The use of "exincome" flows a concept of expenditure-income ("exincome") flows should be developed to create a system that can collect and process information needed by field formations rather than work with what they passively received.
The concept of flows of income, capital, goods, services, etc within an economy is common in economic theory. It is the basis of the value added tax system, whereas in Pakistan we are implementing it without the support of reliable Tax Intelligence system.
Goods and services are monitored as they flow from one person to another and one person's expenditure becomes another's income. This concept is at the core of building Tax Intelligence system (TIS).
For intelligence purposes whether the expenditure or income (exincome) of a revenue or capital nature is not significant. What is important is the ability to trace one person's income from another's expenditure or vice versa by identifying both sides of a financial transaction.
These flows could be recorded by monitoring streams of activity like that which cascades from governmental capital expenditure down to private contractors, subcontractors, employees, wholesalers, importers and finally out of the country to foreign suppliers.
Once the main flows of exincome in the economy are identified it is possible to select points at which the information relating to persons and their transactions in that flow could be gathered.
In Pakistan the major flows are relatively easy to map, as its main source of economic activity is "imports". The flow of "imports" can be monitored through the computerisation of all points of customs where "imports" are handled. Once the exincome stream reaches the contractors, it is a little more difficult to trace. It spreads out through many channels in a wide delta of economic activity.
Tax Intelligence system should be able to track some sections of this flow by examining the records of government departments and other large institutions, for which statutory amendments are required in various laws, especially the Banking Laws protecting even criminal financial transactions.
From the Department of Customs and Excise, it is possible to monitor the imports of goods that enter the country and travel up this delta to wholesalers and retailers that service the large pool of householders and others that are active in the economy.
Intangible imports such as management or professional services by offshore companies can also be traced independently through bank records wherever necessary.
Income flowing into the hands of employees can be recorded through the Tax Withholding System. Other centres of information like that of the Registrar of Motor Vehicles, the Registrar of Deeds, and various agricultural authorities and boards set up by government, can provide information to track rental, transport or agricultural exincome that are not part of the major flows.
Information in respect of offshore transactions and suppliers could be accessed using double tax agreements where possible and appropriate.
One important feature of the Tax Intelligence System should be its recognition of exincome flows. Under the existing system, each piece of information received is followed up without checking whether the data is significant.
This is a reactive approach that leads to an enormous amount of unsolicited, uncontrollable and unmanageable work. Once the main sources of exincome are identified the scarce resources of the CBR can be deployed fruitfully in areas that have the greatest chance of producing positive results.
For example we have detected tax frauds by big multinational companies in Pakistan by using 'transfer pricing' mechanism that can yield tax worth billion of rupees.
The CBR is only chasing small traders and has neither will nor expertise to unearth such sophisticated tax fraud cases.
The IMF is also not very keen to help Pakistan to expose their favourite transnational companies (TNCs), which are inflicting colossal revenue loss to Pakistan. The IMF wizards are suggesting increase in POL prices to force our domestic industry to close or become uncompetitive in export markets. This is a conspiracy against Pakistan.
We are willing to expose tax fraud committed by such TNCs and can also help to recover tax worth billion of rupees avoided by the beneficiaries of loan write offs. But is CBR and State willing to tax the big fish and plunderers of national wealth? They have been set "freed" on good promises of not becoming a threat to certain forces of status quo. Is tax measures are only for the poor and the helpless masses? Why the mighty people in civil-military bureaucracy and big absentee landlords have not been brought into tax net for their enormous tax-free incomes? Why speculative transactions in real estate are not taxed? Why certain mafias are allowed to engulf the investment of small investors at stock exchanges of the country and on the top of that no tax is imposed on capital gains from this activity? Why unlike India and other counties investment in unproductive sectors in taxed to divert it to productive sector?
For example heavy taxation on unutilised property to ensure its diversion to employment-generating industries where tax exemption is available. In India if a residential property, other than self-occupied, if not let out for at least 300 days in a year is subjected to taxation.
DATA TYPES:
UNDER THE PROPOSED TIS TWO TYPES OF DATA IS TO BE RECOGNISED:
-- Permanent or core data that describe the taxpayer and its activities, for example the name of the company and its business, the address, the type of business licence held etc.
-- Periodically recurrent data in respect of the transactions of a company and other classes of taxpayers in terms of income earned, assets acquired and expenditure or liability incurred.
This information, when correlated annually, can give a clearer picture as to whether the person should be registered as a taxpayer or be investigated for any tax fraud.
THE FUNCTIONAL DESIGN: The new database should have a very simple functional design. The system must be designed around the following two major files:
THE CORE FILE: The core information regarding a company or a business extracted from the Registrar of Companies of Firms should be maintained in a database in which data are entered only once. Any subsequent changes need to be made through approved procedures. This database must contain permanent information such as the name, incorporation and tax numbers, and address of the company/ business.
THE TRANSACTION FILE: The other file should be the transaction file, which captures the constant flow of information that comes in respect of the activities of the companies/business.
The transaction file must relate to the company/business file through a business or an incorporation number. Details of all transactions that can be captured through generic fields common to all sources of information eg the monetary value, whether it is a purchase or sale, the date of the transaction, the type of property, and the exact description of the property.
Each source of information from which this data emanates should be coded so that the transactions can be traced to the original source. For example, different codes can be used to distinguish information from the Registrar of Lands from that of the Registrar of Motor Vehicles.
THE ADVANTAGES OF THE SYSTEM:
THE ADVANTAGES OF THE TIS CAN BE:
-- Simple to use. Once the major flows of exincome in the economy have been identified and the information centers/sources selected, then the main task is to see:
-- that all the information is in fact transmitted from the different sources of information and is entered in the transaction file; and
-- the company and business files are kept updated.
-- New sources of information can be easily added on to the system.
-- "Referencing" and cross-verification are done electronically.
-- Information can be recorded and processed quickly. One of the problems of CBR is that by the time information reaches the assessing/tax officer and is acted upon, the business has often closed down or the owners have sold up and left the country or the year of assessment has become statute barred. The speed of TIS can make it possible to track non-filers while they are still actively engaged in business.
-- Data capture errors are minimised. The fact that the core information is entered only once minimises input errors, especially duplications; there are fewer chances for data corruption.
-- The system is developed for a network. More staff can be engaged to enter data simultaneously thus speeding up the process; unlike the manual system in which only one person could use a register or the master taxpayer index at any given time.
-- Officers can be trained to use the system in a relatively short period of time.
-- It increases the skill levels of officers and so their efficiency. Junior officers can attain high skill levels that no only enable them to track non-filers but also to identify taxpayers that merit investigation or audit.
-- A variety of reports can be obtained on a periodic as well as on a ad hoc basis to reflect the amount of data recorded and processed. Reports can also be obtained to monitor the extra tax collected as a result of the information that has been processed, eg the amount of tax that the new taxpayers will be paying in their first year of registration.
-- The cost of setting up the system is comparatively low while the cost benefit ratio is high. The entire development can be accomplished with local funds without requesting aid from donor agencies.
Carlos A. Silvani, in his famous book Improving Tax Compliance in Improving Tax Administration in Developing Countries, edited by Richard M. Bird and Milka Casanegra de Jantscher, (1992) at page 274, has identified four key groups which cause shortfalls in tax administrations.
1. Unregistered taxpayers - the gap between the potential taxpayers and the registered taxpayers.
2. Stopfiling taxpayers - the difference between registered taxpayers and those who file returns.
3. Tax evaders - the difference between the tax reported by the taxpayers and the potential tax according to the law.
4. Delinquent taxpayers - the difference between the taxes assessed and the taxes paid.
The Tax Intelligence System (TIS) can be used by CBR to alleviate some of the problems associated with revenue shortfalls in Pakistan due to above-mentioned reasons.
Unregistered taxpayers can easily be located and those most likely to become regular taxpayers can be selected and followed up. Stopfilers can be encouraged to file returns by issuing or threatening to issue fairly accurate estimated assessments on their income based on reliable information available in the database.
Estimated assessments can often be wild "top of the hat" estimates that are not taken seriously by the taxpayers. If the estimates are too high the taxpayer is too overwhelmed to respond. If they too low the taxpayer would rather pay the tax than file returns. Near accurate estimates send a clear message to taxpayers that the Tax Department has reliable information on their activities and could take sterner action if the default continues.
In Pakistan, our tax officials are doing just the opposite and the entire tax system is discredited.
Tax evaders can be quickly detected if investigation division is able to assess and collect large amounts of additional taxes by detecting:
-- companies and other persons engaged in land sale; and
-- companies that are overpricing imports.
TIS can come in useful when delinquent taxpayers do not pay their taxes. The availability of current up-to-date information can assist seizure of assets or income in extreme cases of default.
Investment in microcomputers is extremely cost effective. In the first year of operation the cost will be recovered. The increase in taxes from new taxpayers and from the new investigation cases will justify the initial investment. There is no doubt that recent innovations in microcomputers technology have made the goal of achieving reasonably effective tax administrations attainable in developing countries, like Pakistan.
However a word of caution is necessary. Current and accurate third party information is a powerful tool in the hands of the tax administration, yet in the final analysis even the best of tools are only as effective as the person who uses them. Once computer systems are introduced, sufficient resources would be needed in training the officers who are expected to use them.
The potential of new computer-based TIS can only be fully exploited when motivated and trained staff uses it.
The CBR must, therefore, prepare an integrated system and not piecemeal efforts here and there, which are being done these days by so-called foreign consultants, retired IMF, World Bank people who have neither competence in taxation nor insight into our mundane realities to suggest any workable solutions.
Taxpayers and the Government have a mutual interest in maintaining the integrity of the tax system ensuring that:
-- it is as easy as possible for taxpayers to comply with their obligations and secure their entitlements;
-- compliance costs are kept to the minimum compatible with effective tax administration; and
-- tax evasion is tackled so that taxpayers who play by the rules are not disadvantaged and public services can be adequately funded.
EDUCATION AND SUPPORT: The CBR must realise that encouraging and assisting taxpayers is the most effective way of enabling them to comply with their tax obligations. Taxpayers are more likely to comply if:
-- they understand and have confidence in the laws they have to observe;
-- it is easy to comply; and
-- compliance is a positive move giving certainty and reflecting good citizenship.
Encouraging and improving compliance can be achieved by respecting taxpayers' rights and helping them recognise their obligations under the law. Publicity, taxpayer education and support are all essential to achieving these goals.
To ensure high level of voluntary tax compliance in Pakistan, the Government must:
-- look at the design of income and corporation tax returns to incorporate a request for a business to give its web site and e-mail address. This could, in the future, bring the advantages of speedier communication and enable the CBR to target sector related information or guidance;
-- examine how developments in technology might be used to reduce compliance costs on business during the audit of electronic data, books and records, within acceptable risk parameters;
-- consider in particular what guidance small and medium sized enterprises (SMEs) which are starting to trade over the Internet and, perhaps, internationally for the first time, need to help them comply with their obligations; and
-- use the opportunities offered by technology to assist taxpayers to comply with the law and to help keep compliance costs for business down
The voluntary compliance can only be achieved through the ways and means discussed above. The reliability of tax machinery, stability of tax laws, low cost of compliance, timely dispensation of justice and respect of taxpayers' rights are prerequisites of this process.
(Concluded)