Huzaima Bukhari and Dr Ikramul Haq
All the tax collection agencies in Pakistan should be dismantled and merged into National Tax Agency (NTA) which alone can effectively enforce tax laws both at federal and provincial levels. NTA, a competent and effective body, set up on modern lines, should have representations of all constituents of the federation of Pakistan. NTA having national-wide data at one place and centralised processing will certainly be able to compel all taxable persons to file tax returns and pay due taxes under various tax codes. NTA must replace Federal Board of Revenue (FBR) and all ineffective provincial revenue authorities that have miserably failed to collect revenues according to their actual potential. For example, provincial Revenue Boards have not been collecting agricultural income tax, imposed since 2000. In the same manner, provincial excise and taxation departments are not collecting taxes they are entrusted to administer. Same is the story of Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB) and Khyber Pakhtunkhwa Revenue Authority (KPRA) in respect of sales tax on services—their capacity to tax all taxable services is quite inadequate.
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. During and after TARP, FBR has 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 has lost its credibility and usefulness, but has also proved to be counterproductive for the very purpose for which it was established—see figures of collections from 1996-97 to 2014-15 [Table A] confirming over-all poor performance.
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Table A: FBR: Performance: 1996-07 to 2014-15
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(Rs in billions)
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Year Targets Collection Growth in Target Tax to
Collection (%) Achieved (%) GDP ratio
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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
2013-14 2275 2254.5 13.9 99.0 9.1
2014-15 2605 2580.0* 14.4 99.0 9.8
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Source: Economic Annual Surveys & FBR Year Books
*Actual collection is still unverified. Independent analysts say it is around Rs. 2555 billion
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 tax-to-GDP ratio despite a swift turn-around in project implementation and concomitant positive trends in some outputs by the last two years of project life”. The report while pinpointing out 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 returns was only 35.5%. The situation has further deteriorated since then as total returns received in 2014 were less than one million.
*Actual collection is still unverified. Independent analysts say it is around Rs. 2555 billion.
In spite of imposing additional taxes of Rs 360 billion, allegedly blocking over Rs 220 billion taxpayers’ refunds and taking advances of many billions, FBR failed to meet the third-time revised target for fiscal year 2014-15, showing shortfall of Rs 222 billion vis-à-vis original target of Rs 2810 billion, which was first reduced to Rs 2691 billion and then to Rs 2605 billion.
Legislators and tax collectors have 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 shamelessly claimed that 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 a 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 the society—we have no tax culture because of these policies of appeasement having State patronage.
Table B: Total number of returns/statements received in 2011
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Nature Number
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Business returns 513,044
Salary returns 160,903
Employees' statements 769,467
Total 1,443,414
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Dysfunctional FBR
FBR, as it exists today, is not only fraught with corruption but lacks professionalism and competence. It has also become a self-serving organisation. The worst example of protecting self-interest surfaced on May 26, 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, purely for bureaucracy, including FBR officials, was secured by blatantly bypassing the Parliament. Obviously, the political elite as protector of militro-judicial-civil complex will not show the courage to revoke this notification. Even the Auditor General of Pakistan will never raise any objection being a beneficiary himself! This proves how bureaucrats rob the nation with the connivance of political masters. Private sector employees for the same allowance are taxed at normal rates applicable to taxable salary income!
During the fiscal year 2013-14, FBR collected Rs. 2254.5 billion and not Rs. 2266 billion as claimed. In 2013-14, income tax collection through efforts of officers (by creating demand) was only Rs. 80.58 billion. It was Rs. 89.4 billion in 2012-13. It exposes the efficacy of FBR as collection on demand fell to 8.7% against 11.5% in the previous year. In fact, FBR has become a tool in the hands of businessmen-turned-politicians. FBR is dysfunctional to the extent that the system has failed to tax a few million ultra-rich because of which income distribution disparities are rapidly widening.
Proposed structure of NTA
NTA, on the pattern of Canada Revenue Agency, shall not only be responsible for collection of taxes for federal, provincial and local governments but also to administer various social and economic benefit and incentive programmes delivered through the tax system—these schemes should be formulated and identified otherwise tax compliance would become a distant dream. People must get social security, disability allowance, income support, child support, pension, just to mention a few, through the tax system.
One of the salient features of NTA would be its innovative structure, an independent Board of Management, accountable to Parliament through the Minister of Finance and Revenue. The minister would have the authority to ensure that the NTA operates within the overall government framework and treats its clients with fairness, integrity, and consistency.
The Board of Management would consist of 15, three each to be nominated by the provinces and rest by the central government. The Board would have the responsibility of overseeing the organisation and management of the NTA. Chief Executive Officer of the NTA, being a member of the Board, elected by majority of members, would be responsible for the NTA’s day-to-day operations. The NTA Board would have no role in the legislation, which under the Constitution of Pakistan is the exclusive domain of the national and provincial assemblies.
NTA would contribute to the well-being of Pakistanis and the efficiency of government by delivering world-class tax and benefit administration that is responsive, effective, and trusted. It would provide unparalleled service and value to its clients, offering its employees outstanding career opportunities.
The guiding principles of NTA would be:
Integrity: foundation of administration. It means treating people fairly and applying the law fairly.
Professionalism: key to success in achieving the mission. It means being committed to the highest standards of achievement.
Respect: the basis for dealings with employees, colleagues, and clients. It means being sensitive and responsive to the rights of individuals.
Co-operation: the foundation for meeting the challenges of the future. It means building partnerships and working together toward common goals.
At present, both the centre and provinces are not collecting taxes diligently and same would be the case once local governments are elected. Our tax potential at federal level alone is Rs. 7 trillion— Flat-rate taxation: Alternate solution, Business Recorder, November 20 and 22, 2015. If agricultural income tax and other provincial and local taxes are also collected efficiently, the total figure at national level 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 an autonomous National Tax Agency that can facilitate people to deal with a 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 are tax lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Professors at Lahore University of Management Sciences)
