Tax legislation is no longer considered as a mere device to raise revenue to meet the cost of governing a community. In a democratic dispensation, it is employed to attain economic policy objectives. The tax statute is a mix of fiscal and economic policy. The economic policy element of fiscal statutes ensures redistribution of wealth, equality and resource mobilisation for social sector development to achieve the goal of an egalitarian society.
Unfortunately in Pakistan, successive rulers, both military and civilian, used taxes as a tool to extort from the masses as much as possible for their own comforts and luxuries. By resorting to repressive tax laws, they made the rich the richer and the poor, poorer. Tax reforms (sic) by the Federal Board of Revenue (FBR) under the World bank-funded Tax Administration Reforms Programme (TARP) lacked the perspective of using the tax legislation as a tool of attaining economic policy objectives of making Pakistan a self-reliant country, free of domestic and foreign debt shackles.
There exists a total misconception in the minds of our policymakers that by merely reframing tax laws the entire tax system would be reformed automatically. This misconception in the past resulted in disastrous results. The government of Musharraf promulgated a new income tax law, operative from July 1, 2002. After 10 years, there is a consensus in all circles - officials and professions - that the new law, aimed at simplifying income tax enactment, has been a total failure to achieve the much desired goal of inducing foreign direct investment and rapid industrial growth. It has failed on all accounts. It is neither fair, practical, harmonious, nor does it contain any meaningful incentives for accelerating the process of investment and development.
Our financial mangers are caught up in a dilemma. On the one hand there is mounting pressure to reduce the fiscal deficit through improved collections and on the other, the ailing economy is not in a position to meet the growing revenue targets, unreasonably increased on a yearly basis in utter disregard of ground realities. The tax machinery is under tremendous pressure to collect more and more revenue, whereas there is recession and retardation in the economy. All kinds of negative tactics are being used as a means to extort money from the already trampled taxpayers by creating inflated demands, collecting advance tax much before its actually due, intentionally withholding refunds and keeping the cases undecided where creation of refunds is inevitable. The top policymakers in the FBR and the Ministry of Finance are obviously not unaware of these tactics and must be part and parcel of this unethical strategy.
In all democratic countries, special committees are formed by elected parliaments for conducting tax reform exercises. Here in Pakistan we are doing it through bureaucratic structures, which are outdated, inefficient, incompetent and corrupt. This is calling the troublemakers to do trouble-shooting, reminding us of Mir who aptly described such situations in the following couplet:
Mir kya sada hain, beemar huay jis ke subub Usi attar kay londay say dawa laity hain
(What a simple soul is Mir who seeks a cure from the protégé of the healer responsible for his illness).
Pakistan's tragedy is that things are always being done by people who are not competent - even eligible - for that job. Military governments make constitutional changes and tax reforms are undertaken by tax baboos, who have proven track records of inefficiency, incompetence and corrupt practices. The FBR has a bad habit of first announcing plans and then doing the homework, whereas it should be the other way around. On the one hand, they want full automation and on the other they have thousands of employees, the majority of whom do not even know the fundamentals of Information Technology (IT). It is quite strange that they want to achieve something for which they are not even prepared themselves. The skill gaps in terms of human resource have not yet been identified and there are talks of highly sophisticated automated systems.
The overwhelming majority of the workforce of the FBR is incompetent, inefficient, disgruntled, dissatisfied, indifferent and lack courtesy towards taxpayers. The mindset of the tax machinery needs a total change, which is more a matter of behavioural transformation. The FBR has yet not identified skill gaps in its present workforce, not initiated anything in terms of improving human resource management and shifted its entire focus on IT development. The catchword for them is "automation" which is not the sole solution for creating a corruption-free efficient, result-oriented, yet taxpayer-friendly tax apparatus. Though the IMF, the World Bank and other donors gave a lot of money to Pakistan for automation, yet nothing has changed. In fact, the FBR's stalwarts and bosses in the Ministry of Finance transferred the bulk of it to their hand-picked consultants who delivered nothing.
There cannot be two opinions about major IT and human resource improvements in the FBR as well as effective audit operations, but first of all a transparent tax policy and development-oriented tax reform agenda should be made public. Tax reforms without a rational tax policy are meaningless for achieving the goal of a functional, efficient and integrated tax administration. If the FBR wants to improve its efficiency, administrative reforms should be done pragmatically. The FBR should be made an autonomous body on the pattern of the Mauritius Revenue Authority (see details at www.mru.gov.mu).
Instead of improving the capacity to detect tax evaders through the Tax Intelligence System, the FBR is imposing more and more tax obligations on organisations and individuals in the form of irrational withholding tax provisions. Everyone knows that the fault does not lie with the tax laws but with the people who are implementing them. What is the guarantee that the tax officials will perform their duties honestly even when all existing tax alaws are replaced with new ones or with a fully automated system?
The experimentation in tax administration and laws without sound research, homework and a pragmatic approach is going to further destroy the existing system. The FBR under TARP replaced 757 income tax circles, working under 139 ranges, 32 zones and five regions, into functional divisions without proper homework and the result is before our eyes. Now they have reverted back to a single-tier system as far as Commissioners are concerned. Their decision to shift from four-layered administrative control to two-tier functional unit has miserably failed. This process of doing away with the traditional circle management to functional units has proved counterproductive. This shift was, in fact, restricted only to the change of nomenclature having only cosmetic value.
For any meaningful transformation, there is a need for professionals, which cannot be produced from the existing lot. The lower staff and officers hardly know their job not to talk of professional knowledge in the field of audit, taxpayers' assistance and facilitation, enforcement, legal, IT and human resource management. The FBR keeps on making tall claims about plugging all the loose ends in tax reforms but so far has miserably failed in all the areas.
It is high time that a National Commission on Tax Reforms, under the direct control of the National Parliament Special Committee, is constituted to suggest and supervise the entire reform process after consulting all the parties involved. The FBR's input in such processes is highly desirable as they are the people who have to implement the laws and policies. It, however, should also be kept in mind that they are responsible for the present chaotic situation as they have become de facto legislators and policymakers. They are just administrators and should not be given the task of legislative work. Bureaucrats dominate the Supervisory Council in the Finance Division that is to monitor and look after the FBR reforms. This is where the fault lies. Unless these tax administrators are made accountable before the public representatives and independent appellate/judicial set up, no meaningful tax reforms can be implemented.
(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Professors at Lahore University of Management Sciences.)