Huzaima Bukhari and Dr Ikramul Haq
The Finance Minister of Pakistan has at last admitted that Federal Board of Revenue (FBR) has a debt of Rs. 200 billion—refunds blocked to show higher collection aimed at hoodwinking the people and International Monetary Fund (IMF). This confession was made on November 26, 2015 before the National Assembly’s Standing Committee on Finance, Revenue, Economic Affairs, Statistics and Privatization. This mammoth quantum of refunds was never admitted by Tariq Bajwa, former Chairman of FBR, who made tall claims on his farewell that under his tenure tax-to-GDP ratio exceeded 11%! If refunds payable, unlawful recoveries, disallowance of inputs under sales tax regime and advances taken are excluded, collection in fiscal year 2014-15 was not more than 8.5%, of GDP. Tariq Bajwa and his team, it is confirmed now by the Finance Minister, blocked huge refunds, besides using other negative tactics, to inflate collection. This also exposes the claims of “extraordinary growth” in tax collection by Ishaq Dar.
In 2014-15, as in the past, FBR failed to meet the third revised target. The original target of Rs 2810 billion was first reduced to Rs 2691 billion and then to Rs 2605 billion. On shortfall of over Rs 220 billion vis-à-vis original target, Tariq Bajwa and his team received kudos from the Finance Minister, besides bonuses! The collection for 2014-15, claimed at Rs. 2590 billion by FBR, is yet not yet officially confirmed and no details are made available on its website—see Table. Data provided to State Bank of Pakistan (http://www. sbp.org.pk/ecodata/tax.pdf) by FBR shows total collection for 2014-15 at Rs 2589.97 billion. This collection was made possible after imposing additional taxes of Rs. 360 billion, blocking refunds of Rs. 200 billion and taking advances of many billions not yet due (‘Musical chairs?: A clean-up job in FBR on the cards’, The Express Tribune, July 25, 2015).
The Finance Minister told the Committee that “an out of the box solution is under consideration to clear all the pending refund of Rs 200 billion in an effort to avoid their financial impact on federal and provincial governments’ income”. Earlier, FBR’s new Chairman, Nisar Muhammad Khan, admitted that “Rs. 88 billion sales tax refunds are pending”. Ishaq Dar told the Committee that “in case of payment of refunds from divisible pool, it would cause serious consequences on federal and provincial governments’ income.” It was a strange and shocking argument. For showing inflated income, the sufferers are none others but the taxpayers who are deprived of their legitimate refunds! The question is why to show inflated collection to pay more to provinces from divisible pool? The provinces should raise their own revenues by taxing the rich and mighty.
Chairman of the Finance Committee, Qaiser Ahmad Sheikh, rightly observed that the blockage of refund claims has created a serious liquidity crunch for the exporters. Business community, due to FBR, is facing cash flow problems and everybody is making a hue and cry over the pending refund claims. Strangely, the worthy Finance Minister and FBR officials have yet no plan to clear this huge debt, which is increasing every year.
=====================================================================================
Table: FBR Tax Collection (2001-02 to 2014-15)
=====================================================================================
(million rupees)
=====================================================================================
Fiscal Year Direct Taxes Sales Excise Customs Total of Total Tax
Indirect Collection
=====================================================================================
2001-02 142,505 166,561 47,186 47,818 261,565 404,070
2002-03 151,898 195,139 44,754 68,836 308,729 460,627
2003-04 165,079 219,167 45,552 91,045 355,764 520,843
2004-05 183,372 238,537 53,104 115,374 407,015 590,387
2005-06 224,988 294,798 55,272 138,384 488,454 713,442
2006-07 333,737 309,396 71,804 132,299 513,499 847,236
2007-08 387,862 377,430 92,137 150,663 620,230 1,008,092
2008-09 440,271 452,294 116,055 148,382 716,731 1,157,002
2009-10 528,649 517,302 121,182 161,489 799,973 1,328,622
2010-11 602,451 633,357 137,353 184,853 955,563 1,558,014
2011-12 738,822 804,846 122,460 216,898 1,144,204 1,883,026
2012-13 743,410 842,525 120,922 239,459 1,202,906 1,946,316
2013-14 877,274 996,100 138,064 242,799 1,376,963 2,254,237
2014-15 1,033,720 1,087,790 162,248 306,220 1,556,258 2,589,978
=====================================================================================
Source: http://www.sbp.org.pk/ecodata/tax.pdf
In ‘FBR: blame game continues’, Business Recorder, May 16, 2014, it was mentioned that the then Chairman FBR during hearing before the Senate Standing Committee on Finance on May 13, 2014 understated the figure of outstanding refunds. He claimed that only Rs 97 billion were payable as refunds. Now the Finance Minster contradicted that claim. One hopes that Tariq Bajwa will now render a public apology for misstating the quantum of refunds.
Till today, FBR has also not made public the details of outstanding refunds. For good governance and transparency, fiscal data of this nature should be available on the websites of Ministry of Finance and FBR. It should be updated every month so that public know how much tax is collected under various heads and what is payable to the taxpayers.
Of all the federal government institutions, FBR is, rightly or wrongly, considered as the most incompetent, inefficient and corrupt. Even if it is merely a perception and not reality, it must change. The people from Inland Revenue and Customs are considered proponents of status quo as the existing system gives them unbridled and unfettered discretionary powers. It is, therefore, important to diagnose what actually ails the system in totality, otherwise it would be impossible to reform and re-engineer the existing processes and make the organisation vibrant, effective and people-friendly.
Voluntary tax compliance cannot be achieved without an effective system of deterrence. Even after wasting huge funds, FBR lacks an effective, automated Tax Intelligence System that can effectively check tax evasion and avoidance [‘Resource Mobilisation Strategy, Business Recorder, March 21, 2014]. In these circumstances, can the new Chairman of FBR succeed in changing the image of FBR by making it a transparent, corruption-free, efficient and effective organisation, capable of performing the assigned duties diligently within four corners of law?
Do our policymakers and tax administrators have any concrete study about real tax potential of Pakistan? Though it is difficult to be measured as size of informal economy is enormous, yet it can safely be assumed that it is not less than Rs 5.5 trillion. We certainly have 3 million individuals having taxable income of Rs 1.5 million—total income tax collection from them, according to tax rates for tax year 2016, comes to nearly Rs 300 billion. If super-rich about 0.2 percent of population are taxed properly, tax collection from them would be around Rs 100 billion. If we add income tax from corporate bodies, non-individual taxpayers (AOPs) and individuals having taxable income up to Rs 1,500,000, the gross figure would be nearly Rs 2500 billion. FBR collected around Rs 1033.7 billion as income tax in fiscal year 2014-15. Due to weak enforcement and rampant corruption, the collection of sales tax in 2014-15 was Rs 1088 billion, customs duties Rs 306 billion and federal excise was Rs 162 billion. This was around 50% of actual potential. It should have been at least Rs 3000 billion.
Strangely, the Finance Minister till today has not bothered to tackle undocumented economy and bridge monstrous tax gap. He rather opted to increase sales tax rate on some items and impose regulatory duty (RD) on numerous imported items—Dar’s mini-budget, Business Recorder, December 1, 2015. It is clear that he did not bother to read what was argued by Zubair Parekh in ‘The Laffer Curve & Pakistan’, Business Recorder, November 29, 2015 and us [Flat-rate Taxation: Alternate Solution, Business Recorder, November 20 & November 22, 2015] that increase in tax rates will not increase tax revenues. Dr Sajjad Akhtar in his op-ed, Impact of RD: Lessons from economic history, Business Recorder, December 1, 2015, has rightly asked: Will the imposition of RD help to recover the shortfall in revenues to the tune of Rs 40 billion or even half of that amount in the next 7 months”? Taking clue from decline in trade revenues after the imposition of RD in 2008-09, he is of the view that the positive impact of RD on revenues is likely to be very small.
By now, it is crystal clear that Ishaq Dar, like his predecessors, does not want to undertake fundamental reforms [Case for “NTA”, Business Recorder, November 27, 2015] that can fetch tax collection of over Rs 5 trillion helping FBR to clear the entire backlog of refunds, make Pakistan a self-reliant economy capable of retiring debts, fulfilling needs of investment, rapid growth, generation of jobs, and providing all universal entitlements to citizens that are available in any social democracy.(The writers, tax lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)
