The Federal Board of Revenue (FBR) is undergoing massive changes and its top management contends that these changes are being tailored in line with best international practices. One such major change is the creation of IRS or the Inland Revenue Service. According to the FBR, such a service exists in 126 countries.
The FBR has also got an ordinance promulgated for the creation of this service and other changes in different revenue Acts. Since these changes will have deeper impact and as such it would be appropriate to see what these changes and the best practices are and more importantly what would be their impact on the common man.
To begin with, these 126 countries where IRS exists represent not more than 10% of population and have even less share in the global trade. It is again relevant to note that no such service exists in neighbouring countries or in developed economies of Asia. Secondly, it is intriguing to note that only the portion of practices has been retained and being pushed forward that only strengthens the position of the top management and in no way strengthens the institution.
In developed countries such as Australia and New Zealand where IRS exists. But, there are separate boards for IRS and Customs in these countries. Such separation makes sense as they deal with all together different taxes for which distinct expertise is required to develop a taxpayer-friendly culture.
It is not clear as to why the separate boards have not been created and the top management is still intending to supervise a battalion of members. In comparison to all reformed models in other countries, the top management is lean and hungry. In Australia, there are only five members and so is the case with New Zealand. On the contrary, here the separate Boards for direct and indirect taxes have not been created. It is perhaps likely that the top management does not want to give up the absolute authority. In comparison to our neighbouring countries, not more than six members are on the board. The countries where the IRS has been created under the aegis of the World Bank are all banana republics. These are some African countries, including South Africa, and the CIS states. No such creation has taken place in EU, Pacific Asia, the US and India.
It is also maintained that this service (IRS) has been created to increase tax-to-GDP ratio. Here it is crucial to consider the studies conducted by experts who evaluated the data for many years. In a classic study conducted by Professor Richard M. Bird of University of Toronto, the conclusion was that the favourable impact of these changes/reforms is inversely proportional to the size of GDP; higher the size of GDP, lesser is the impact.
This rationale makes a greater sense as tax-to-GDP ratio is a far more complex issue which is interlinked with the type and volume of the GDP. The FBR has not put up even any empirical evidence which could corroborate its claim that the creation of this service would help increase tax-to-GDP ratio. It is also contended that all the tax services are essentially the same and anybody can do any tax-oriented job.
This argument is as frivolous as to say that a gynaecologist being a surgeon can also perform a cardiac surgery. The US is conducting a lot of studies before even it adopts some kind of VAT and so is the case of India. We may also know that in Malaysia or Indonesia, Customs administers the VAT. In EU, there are separate boards as well as same boards for federal taxes but one thing is common in all the models, that separate streams exist for different levies to facilitate and expedite the whole process.
There is a need to understand as to why the World Bank and the IMF come up with novice proposals. We need to understand that why they offer prescriptions to only those countries that approach them with requests for financial aid. Such recipient countries are told to strictly follow or adopt their designed models and adopt practices that fit their purpose. In different studies it is revealed that cartels of consultants exist in the IMF and the World Bank.
These organisations propose models for which only such consultants are hired at hefty salaries. It is quite evident that these consultants safeguard each other's interests, and applaud each other's papers in conferences that are later cited and considered as authority on reforms. It is, in fact, a trade union of self-proclaimed experts.
The ordinance, which has created IRS, has also introduced assessment based tax laws. It is interesting to note that it has done away with separation of powers and has invested executive and judicial power in the same person. This is a historical feature of Income Tax Service where the assessing person makes the adjudication as well. It is not understood as how a taxpayer will get justice from a person who frames the case and also decides it.
It is practically the same as to assigning investigation and judicial power to police and doing away with the magistracy system. It is high time for the legislature to take note of such draconian power being given away to the taxman.
It is ironic that this step is also attributed as one of the best international practices. It is, therefore, no wonder that Pakistan ranks at the bottom of all the human indexes because of such steps. The GOP gets aid from the IMF and the WB with heavy strings attached. These funds need to be utilised prudently and judiciously. These must be used to destroy whatever institutional arrangements we have.