First time in a long time, a democratic elected government is seemingly seriously thinking about the separation of tax enforcement and policy arms of federal government. The intent is right and is in the manifesto of PTI. It was part of manifestos of the previous two governments as well; but remained a part of the manifesto, and nothing more.
The fundamental conflict is that the FBR has always been under pressure in terms of meeting the tax revenue targets in the short term while the long term forming tax policy, which is implicitly the domain of same institution, is compromised in the process.
A few examples of previous government demonstrate that short term targets eluded long term goals - such as the WHT on banking transaction for non-filers was sought for enhancing filing (documentation) but in essence, it was used as a measure of collecting taxes while the informal economy expanded unprecedented in the process. Similarly, corporate income tax was reduced in a staged manner from 35 to 30 percent in five years, but in between super tax, enhanced dividend tax, bonus tax etc were introduced to kept the effective tax rates unchanged.
The FBR collection machinery is perceived to be ineffective, incompetent and demoralized. In order to enhance tax collection, WHT regime was expanded in the last term by passing on the buck of collection to withholding agents - every other formal business had become WHT agent to collect advance income and sales tax. However, the latter likes to operate in shadows (informally) and the life of agents becomes miserable in the process. Slowly and gradually, they have started operating informally, denting the process of documentation.
The need of an effective coordination between provinces and center becomes imperative after 7th NFC award and 18th amendment. The provinces have opened up their own taxation authorities to collect taxes in their domain, earlier collected by the FBR. As the provinces started getting bigger share of pie, the FBR (federal government) started to encroach in the domain of provinces to elude provincial taxation authorities to attain their potential.
The awful part in the tussle between layers of government is poor tax complying businesses - firms have to comply with both provinces and center. There is no formal one window operation to adjust taxes amongst provinces and between provinces and federal government.
The pressure of tax collection resulted in not releasing refunds where due. Dar, in an effort show performance to the IMF, kept on not releasing refunds which choked the exporting and other businesses entitled to refunds.
All these unintended fiascos have started eating up time of entrepreneurs (especially for SMEs) in tax compliance. The corporate sector can still, to an extent, bear the intricacies of tax compliance, but in case of the small companies where CEO has to spend higher time on tax compliance innovation; business development and efficiencies in the operation are compromised.
Two-third of taxes are indirect in Pakistan and within direct taxes, three-forth are indirect in nature. Excluding WHT, the contribution of direct taxes is a mere 12.5 percent of total taxes - this raises the fundamental question that what is the need of FBR’s 20,000 odd team as most of collection does not require taxmen’s active involvement.
The need is to go beyond forming a tax policy board under FBR. That could be a short term answer to the woes, but to address broad contours of taxation compliance, inducing investment and to have inclusive growth, one taxation authority at the country level is imperative - akin to one window operation for filing all kind of returns and submitting all kind of taxes for SMEs.
The talks of forming a tax policy board are a welcome move where the FBR chairman would be a member to have a voice from collection authority. Members from other ministries, senate, parliament and private sector must also be included to have tax policy be in sync with trade, investment, and broader inclusive economic growth plans.
However, forming a policy board deals with one leg of the problem i.e. policy to be aligned with long term inclusive growth. The harassment and incompetence of FBR would still continue to go against the efforts of enhancing documentation and cracking down on tax evaders.
The need of the hour is to slowly and gradually diminish the role of FBR and objectively it should be replaced by a new nation-wide tax authority or revenue agency. The experts are of the opinion that corruption is in the DNA of the FBR and is beyond repair.
But the FBR cannot be dissolved in a day - a slow process of change is required. A few years ago, the WB advised government to reduce FBR strength by 5,000 members. But that never happened; even the retirees are replaced by new people within the same system. There should be an exercise of identifying competent resources at the FBR and taking them into a new agency or authority, besides inducting fresh blood. Others can be moved around for various other government services. Easier said than done though.