Oct 4 - 10, 2010

Even after the completion of 5-year world bank funded revenues tax administration reforms programme, there seems no improvement in the performance of the Federal Board of Revenues (FBR) both in terms of meeting the annual targets or improving tax to GDP ratio, which is lowest in the region.

The FBR has notified yet another "Reform Coordination Group" to obtain input of experts on modern tax reform strategy and measures to improve tax to GDP ratio which has declined to 8.9 per cent in 2009-10 from 13 per cent in 1992-93.

The FBR missed the annual tax collection target by Rs65 billion in the financial year 2009-10 during which it could collect Rs1315 billion against the target of Rs138 billion. During the first quarter of the current fiscal year (July-Sep 2010) the FBR, sticking to its tradition, missed the quarterly target by Rs15 billion. It could collect Rs220 billion against the target of Rs335 billion fixed for the first three month the current financial year.

The recently formed reform coordination group set up in FBR to spearhead the ongoing reform programme held a meeting last week to review the progress of the tax reform programme in the light of its objectives. It was observed that reform objectives were needed to be disseminated to all the stakeholders in a more elaborate manner for a proper and better understanding of the reforms initiatives.

The meeting also felt the need for establishment of a core unit at FBR headquarters to gather and use data on income, expenses and assets of persons from different sources, laying emphasis on utilisation of the same for ensuring correct filing of income tax return for the tax year 2010 and tracing the non-filers for further necessary action under the law. It was also recommended that updated data of electricity consumers and the data collected as per survey forms in 2001 should be utilised to enforce the Income Tax return. It was also discussed and decided that the group would present its topic wise report after further deliberations as early as possible.

According to the experts, the achievement of the desired objectives is not possible with the existing pro-rich and unjust tax system.

It is high time a paradigm shift in prevalent tax policy takes place. According to them, our revenue potential is not less than Rs4.5 trillion provided pro-growth, equitable and rational policies are devised with the backing of stakeholders. We need broadening of tax base, overhauling of tax machinery and withdrawal of all exemptions and concessions available to be privileged sections of society. If we do that, there will no be need for any internal or external borrowing. Implementation of a rational tax policy can convert current fiscal deficit into surplus. Successive governments civil and military alike have not initiated any meaningful debate on formulation of a pro-growth 'National Tax Policy'. On the contrary, they introduced tax policies that have pushed millions of people below the poverty line.

According to them, following are some key areas where a paradigm shift is needed at structural and operational level for ensuring not only substantial revenues for the state but also redistribution of wealth.

Ostensibly, money for industrial and business growth and public benefits is scarce, but colossal unaccounted for cash supply is circulating in the economy in search of further undercover gains. Racketeering is doubly compounded as it necessitates greater tax burden on law abiders. The most crucial problem faced by us is taking stringent measures to curb tax evasion, thus, distributing the burden of taxes fairly and justly in society. The rich should pay more; but they are enjoying tax exemptions. Honest taxpayers are disillusioned by the fact that the ruling elite is not only paying its taxes, but also abusing their position for unprecedented luxuries. If we want to bring any meaningful change in our tax system, the progressive taxes, abolished during the last 30 years, should be restored and regressive ones to be abolished forthwith. Tax amnesty schemes are to be dispensed with once for all and unexplained assets must be confiscated by the state for the benefit of the poor.

The existing tax policy needs to be reformulated providing an equitable pragmatic, and business friendly tax system, integrating good tax administration with simplified tax laws that are easily understood and hassle-free from implementation prospective. Recent efforts of the government to reform tax system, through foreign loans / grants have not yielded any positive result. These remain a closed door, bureaucratic exercise lacking any meaningful dialogue with tax payers, public pressure groups and tax experts. In the absence of a well designed tax policy, the agenda of tax reform will never succeed. Tax bureaucrats are not supposed to make any legislative and administrative changes, but in Pakistan they are doing so.

The existing tax system protects exploitative elements having monopoly over economic resources. The poor are paying an exorbitant sales tax of 17 to 23 per cent (in fact 40 per cent on finished imported goods after customs duty, special federal excise duty, sales tax after mandatory value addition and income tax at source) on essential commodities. But the mighty section of society such as absentee landlords, big industrialists, generals and bureaucrats are paying no wealth tax/income tax on their colossal assets/incomes. It is tragic that in a country where the rich make billions on a daily basis, tax to GDP ratio is pathetically low at 9.8 per cent.

The government is least bothered to tax the rich and crack down on underground economy. There is an urgent need to tax wealth and income of the rich and mighty. Rent of agriculture land derived by absentee landlord should be taxed so heavily that they are forced to give up ownership of these lands to the tillers who produce agriculture produces. The corporate should be brought down to 20 per cent to promote industrialisation, but any director or other office holder (having more than 20 per cent shares) drawing annual salary exceeding Rs5 million should be taxed at the rate of 50 per cent.

The finance minister Dr Hafeez Sheikh, lamenting the shockingly low tax to GDP ratio in Pakistan, told the newsmen at a recently held press conference in Islamabad that in Pakistan it was the most difficult task to recover taxes from rich and affluent and influential class. It sounds unbelievable but it is a fact and supported by a recent report published in a leading national daily newspaper which was not denied. According to the newspaper, Prime Minister and his 25 ministers have admitted in their sworn affidavits submitted to the Election Commission of Pakistan that do not pay income taxes. This list of 25 ministers also includes the name of Qayyum Jatoi, who claimed without any sense of shame in a live TV transmission that it was their right to earn through corruption. To promote tax culture in such a society is indeed an uphill task.