Tax mobilisation strategy

The Chairman Federal Board of Revenue (FBR) has directed Chief Commissioners of Large Taxpayer Units (LTUs) and Regional Tax Offices (RTOs) to take immediate steps to achieve downward revised revenue collection target of Rs 775 billion for last quarter (April-June) 2013-14. This has become a routine now that every year FBR fails to meet the assigned target. What makes the situation more painful is the fact that even revised (downward) target is also not achieved. Unfortunately, the successive governments have failed to take action against the responsible officers of FBR for their persistent failures. On the contrary, they are rewarded with bonuses and honorariums. The Public Accounts Committee has also failed to take notice of revenue leakages and rampant corruption in FBR.

According to press reports [Business Recorder, March 14, 2014], the issue of achieving revised revenue collection target of Rs 2,345 billion was discussed threadbare during the Annual Chief Commissioners Conference held at the FBR House on March 13, 2014. FBR Chairman informed the Chief Commissioners that “the tax machinery has to focus on key areas to ensure collection of the assigned targets during the last quarter of 2013-14”. According to the report, the revised revenue collection target for April 2014 is Rs 196.3 billion, May 2014 Rs 219.5 billion and revised revenue collection target for June 2014 is Rs 359.2 billion. Total revenue collection target was Rs 775 billion for the last quarter of current fiscal year. The target of March 2014 was also discussed during the conference and tax authorities directed the field formations to meet the assigned target of Rs 215.8 billion set for the current month.

It was claimed that tax collection target of Rs 2,475 billion for 2013-14 was revised downward to Rs 2,345 billion due to “low collection of customs duty and federal excise duty (FED).” This year, collection in customs and federal excise duty is below expectation. According to FBR, lower customs collections are due to “decreasing trend of dutiable imports vis-à-vis duty-free imports.” As regards low growth in FED, the reason assigned is low realisation from cigarette manufacturing and discontinuation of collection from telecom sector against the backdrop of imposition of sales tax by the provinces.

As on March 17, 2014, FBR collected Rs 1,440 billion, 17 percent higher than the amount realised in the same period of last fiscal year. FBR’s spokesperson told APP that Rs 527 billion collected as income tax against Rs 481 billion last year, Rs 700 billion as sales tax against Rs 588 billion last year, Rs 104 billion as FED against Rs 79 billion last year. Custom Duty collected was Rs 157 billion, with no growth from last year. He further revealed that some 900,000 tax returns were filed this year.

Field officers in the wake of instructions from top bosses have stopped adjustments of determined refunds against demands and advance tax liabilities. They have started raising illegal demands and blocking genuine refunds. They re resorting to all others possible negative tactics, including taking advances from big organisations even though the same may not be due. If this is the way to meet targets by FBR then one can only lament. Unfortunately, neither courts nor Federal Tax Ombudsman has ever taken any suo motu action against this highhandedness. Even the tax bars, NGOs and media have never exposed that growth story projected by FBR is a farce. Collection figures are manipulated – Revenue targets for 2013-14, Business Recorder, June 7, 2013. Audit by Auditor General of Pakistan should be commissioned to ascertain the quantum of refunds unlawfully withheld and how much advance amount not due was collected to show higher growth rate. Will our finance minister or Public Accounts Committee order this?

The concept of a rational revenue mobilisation strategy is alien to our policymakers and functionaries sitting in FBR. The best thing for us is to devise and implement economic policies aimed at rapid growth and investment. It should be the topmost priority – taxes will automatically increase with higher growth but collecting taxes not due in an ailing economy is not only counterproductive but can lead to further deterioration. Every political party promises rapid industrial growth as its main agenda on paper, but when in power fails to do so. As regards taxes, it levies the same of the poor and yields before the rich and mighty controlling them. The culture of VIPs/plots/perks/benefits continues unabated. Waiver of taxes or reduction in rates through issuance of statutory regulatory orders (SROs) is against Article 162 of the Constitution yet the government is saying that in 3 years such SROs will be withdrawn!

Only through higher and sustainable growth rate of 8% for at least a decade we can generate required employment’s of two million per year. Without this growth rate we cannot overcome our fiscal deficit. We also need to immediately withdraw all exemptions and concessions and improve capacity of the FBR. We need radical changes, namely, more tax from the rich, reduction in the exorbitant sales tax rate (it should be 8% across the board), bringing corporate tax rate to 25% and progressive personal taxes (upper rate of 55% if income exceeds 20 million), introduction of equitable tax base, simpler and fairer tax procedures.

We are all aware about massive sales tax evasion coupled with under-reporting and non-reporting of incomes in Pakistan. The challenge is how to bridge the tax gap of billions of rupees – it is 70% according to official study whereas independent analysts say it is more than 200%. Issue of documentation is lingering on for years. No government – military and civilian alike-has taken any action to check black economy and leakages in tax collection. On the contrary, unprecedented amnesties and concessions were given to tax evaders and looters of national wealth. It has simply never been the intention of any government since General Ziaul Haq, to crack down on tax evaders and combat generation of dirty money – result is the present grave crisis of governance, corruption, resource mobilisation, debt burden and mounting inflation. The only way to check massive evasion in customs, income tax and sales tax is implementing an integrated Tax Intelligence System (TIS), which is capable of recording, storing and cross-matching all inflows and outflows.

For collecting taxes, the following measures are inevitable:

— All in-bound and out-bound containers should be scanned/x-rayed to check evasion of customs duties and determine inflows.

— Encouraging, rather forcing, payments by credit cards/cross cheques for business purchases exceeding Rs 25,000, and giving incentives for reporting transactions to FBR – at least 10% as refund of the amount paid as sales tax. The procedure for claiming refund should be simple, ie payer should email evidence to the Central Tax and Refund Depository, which authorises refund directly to the credit card/bank account used after verification of genuineness of the invoice (by checking sellers’ registration number; or alternately;

— Any person who pays and reports sales tax may be allowed to claim against income tax liability 10% of total amount.

— In this scheme, the people may choose not to claim full credit of sales tax paid since they might not be able to justify the sources of their expenses. For broadening of tax base, the government can announce immunity for 3 years from scrutiny of expenses declared through sales tax invoices alone – it would go a long way to document the economy yielding more and more revenues in the coming years under income tax regime.

— This scheme would encourage people to obtain sales invoice for each and every transaction, which is presently not being insisted upon. Evasion of sales tax is mutually beneficial. If buyers are given the above incentive, they will insist on invoice and the government without expending any money or making extra efforts would be able to substantially expand the tax net.

— Such schemes were successfully implemented in Taiwan, Turkey and Venezuela. In India, the government of Kerala introduced 5% sales tax for all retail sales with incentives to both the shopkeepers and buyers. The shopkeepers got a 10%-15% refund of tax collected and paid to the government, and the buyer retrieved coupon of Rs 5 for every purchase of Rs 100. Every week a draw was held and coupon-holders won lucrative prizes. This scheme boosted retail sales of shopkeepers who were willing to get registered with the government. There has been tremendous increase in government revenues with the introduction of this scheme.

In Pakistan’s peculiar milieu, innovative measures would have to be employed to restructure the tax system and restore public confidence in tax officials. A State that has miserably failed to protect the life and property of the citizens, people say, lacks moral authority to collect taxes. Thus, even a good tax system will not work unless the prevalent situation – restoration of writ of state – is not established.

The Parliament, first of all, should introduce Taxpayers’ Bill of Rights assuring that money collected from citizens is mainly spent on their welfare and not for the benefit of a few. Secondly, there should be taxation of all incomes irrespective of their source (agricultural or non-agricultural). Thirdly, broad-based and harmonised sales tax (HST as in Canada), covering all goods and services, at a low rate of 8% should be implemented.

Tax collection and compliance cannot be improved without the implementation of an integrated Tax Intelligence System that can correlate sales tax collections with income tax returns and monitor all transactions – Resource Mobilisation: Tax Intelligence System, Business Recorder, February 25, 2011. It should be coupled with a speedy refund system, which is fair and transparent – while enforcement should be strict and stringent, refunds should be paid expeditiously. There must be no sacred cows, amnesties, exemptions or concessions. The tax base cannot be broadened unless all goods and services – barring a few essential eatables, books, children’s garments, education tools – are brought into the sales tax net and all persons having income of Rs 500,000 or more should be compelled to file returns electronically with declaration of assets and liabilities.

FBR must publish directory of all taxpayers every year so it can be seen how much tax is paid by high-ranking civil-military officials, judges, politicians, public office holders, rich professionals (lawyers and doctors etc) and businessmen and how much wealth is owned by them. FBR should also publish names of persons who are tax evaders. The tax directory recently published by FBR of members of parliaments is silent about their wealth statements. Tax Directory without disclosure of assets/liabilities is meaningless.

The existing taxes, sales tax at an exorbitant rate of 17% with lots of exemptions, excessive withholding taxes, presumptive and minimum taxes and non-taxation of agricultural income has created distortions – the system has failed to create equity, besides not being able to generate the desired tax-to-GDP ratio. To improve the tax-to-GDP ratio, all kinds of exemptions and concessions must be withdrawn. All persons earning income of Rs 500,000 or more – from whatever source – should be taxed.

FBR should be made an autonomous body insulated from external political, financial and administrative pressures. The government should devise, through a democratic process, a rational and consensual tax policy after taking input from all stakeholders and experts in the field and implement it after securing consensus in the Parliament. This alone can help in broadening the tax base and improving tax-to-GDP ratio in the country to a respectable level.

(The writers, tax lawyers, are Adjunct Professors at Lahore University of Management Sciences (LUMS)