Towards TARP-II?

In the beginning it was tax evasion, and then became rampant corruption and eventually mafias took over, making the FBR irrelevant in most of the sectors-Ali Arshad Hakeem, Chairman FBR.

While addressing a two-day workshop, “Accelerating Tax Reforms”, jointly held by FBR and the World Bank, the Chairman of Federal Board of Revenue (FBR) claimed that from March 1, 2013, the field officers would start issuing notices to 300,000 biggest tax evaders. He vowed to arrest 100 big smugglers, abolish the zero-rated regime for the textile sector and review of section 111(4) of the Income Tax Ordinance, 2001 that is meant for genuine remitters but is abused by tax dodgers to whiten their untaxed income. These pronouncements are encouraging moves – after all it is better never than late. But unfortunately, there is news that all this meant to sign a shabby deal with the World Bank for another tax reform project for which a loan of $300 million will be taken after failure of earlier $149 million Tax Administration Reforms Programme (TARP).

The statement of chairman came in the wake of order by the Supreme Court on February 22, 2013 requiring “the FBR to furnish the details of all tax evaders”. During the hearing in the case of missing containers of International Security Assistance Force (Isaf), the Chief Justice of Pakistan, while admonishing FBR, observed that “there will be no budget deficit if FBR recovers all due taxes”. The court instructed the Chairman FBR to develop a foolproof system to foil tax evasion. “All the markets in the country are flooded with smuggled items that destroy local industry,” the Chief Justice of Pakistan noted with concern.

The Supreme Court was informed that in response to 7,972 show-cause notices, the FBR had received as many as 7,000 Cross Border Certificates (CBCs) which were dispatched to concerned collectorates of Customs at Quetta and Port Qasim Karachi. The counsel for National Accountability Bureau (NAB) contended that FBR reported a total of 7,972 missing Isaf containers whereas Federal Tax Ombudsman (FTO) put the number at 28,000. The court observed that in view of the FTO’s findings, the NAB was to conduct a thorough and proper investigation, confront the accused with the contents of report, and rest of the matter should have been left to the trial courts. The NAB, as usual, is delaying the matter while FBR is saving the corrupt officials involved in the scam.

The Chairman FBR expressed “tough” (sic) posture towards tax evaders in the workshop arranged with the World Bank with the aim to seek more funds for another tax reform programme, TARP-II. It needs to be mentioned that he was an ardent advocate since taking over the office as the choice of President of amnesty schemes for tax evaders, but failed to convince the legislators to pass the proposed Bill. He told the World Bank officials that as “part of plan-B, we would now bring 300,000 potential tax dodgers into the tax net for collecting Rs 90 billion of which five percent will be given to the FBR staff as reward money.”

The Chairman claimed that soon the President would issue an ordinance authorising FBR to suspend the Computerised National Identity Cards (CNICs) of tax evaders who would not comply with the notices. He revealed that exemptions granted in the last four years cost the national exchequer a loss of Rs 640 billion. Chairman FBR said that the narrowness of the tax base was shocking as only 750,000 Pakistanis of a total of 180 million were registered with the income tax authorities. According to him, only 100 companies pay 82 percent of sales tax and tax paid by one tobacco company alone, is more than what the entire salaried class contributes to national kitty. “With this flawed system, a few people get rich and the mafia takes over,” he said and added that “this is the failure of the system”.

We have been continuously writing since 1994, seeking to draw the attention of all who matter towards a very large affluent and powerful segment of society that has successfully managed to keep itself off the tax roll. Our campaign is now bearing fruit – at last, the top man of FBR has admitted the failure of tax system and need to crack down on those who have been shamelessly depriving the exchequer of billions of rupees. Not only are these tax evaders stifling economic progress, they are also responsible for shifting burden of taxes on the shoulders of those who are not even liable to pay any income tax. Many decades of tax evasion have forced the country into debt slavery, recession, abject poverty, political turmoil, chaos, foreign subjugation and overall atmosphere of despair prevails.

We have been clamouring through these columns that there is a wealth of information available to FBR of lucrative immovable property, expensive luxury vehicles, hefty bank balances but nothing has been done till today to tax their owners, who also spend enormous amount on foreign travels, entertainment and utilities. It needs to be reiterated that taxes are not only required to run a state, but also meant for fostering growth with justice, to divert the flow of capital towards productive investments, to propel the economic cycle, to empower the government to extend social services to the poor and to equitably redistribute wealth so that not a single person is left deprived and destitute.

As we have mentioned time and again, unless and until, the rich and mighty pay taxes there is no way that Pakistan can break free from debt shackles and humiliating submission before the World Bank and the IMF. Unless tax delinquents are brought to justice, honest taxpayers would have no reasons to revel. For a long time the honest ones have been bearing the brunt of high taxes while their deceitful counterparts were on different occasions, generously awarded with extremely low-rate amnesty and money whitening schemes – section 111(4) as mentioned by us time and again is a permanent tool to get the untaxed money whitened by just paying a premium of 1 to 2 percent to any money exchange dealer. Tax evasion is nothing new to nations, even countries boasting high tax-to-GDP ratio have cases of tax frauds but to an extent that does not result in a significant dent in collection. However, when the scales are tilted towards more evasion and less collection then obviously there is serious cause for concern as is the case in Pakistan. If Chairman FBR and his team demonstrate firmness, they can easily collect Rs 6 trillion – though the actual potential is not less than Rs 8 trillion [see ‘Taxation for economic growth’, Business Recorder, November 21, 2012]. Mobilisation of resources to such a level would create fiscal space and end dependence on loans. This would lead to self-reliance – a prerequisite for making Pakistan an egalitarian state.

How to enforce tax compliance without harming Pakistan’s economic growth is the main challenge before FBR. The crisis and dilemma faced by Pakistan is massive and blatant defiance of tax obligations. As taxes collected are ruthlessly wasted by the elites and are not resulting in the well-being of people, tax avoidance has become a natural reaction. We need simple tax statutes, rational policies and effective enforcement apparatus – complete restructuring is required to reform the existing tax system to restore public confidence.

The campaign against tax dodgers will not succeed unless the prevalent negative mindset of the tax officials is reversed. There is an immediate need to improve operational efficacy of tax apparatus and quality of the human fabric that controls it. The majority of officials lack professional competence and integrity. No effective mechanism has so far been evolved to check any unfair practices on the part of tax administrators. They are not liable to punitive actions and/or pecuniary damages even after the final fact-finding authority adjudges their actions arbitrary, excessive and beyond their assigned powers. The FTO should be given the statutory power of awarding damages in such instances.

Taxpayers must be given rights before the FBR initiates stringent campaign for enforcing tax obligations. For restoring confidence of taxpayers, the President along with ‘Enforcement of Tax Obligation Ordinance’ should also promulgate ‘Taxpayers Bill of Rights’ [see text in ‘Need for Taxpayers’ Bill of Rights’, Business Recorder, May 13-18, 2011]. The present tax system imposes greater and unjust incidence on the weaker sections of society e.g. 16% sales tax (in fact 30% on finished imported goods after levy of all kinds of taxes) takes larger portion of low-income groups compared to high-income groups. The rich and mighty are not paying income tax on their colossal incomes, including rents from agricultural lands derived as absentees landlords, profits made through transactions in real estate and on the money/share market. Since they are not paying tax on real incomes, the vast majority of citizens question why are they being subjected to exorbitant and multiple indirect taxes?

During the 6-year period of TARP, the FBR miserably failed to improve tax system, especially voluntary compliance and tax-to-GDP ratio, which has in fact nose-dived at the end of TARP. Reportedly, the FBR is again begging for a huge loan of $300 million from the World Bank for TARP-II. According to a press report, the World Bank has already given $3 million for project preparation. How can such an agreement be negotiated by a government which is about to end its tenure in the mid of March 2013? It confirms existence of unholy nexus between tax bureaucrats and the World Bank officials. Do we need foreign money to crack down on non-filers? Once again, there is something fishy about the deal. Certainly, the crafty bureaucrats sitting in the FBR are playing foul. We can never reform tax system with the World Bank’s prescriptions and FBR’s bureaucrats.

We need people-friendly, pro-growth and equitable policies. The actual tax potential cannot be tapped unless the government takes some concrete and positive steps in taxing capital employed in unproductive areas ensuring its shift to productive sectors that generate more goods and services, leading to greater employment possibilities.

Taxation should help boost growth rather than retarding it. Taxes are by-products of growth and productivity. If we accelerate industrialisation and infrastructure development and attain sustained economic growth, taxes will automatically improve. The emphasis should be on growth and not mere taxes in isolation. Achieving growth rate of at least 9-10 percent for a decade should be the foremost priority – it will automatically generate substantial revenues. With higher growth, the goal of redistribution of wealth can be achieved by levying progressive taxes and spending the same for empowerment of the weaker section of society. It is not possible to achieve growth and equity through regressive and harsh taxation as FBR has been doing since long. FBR’s promised campaign against tax evaders alone will not serve any useful purpose as more revenue is an issue but not the only issue – it should not be seen in isolation. The real issue is generation of revenues without harming already ailing economy and more than that the utilisation of taxes for welfare of public and development of society as a whole and not for the benefit of a select few.

(The writers, tax lawyers and authors of many books on Pakistani tax laws, are Visiting Professors at the Lahore University of Management Sciences)