Most Pakistanis have come to accept the fact that corruption is not an accepted practice in government, including among its tax collection authorities, but is also pervasive. Federal Finance Minister Dr Hafeez Sheikh while chairing a meeting of the Tax Co-ordination Group has rightly underscored the need for a fair, equitable and corruption-free tax system which, according to him, is the government's primary objective and called on the Federal Board of Revenue (FBR) to formalise recommendations for early approval by the government.
This is indeed a laudatory objective and would have the full support of not only those taxpayers of this country who are a victim of the inequity, but also the international community that has been vocal in recent months about the need for the country to tax its elite, defined as the rich landlords in our provincial and national assemblies, who refuse to legislate a tax on the income of rich landlords.
Dr Sheikh's directive to the FBR to formalise suggestions in this regard, however, was surprising given two facts. First, the five Letters of Intent (LoI) that have been submitted by the Pakistan government to the International Monetary Fund (IMF) Board as a prerequisite to the release of each tranche under the Stand-By Arrangement has entire sections devoted to government's commitment to specific tax reforms.
The first LoI dated November 20, 2008 envisaged a number of tax policy (including the implementation of a full value-added tax, with minimum exemptions, to be administered by the FBR) as well as administrative measures (including integrating income and sales tax administration and the reintroduction of a risk-based audit strategy to be implemented by December 2008).
The LoI, dated 16 March 2009, committed the government to replace the GST with the VAT and reviewing the sales, excise and income tax laws to minimise exemptions and zero-rating. By December of last year, the LoI committed to focusing on reducing the number of under-reporting taxpayers and non-filers (which would be possible once the VAT is implemented) and the tax audit and enforcement plans to be put in place and the tax refunds system strengthened.
The fifth post-flood LoI had the government stating that, "We will continue to cooperate closely with the Fund in the context of our SBA, both to provide support for our reform efforts and to help provide a consistent economic and financial framework in the challenging period ahead. Specifically, the existing GST will be transformed through the introduction of a reformed GST, capturing the features of a VAT, enabling us to start raising the tax revenues required for sustainable growth." The focus, therefore, was the VAT, or the not so innovatively renamed Reformed GST as the main pillar of our tax reforms.
As the government began to implement its commitments, as highlighted in the LoIs, it blatantly disregarded public opinion, failed to compel various Members of FBR to co-ordinate, and did not seek to tailor these commitments within our unique context. Thus, the IMF's suggestion, based on experience of other countries, developing and developed alike, to first launch a public campaign to sell the concept of equity as incorporated in VAT was never carried out, barring a few seminars with select participants.
In addition, the fact that the VAT on services, to be collected by FBR, was violative of our constitution was not taken into account. And finally, the recent concerns by the World Bank, as noted in its review on the implementation of the enforcement tool, that there was no consultation with the FBR Member Enforcement.
Sohail Ahmed, the Chairman of the FBR, revealed that cases involving tax disputes of over Rs 100 billion are pending at different courts, including 37 billion rupees in the Supreme Court. He requested a special bench to be constituted to deal with these cases. There is ample evidence to suggest that the delays in the country's justice system need to be dealt with without any further loss of time.
However, what Ahmed must also be fully cognisant of is the fact that harassment of taxpayers is an oft-cited phenomenon, due, no doubt, to the fact that the performance of FBR staff is linked to the quantum of tax demand they raise and not on the tax actually collected. Hence, there is a surfeit of trumped up and spurious tax demands that are unnecessarily raised against taxpayers and they are eventually set aside by the courts.
There must be some mechanism that seeks to link the performance of the tax collector with the preparation of a foolproof case that leads to conviction of the taxpayer for non-payment and realisation of taxes due. To conclude, there is a lot of work cut out for the government with respect to rendering our tax system equitable and corruption-free and needless to say, the blueprint for achieving this challenging objective is available in numerous reports, state-sponsored, multilateral-sponsored and indeed private-sponsored.
The only ingredient lacking has been the government's commitment. The government is, therefore, required to address this subject not from a moral perspective, but from a pragmatic one, and ultimately discover that in the end, honesty in the government, including its revenue generation machinery, is, in fact, the best policy.