Huzaima Bukhari and Dr Ikramul Haq
Federal Board of Revenue (FBR) has been serving the interests of rich and mighty in Pakistan. The privileged classes have been getting enormous tax benefits through Statutory Regulatory Orders (SROs). Pakistan can never come out of existing fiscal mess unless SRO culture is abolished and FBR is replaced with National Tax Agency (NTA) that can effectively enforce tax laws both at federal and provincial level. Had FBR been an effective body, it could have compelled all the taxable persons — not less than 20 millions — to file tax returns and pay due taxes. Equally incompetent and ineffective are provincial revenue authorities that have miserably failed to collect agricultural income tax imposed since 2000 as well as other taxes and levies.
FBR mercilessly wasted borrowed funds of millions of dollars given by the World Bank and other donors for implementation of a comprehensive five-year-long Tax Administration Reform Project (TARP) that was extended for another year on the request of Pakistan. FBR, since the inception of TARP failed on all fronts — in meeting revenue targets, broadening of tax base, countering corruption and leakages, implementing sales tax, increasing share of direct taxes and improving tax-to-GDP ratio. At the end of TARP, tax-to-GDP ratio nosedived to 8.8% from 9.4% in the year when the programme started! Despite having both money and expertise, FBR could not introduce an effective automated tax intelligence system to bridge the huge tax gap of over 200%. The World Bank in its report, “Implementation, Completion and Result Report” issued on the completion of TARP, observed: “The current narrow-base of general sales tax (GST) in Pakistan remained almost entirely unchanged throughout 2005-2012, despite efforts to overhaul the indirect taxation structure by introducing a reformed GST featuring few exemptions and wide coverage of goods and services.”
This is the sordid story of tax reforms in Pakistan even when enormous funds — over US$100 million — and best professional advice was available. As confirmed by the report of World Bank, FBR not only as an organisation lost its credibility and usefulness, but proved to be counterproductive for the very purpose for which it was established — see figure of collections from 1996-97 to 2012-13 [Table A] confirming overall poor performance.
Table A: FBR: Performance : 1996-07 to 2012-13
(Rs. in billion)
Year Targets Collection Growth in Target Tax to
Collection Achieved GDP ratio
1996-97 286.0 282.1 5.2 98.6 11.6
1997-98 297.6 293.6 4.1 98.7 11.0
1998-99 308.0 308.5 5.1 100.2 10.5
1999-00 351.7 347.1 12.5 98.7 9.1
2000-01 406.5 392.3 13.0 96.5 9.3
2001-02 414.2 404.1 3.0 97.6 9.1
2002-03 458.9 460.6 14.0 100.4 9.4
2003-04 510 520.8 13.1 102.1 9.2
2004-05 590 590.4 13.4 101.8 9.1
2005-06 690 713.4 20.8 103.4 9.4
2006-07 935 847.2 18.8 101.5 9.8
2007-08 1.000 1008.1 18.9 100.8 9.8
2008-09 1,179 1157.0 14.8 98.1 8.9
2009-10 1,380 1327.4 14.7 69.0 9.0
2010-11 1,667 1587.0 19.6 95.2 8.8
2011-12 1952.3 1883.0 18.2 96.5 9.1
2012-13 2007 1939.4 03.0 96.6 8.5
Source: Economic Annual Surveys & FBR Year Books
The World Bank concluded that “during the economic crisis period and subsequent years (2008-11), GST productivity index declined at a higher rate compared to FBR tax-GDP despite a swift turnaround in project implementation and concomitant positive trends in some outputs by the last two years of project life.” The report while pinpointing weak compliance levels, lackluster results in reform implementation, especially those related to short-term actions aimed at curbing evasion through more effective enforcement actions by the final year of project implementation, noted “performance from 2008 onwards, far from the project’s objectives envisioned at the outset”. At the end of TARP like sales tax, income tax indicators were extremely poor [Table B]. Out of total population of 180 million less than 1.45 million filed returns in 2011—disturbingly the share of business
Table B: Total number of returns/statements received in 2011
Business returns 513,044
Salary returns 160,903
Employees’ statements 769,467
Source: Data compiled by PRAL
Legislators and tax collectors jointly turned Pakistan into a tax haven — a paradise for tax dodgers and plunderers of national wealth. Pakistan is perhaps the only country where 70% legislators were found guilty of not filing tax returns and then shameless claimed since tax was deducted at source on emoluments received as holders of public office there was no need for it! Our Parliament encourages tax evaders by legitimizing untaxed money “remitted” (sic) through normal banking channels — reference section 111(4) of the Income Tax Ordinance, 2001. One just has to go to a money exchange company, give them local currency and fake remittance is fixed at a nominal commission! This facility, they claim, is necessary for “growth” of economy. Such lethal prescriptions for economic growth have actually destroyed the entire social fabric of society — we have no tax culture because of these policies of appeasement having State patronage.
FBR, as it exists, is not only fraught with corruption but lacks professionalism and competence. The worst example of protecting self-interest surfaced on 26th May, 2012 when for officers in Grade 20 to 22 rate of tax on monetized transport allowance was reduced to just 5% through SRO 569(I)/2012. This benefit for bureaucracy, including FBR officials, was secured by blatantly bypassing the Parliament. Obviously Auditor General of Pakistan would never raise an objection being a beneficiary! This proves how bureaucrats rob the nation. Private sector employees for the same allowance are taxed at normal rates applicable to taxable salary income!
In the prevailing scenario, the only viable solution is to replace FBR with NTA, responsible for collection taxes for centre, provinces and local governments. NTA must be run by independent Board of Directors comprising professionals. All the governments should discuss this idea and pass the necessary laws. The independence of NTA would certainly be respected by all the governments being a national and independent body and not a useless government department. After meeting its expenses, NTA would distribute taxes to the respective governments to which these relate.
At present, both centre and provinces are not collecting taxes diligently and same will happen to local governments once elected. Our tax potential at federal level alone is Rs 8 trillion. If agricultural income tax and other provincial and local taxes are also collected efficiently, the total figure would be around Rs 12 trillion. For harnessing the full tax potential at federal, provincial and local government levels, NTA is the need of the hour. Through consensus and democratic process, all the parliaments can enact laws for establishing autonomous National Tax Agency that will facilitate people to deal with single Revenue Authority rather than multiple agencies at national, provincial and local levels. The mode and working of NTA can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156].
(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Professors at Lahore University of Management Sciences)