Tax reform or bust

The unholy trinity won’t let up

Vested interests, a high sense of entitlement, poor management of expectations and willing collaborators have plagued Pakistan’s progress for more than an eternity. The lack of political and any other will to take the bull by the horns has taken its toll. The country is like a personal fiefdom of many vested lords who rule the roost while the nation continues in its agony.

Today we read that sovereign guarantees issued to the controversial IPPs have or are in the process of being called. A default has happened or is imminent. It’s important to understand where the country’s revenue stream is and how its payments are balanced. Without adequate revenue, there will be defaults and there will be restricted growth. And development will be obstructed. With the NFC award, the federal government has transferred 60% of the total resources to the provinces restricting its own ability to fund. The revenue resource that is available to it is primarily the federal taxes et al collected by the FBR.

The FBR is an enigma. The name change from CBR being nothing more than just that. The much trumpeted reform programmes over decades have yielded precious little. There is no real will. This presents a fait accompli. If those entrusted with tax collection are simply not willing to extend their services and self above all is their motto, then nothing can be done. And they know it. Pakistan has a history of inadequate revenue collection; its tax to GDP ratio of 9.3% is probably amongst the lowest in the region. Sri Lanka’s is 14% and Turkey’s, the new economy, a whopping 29.3%.

Add to this the element of the unholy trinity. Businessmen, accountants and the revenue collection agency combine to ensure that vested interest is served at all the important levels. Talk to a businessman, his interest revolves purely around those benefits that serve him well. Accountants cannot be independent; their clients are big businesses and they need them to survive. Therefore they do all that is needed to serve them well. And in this process, they have developed another role: that of the middleman. They have made themselves invaluable to those assessing, collecting and paying. The government has been consulting these elements for decades without positive results. Its revenues have grown with the growth of the economy but not due to innovative reforms.

So where does the interest of Pakistan stand, in all of this? Certainly not in ridiculous suggestions to save the skins of some at the cost of others. How can an individual be taxed at the same rate as a business? It is a preposterous thought. Business expenses out everything; can an individual do that? The unholy trinity at its best.

The department is satisfied with showing an increase in collection percentages. If the figures are correct, it is assessed that the increase over the corresponding ten months is 26%, which is certainly commendable. The question arises as to what percentage of potential increase does this represent? What is important is the number of new taxpayers added. Taxing the already taxed is now an antiquated folly, but obviously an easy way out. The finance minister has repeatedly said that he does not believe in this and he has stood by this going by the last two budgets.

The change of culture can only be by drastic reforms. Today these are thwarted by vested interests. Simple remedies are ignored. Why doesn’t the FBR decide to impose sales tax on every shop on the basis of square footage at a nominal rate? This brings the business onto the radar. With that, more than half the job is done. But such new ideas are never implemented; old hands are repeating the ‘same ole’ under the garb of expertise.

No sectoral analysis has been done despite much lip service. Why not? Because it will highlight the gross anomalies existing within important sectors. The vested interest will not allow it. You will discover units of the same age operating on different scales, with dubious bottom lines and even more contentious tax rebates. Comparative review will reveal plenty to investigate; notwithstanding the opinion of conflicted gurus.

FBR had an independent intelligence wing. In April 2011, the DG I&I had discovered a mega scam of PKR24.79 billion. Cases were registered and 2.18 billion was recovered by 30th June 2011. Then the powers were withdrawn and a new organization for IR setup. Two months later, after much water had flowed under the bridge, the powers were restored but restricted. A further 1.27 billion recovered. The new organization has not reported cases of any magnitude.

Today’s requirement is independent investigation incorporating forensics that will follow cash and evasion. Create a basic fear of discovery and penalty while encouraging registration. Despite attempts to draw its focus to forensic accounting, the FBR remains indifferent. They need to realise this is the only real answer; the moot point is merely the will. The finance minister is on record as being committed to reform. A tax reforms council is in place. The onus is on it to introduce essential reforms without let or hindrance. With an election year budget in the offing, the FM’s only recourse is to revenue collection and a vastly increased resource base. Of which the trinity knows there is plenty.

The writer may be contacted via e-mail at [email protected]