor has submitted and allows us to uncover any misconduct.

<B>BRR: Don't you think the database of taxpayers should be linked between all the provincial tax authorities as well as FBR?</B>

<B>RA:</B> When I was with KPRA in KPK as well, my demand from FBR was that all our systems should be linked together to promote information sharing and increase transparency. It has not happened so far, but it should.

<B>BRR: Fashion designing has become a huge business in Pakistan. Is something being done to bring the sector into the tax net?</B>

<B>RA:</B>There are a number of factors. Firstly, with respect to fashion designing we had a very limited scope because most of them fall into the goods category. If a fashion designer is making a suit or dress which is made to order; or if he is providing his services in designing of something which is related to the final product, then these services are actually concealed. So it is harder to target these segments. But made to order is slightly easier to find out. We started with simple things like bridal dresses which are all made to order. The charges are phenomenal with the highest that came to our knowledge being Rs 7.5 million for a single bridal suit.

Once we moved into it, we started creating ripples within the fashion designing industry and we did shut down some big names. There was a lot of hue and cry made by those big names, but we are always thankful to the media that started exposing all these stories. The fashion designer industry came under immense pressure and some of them are international as well. Finally, we had a meeting with the Pakistan Fashion Design Council (PFDC) that realised for the first time that there is a thing called paying taxes. That was the day they made it mandatory for all their members to have them registered with FBR and have a NTN number which the majority did not have.

<B>BRR: There are issues of FBR trespassing in your domain and there are issues within the provinces on destination and origination of services. How will these issues be resolved?</B>

<B>RA:</B> The debate on taxation at origination or destination is a world-wide phenomenon where some day you have to decide whether it should be the origin or destination. These problems were also faced by Germany as well as the European Union, which resolved them eventually.

We are newly developed agencies, and there is no culture of resolving such issues. So issues and problems for the business community remain. Some principles should be decided once and for all such as whether to tax at source or destination, but there should also be clarity and consistency. We should look to the EU, which has solved these issues despite being such a complex system with so many different stakeholders.

The biggest loser that emerges in this scenario is the province of Punjab followed by KP when it comes to source and destination. And the biggest winner is Sindh Revenue Board (SRB) and the Sindh government. That is why since one of them is a very big winner; it does not want to share its spoils with the other provinces.

Let's take advertisement as an example. The majority of advertisement agencies have their head offices located in Karachi. Wherever you make your advertisements we don't care. We are more concerned with where the services are consumed. Now the services are being consumed in Punjab because 60-65 percent economy is here in Punjab. Yet the SRB collects all the taxes and gives them guarantees also that they will take up the issue of adjustment with the FBR and PRA to avoid double taxation, but nothing has moved for the last 3-4 years. This financial year we plan to change our strategy and we will not buy these stories.

<B>BRR: What are the taxation problems pertaining to the telecom sector?</B>

<B>RA:</B> There are two major problems. One, telecom companies do not share their data with us. So we are not aware of how they apportion their taxes between the provinces. Secondly, some of these telecom companies come up with splendid ideas that give you free minutes, SMS and internet. According to economics, there is no such thing as free; so these packages also have a baseline cost calculated by the regulator PTA, and we asked them to give us the 19.5 percent due on that. How can you waive that off?

With the telecom companies not sharing data with us, we have asked for a forensic auditor to help us in this regard, and the FBR has kindly agreed to it; we might in the coming financial year be able to conduct an audit of at least one telecom company if we get the required resources and expertise.

<B>BRR: There are issues between the FBR and provincial tax authorities as well including on withholding tax input adjustment. Can you elaborate on those?</B>

<B>RA:</B> A major issue we had with the FBR was pertaining to input adjustment specifically for the telecom sector. When we started reconciling the total input adjustments, we had a claim that FBR had to pay us Rs 12.9 billion. FBR agreed to Rs 6.1 billion based on their calculations. But the real issue was that SRB had to actually give Rs 22 billion to FBR, whereas FBR had to pay PRA Rs 6.1 billion in adjustments. In nine months' time, reconciliation between FBR and SRB resulted in a total amount of only Rs 45000. The hassle with the SRB over input adjustment eventually led the federal government to scrap the provision for input adjustment in the Finance Bill, 2016.

On 10 June, 2016 we had a meeting with the FBR where I insisted that they should write in the minutes that Punjab government still requests to reconsider this decision. However, FBR continued with their policy as SRB was not willing to come to a logical conclusion. After a tough stance taken by FBR on this issue, FBR allowed Punjab to take counter measure in their Finance Bill 2016 by disallowing input adjustments (VAT mode). Subsequently, we also disallowed all the input adjustments of the entities whether federal or provincial that does not offer the same services to our taxpayers.

As far as the PRA is concerned, we are at a comfortable position because we don't tend to lose much. Despite being the sufferer in the previous system, we still pleaded till the last moment with the FBR to not go ahead with this removal of input tax adjustment. Because ultimately it is the end consumer who will have to pay because there is a higher incidence being passed on to them by the businesses.

<B>BRR: This connects to another issue which is the high cost of doing business. One of the reasons cited by experts is the cost of compliance by the taxpayer. There are multiple tax authorities with the compliance costs being a heavy burden?</B>

<B>RA: </B>There are a lot of things that can be simplified to reduce the cost of doing business by bringing some simple administrative changes, and the PRA has been vocal about this. Previously no one thought about this idea that came from Almas Hyder from the Lahore Chamber of Commerce.
The lead in this initiative has to be taken by the Finance Department, and they have set timelines for achieving certain goals. Many organisations are still running in traditional modes, and there is resistance to change the status quo. At least people have started thinking about these issues and the government has shown serious commitment to bring about an ease in doing business as well. But I believe by next year Pakistan will rank better than previously with respect to the cost of doing business.

<B>BRR:</B> Does PRA plan to publish annual tax directory that showcases its performance in terms of revenue collected by sector and also in terms of registered filers, tax buoyancy etc?

<B>RA: </B>For the past years we have not been able to do so, but from this year we plan to publish an annual tax directory.