The government expects FBR collects Rs 2.8 trillion plus taxes in the next 12 months and substantially expand its tax net. Given the challenges FBR faces during the year beginning July 2014, it therefore needs to evaluate the available options in tax policy and administration to mop up the required revenue resources and turning the existing nominal tax bases into effective tax bases.
As to the Tax Policy, the framework for 2014/15 is already effective; FBR therefore can do little about it now. However, as the tax policy deals not only with selecting the kinds of taxes to be used and the rates to be applied; in a sense it also deals with the total revenue to be collected as well as the allocation of resources to the various departments of tax administration. The FBR may therefore review the cost (to taxpayers and to the government) of collecting the amount of tax revenue sought (including leakages from taxes collected through corruption and mismanagement) which should be as low as possible; and the tax structure does not exert unintended influence on the distribution of productive resources across alternative sectors and activities. The FBR, through strengthening its monitoring and audit framework as well as looking for tax revenues which are primarily lost for political reasons, would be able to partially achieve both the aforesaid policy objectives.
We would suggest that the FBR may also initiate preparing its tax policy inputs for the year 2015/16 based on the internationally accepted general guidelines aiming at: meeting community standards of fairness; simple and easy to calculate taxes; broad base spreading the burden of taxes among more taxpayers and across a large number of economic activities; limited exemptions, deductions and the number of rates; and of course some degree of “flattening” of taxes by reducing the number of rate brackets and simplifying the tariff structures.
Notwithstanding the policy constraints, FBR is well aware that the amount of revenue generation during the forthcoming 12 months would be importantly influenced by the administrative capacity to perform key functions for: registering taxpayers; monitoring, recording, and controlling payments and declarations in a timely manner; notifying taxpayers when they fail to file or pay on time; selecting and performing audits and collections activities effectively; improving taxpayer services and education; and of course the overall organisational development and management training in tax administration.
It is therefore imperative that the FBR initiates improving the aforesaid areas of its tax administration. FBR may right away deal with a fairly common problem which most taxpayers face, either by ignorance or otherwise, as to who is subject to tax obligations. This would do away the confusion or undue complications in tax enrolment monitoring. FATE Wing at the FBR could play positive role in addressing these issues through its website and call centers across the country. Streamlining the processes and eliminating duplications via centralisation of databases and processes could also be one of the potential payoffs from adopting simplified tax structures.
FBR knows well that the tax audit selection process has been controversial over the years fairly diluting FBR efforts to mop up its due revenues. FBR needs to establish clear criteria, automated systems and good data as the basis of audit selection to avoid disputes and litigation on this point. It is internationally accepted best practice to substantially remove discretion from the process to yield more revenue. As an integral part of skill development for conducting tax audit, FBR must establish ongoing training function. Institutionalised training capacity is particularly important in the tax services. Changes in legal, accounting, business rules and practices and other specialised areas call for continuous training of tax officials. The training directorates therefore must play an effective role in training of FBR personnel particularly at the staff level.
End to end use of IT is absolutely essential for successful enforcement of taxation laws. FBR requires a large volume of high quality tax and general economic data for effectively managing its tax system. The facilities, equipment, organisation and systems for collecting, storing and analysing these data are essential for steadily improving performance and efficiency of the tax system. Unfortunately, PRAL has not enabled the field formations unfettered access to their data requirements and timely response to the specific enquiries thus adversely impacting the tax audit efforts.
Yet another important area which has been neglected or, for that matter inadequately handled, is ‘Revenue Forecasting’ on a scientific basis. Government continues to forecast revenues on a ‘rule of thumb basis’ and the FBR facing shortfalls every year. FBR requires establishing a modern revenue forecasting system for each tax type, taxpayer type, and geographic region, and monitoring their performance. This function can be performed using the databases and professionals in a policy analysis unit. Such monitoring can help to detect and remedy local problems before they become more serious.
The FBR may like to consider some of the several features which distinguish successful tax administrations around the world. The set of good or best international practices in tax administration around the world management include: defining, communicating and applying clear roles for the normative, functional-support and operations levels; providing clear communication channels among different levels and among interdependent units; maintaining a comprehensive, up-to-date record of all taxpayers and their tax obligations; directing the allocation of the bulk of financial and human resources to the front-line? functions and to those support functions directly related to tax compliance; enforcement and taxpayer service; delegating authority to all operations levels and officials of the organisation; encouraging development and application of technology in all functions, including internal management information systems; and providing functional and management training, career opportunities and a work environment that helps attract and retain a high-caliber, career workforce.
Coupled with the above practices, political and social environment and relationships with the parallel organisations as well as taxpayers would mostly contribute towards the system effectiveness in revenue mobilisation.
(The writer is a former Member FBR)
Ahmad Khan, "Revenue policy and administration: Building capacity," Business recorder. 2014-07-06.Keywords: Economics , Economic issues , Economic systems , Revenue policy , Tax policy , Tax reform , Economy-Pakistan , Pakistan , FBR