Compliance is the key

The World Bank has come up with a new idea to resolve the issue of fiscal mismanagement of the country. According to its new document entitled "Pakistan Revenue Mobilisation Project", Pakistan has a great potential to raise its tax receipts without imposing new taxes or increasing their rates. Its tax potential could reach as high as 26 percent of GDP, if tax compliance could be raised to 75 percent which was a reasonable level of compliance for lower middle income countries. This means that Pakistan's authorities are now capturing only half of the tax potential. These observations have been made in the revenue mobilisation project undertaken with the help of dollar 400 million assistance programme to be implemented by the FBR aimed to contribute to a sustainable increase in domestic revenues. The credit of dollar 400 million would come from World Bank affiliate, IDA.
Coming to the weaknesses of the FBR, the World Bank believes that unlike most revenue authorities in other countries, the FBR is not organised along functional lines, nor does it have a clear hierarchical structure. It is a large organisation with a staff of 21,000 of whom two-thirds work for the Inland Revenue Service (IRS) and one-third for Pakistan Customs. Besides, there is a lack of coordination between federal and provincial governments which has a negative impact on total tax receipts. The share of tax revenues collected by the provinces is small but has been growing at a modest rate of 0.4 percent of GDP in 2010-11 to 1.2 percent in 2017-18. Despite all these weaknesses, the country's revenue performance has improved significantly, increasing from 9.5 percent of GDP in 2011-13 to 13 percent in 2017-18. This increase was largely attributable to recent policy measures like a reduction in tax exemptions for specific industries and improvement in tax administration.
We feel that though most of the observations of the World Bank would appear to be very genuine and quite in line with most of the other countries, yet these are not based on ground realities in Pakistan; nor do these reflect the past experience of various governments. There are of course no two arguments that, against the backdrop of sharply rising expenditures, Pakistan should have increased its tax revenues sharply to ensure fiscal sustainability and create fiscal space to finance much-needed investments in human capital and infrastructure besides generating capacity to repay the past loans. However, such a task has not been accomplished despite the best efforts of the governments. The current year's performance of the FBR has been particularly worse, with a huge shortfall in tax revenues compared to the projections and the overall budget deficit is likely to reach nearly 7.5 percent of the GDP which could crowd out private sector credit and increase inflationary pressures further in the economy. The World Bank's report says that FBR does not have a clear hierarchical structure. Such a point also seems to be removed from reality as the duties of the officials are quite clear and they have to follow the command of their superiors. Of course, the overall structure of the FBR may have to be overhauled which could be a great challenge. The present government seems to be quite keen to improve the performance of the FBR and has developed a transformation roadmap which seeks to make the FBR a semi-autonomous revenue authority with financial, managerial and operational autonomy. The Prime Minister seems to be so upset with the present working of the FBR that he has appointed a new chairman, who is a tax expert, with a view to getting better results. The situation is even more profound in provinces where they continue to announce "tax-free" budgets year after year.
Good luck to other countries where tax compliance is so high that they could generate enough resources with the existing rates and without broadening or deepening the tax net. Unfortunately, in Pakistan, the tax machinery is inefficient and largely corrupt while tax avoidance in Pakistan is largely seen as a matter of prestige and clout of the person and may be the highest in the world. Tax exemptions are another major factor contributing to the shortfall in revenues.