Earlier this week there were talks on replacing Federal Board of Revenue (FBR), if not reforming the institution. Most experts are converging to the point that FBR in its current state is irreparable. The more important problem is multiplicity of taxation collection and policy authorities and in the process the tax-paying entities' cost of compliance and actual tax incidence significantly increase to lower the score on ease of doing business.
The PM's frustration is on lower collection by FBR in the first few months of PTI, and he is getting convinced that the FBR needs overhauling. There is no way to immediately increase collection without squeezing the way the then finance minister Ishaq Dar of PML-N used to do. Most taxes are collected as full and final, and economic slowdown has lowered the collection. Within direct income tax, the advance taxes collection practice was there to meet targets. There is a limit to advances, and in days of low profits, companies refused to pay further advances.
Having said that, need of the hour is to reform taxation system. The solution is in having one national tax authority that collects taxes on behalf of federal and provinces in a simplified manner. The taxation policy board should comprise all stakeholders including provinces and work under the Council of Common Interests (CCI).
Seeing the other developing countries' experiences in taxation domain and Pakistan's own in other areas, the idea of having a new authority is compelling. Academic literature shows that in the 1990s, the trend in developing countries was tilted towards the creation of semi-autonomous revenue authorities to replace the existing tax collection authorities.
In Pakistan, in the past three decades, with the exception of SBP, there is no success story of reforming any public institution, but there are a number of successful examples of new bodies. For instance, there are efforts to reform the Punjab Police by having new divisions within existing structure - but all these are blended in the corrupt and incompetent colours of existing policing system. However, Motorway Police was formed from the scratch and is kept insulated from existing policing culture. The organization is known for its better ethics and performance for decades now. Lately, Punjab Safe City is another good example to demonstrate.
Similarly, Nadra is a star in the federal domain. It is probably one of the best state run institutions and it has no contamination of any existing corrupt or incompetent government department. Likewise, Securities Exchange Commission of Pakistan (SECP) and Competition Commission of Pakistan (CCP) were formed in last two decades by replacing the old CLA and MCA respectively. However, caution is required as not all new organizations continue to perform well in the long run - such as National Accountability Bureau (NAB) was formed due to incompetence of Federal Investigation Agency (FIA), but over the period of time, the new organization created its own problems.
Some may argue that replacing the FBR may halt the overall tax collection system while few may say that FBR is under resourced. But that might not be factually correct as even within the direct taxes, majority is withheld - in FY18 only six percent of direct tax collection was on demand while it was 10 percent ten years ago.
The problem of FBR corruption and harassment was always there, but in the previous regime, the tax policy has been used to arm-twist businessmen by imposing irrational taxes and making them responsible for collecting on behalf of others. Most of taxes are implicitly or explicitly considered as full and final, be it a filer or non-filer. The tax policies have failed to broaden the tax base or to enhance documentation through filing. Around two third of fresh filing is probably zero return filing in the past three years.
There are a handful of big taxpayers as less than one percent of filers contribute more than half of taxes. What is the use of 20,000 plus FBR tax force when majority of collection is hinged upon a few filers? Virtually every big listed company has some taxation issues - there are numerous tax related notices issued to stock exchange in the past few years. Does that mean everyone tries to evade tax? Or is it due to FBR's undue pressure on existing tiny base?
The foremost need is to bring new and simplified tax policies by automating the taxation collection mechanism - complete separation of policy and collection, with less human interaction in filing. Strengthen the tax auditing system by forming a new wing for all kind of provincial and federal taxes.
The problem is in tax skewed policies, corrupt and incompetent FBR tax force, and complex filing return systems. Mend them, and have a unified national tax authority and make FBR wings, and provincial tax bodies, work under it. Get the best human resource out of the existing in the new one, and let it operate without pressures of quarterly targets. It may well be a difficult and painstaking task, but worth taking a shot at.