Oiling the tax machinery

Prime Minister Imran Khan has stated that the objective of the meeting with Grade 21 and 22 Federal Board of Revenue (FBR) officials at the Prime Minister's office was to get their feedback and suggestions to "restore confidence of businesspersons and general public in FBR for economic development." There is no question that reforming the FBR is a dire need and has been for decades, reflected by FBR reforms being a major structural time-bound benchmark programme condition in previous International Monetary Fund (IMF) programmes, including the ongoing programme. Failure to implement tax reforms led to the IMF suspending the 2008-13 programme and during the 2013-16 programme, Ishaq Dar focused on raising revenue through raising existing taxes, a design flaw, which, unfortunately, satisfied the IMF at the time but did not resolve the issues indicated by tax reforms once again being a major component of programme conditions.

However, the focus of the Khan administration, backed by several statements made by the task-force on governance and austerity reforms' team leader Dr Ishrat Husain, has been to restore business confidence - a narrative that presupposes that the 500 billion rupee loss of annual revenue due to FBR corruption, as noted by a previous finance minister, can be laid entirely on the doorstep of the FBR officials. That is simply not true and an old proverb - it takes two to tango - can be appropriately applied in this instance. Within the administration, conflicting narratives have surfaced: on the one hand, federal cabinet members, including the prime minister, are at pains to accuse National Accountability Bureau (NAB) of harassing not only businessmen but also bureaucrats who, they maintain, are unwilling to sign off on any documents due to fear, but on the other hand, also claim that bureaucrats have become partisan and are refusing to implement the government's directives. To deal with these conflicting opinions it is imperative that the task-force on governance recommendations, not yet shared with the public, begin to be implemented. The PTI government has been in power for around 16 months and it is about time the administration launched its reforms instead of relying on the Prime Minister's charisma and honesty to convince FBR officials to do their job properly. Be that as it may, the government's focus on limiting NAB to certain sectors only has not yet passed the legal litmus test as a law cannot be discriminatory.

The Prime Minister during his interaction with FBR officials, once again referred to replacement of FBR with Pakistan Revenue Authority (PRA). The common sense of this measure is not clear as the FBR staff would have to legally be accommodated and one would assume based on their experience they would be retained in the PRA. What is required is a change in the mindset of the FBR officials and for this purpose civil service reforms would be required that remain pending to this day.

But what is more important from the perspective of the public is reforming the tax structure itself which is heavily reliant on indirect taxes, whose incidence on the poor is greater than on the rich. Additionally, around 70 percent of all direct tax collections are from withholding taxes, levied in the sales tax mode, an indirect tax. The incumbent government's condition on the mandatory use of CNIC for all transactions above 50,000 rupees, a condition that previous administrations announced but failed to implement due to organised resistance by the traders/wholesalers, remains suspended till end January and one wonders if the government would be able to begin implementation in the remaining five months of the current year. If it succeeds then that would certainly be a feather in its cap in terms of widening the tax net.

The revenue target for 2019-20 is unrealistic and the Prime Minister should acknowledge it, the shortfall in the first quarter has been 164 billion rupees; higher revenue generation has not been through widening the tax net but mainly through raising existing taxes - a policy followed by the then finance minister Ishaq Dar as well. The taxation reforms need to be initiated without any further loss of time.