The Federal Board of Revenue (FBR) has recently announced the creation of a new Internal Revenue Service, under strong IMF pressure, that shall deal with both Income Tax and Sales Tax and hence Sales Tax and Income Tax have effectively been merged into one department.
It has been found that the same has been done under pressure from multilateral donor agencies during the recent government-IMF talks at Turkey. However, this hasty step of the FBR appears to have far-reaching consequences in terms of its constitutional, legal, administrative and revenue implications and it seems that the Board has not bothered to consider these ramifications at a time when the country is already facing financial crisis.
Traditionally in Pakistan, Indirect Taxes like Customs, Sales Tax and Federal Excise are governed by the Customs Department, while direct taxes like Income Tax and Wealth Tax are governed by the Income Tax Department. The instant decision shall practically lead to the governing of Sales Tax by the Income Tax Department, in addition to their role in collection of Income Tax.
With the stated objectives of improving the tax to the GDP ratio and harmonising the tax administration, the 149 million USD (READ LOAN) Tax Administration Reforms Program (TARP), funded by international donors was started in 2004 and was supposed to end by December 2009. However, the programme was declared 'unsatisfactory' by the World Bank due to only 22% fund utilisation.
An April 2009 World Bank report ( Follow up Tax Administration Review... Page 16) clearly explains that. Around 57 million USD allocated for automation/data warehousing projects, integrated tax management system etc were declared surplus, meaning that no substantial automation project could be initiated and the FBR requested the World Bank to cancel around 63 million USD grants due to non-utilisation.
An analysis of TARP documents, available on the World Bank website reveals some interesting facts. It reveals that TARP has sanctioned some 54 contracts up-till now. TARP has disbursed some 6 million dollars, as consultant fees, while 16.5 million dollars have been spent on interior decoration/refurbishment of offices.
Around 136 vehicles have been purchased at an expense of 1.7 million dollars and items like office furniture and air conditioners have consumed yet another 3 million dollars. And amazingly, the furniture has been bought from a computer firm. As per data available on the World Bank website, more than 6 million dollars have been paid to foreign consultants.
Reportedly, these foreign consultants, serving Pakistan selflessly, are being paid around 500 Pounds a day as daily allowance. However the amounts actually paid to all the consultants by FBR remain a mystery, as these are in addition to the above-mentioned 6 million dollars.
A source privy to the developments also informed, on condition of anonymity, that the Reform wing has intentionally withheld some of the reports of these consultants and has only made public the report by one Carlos Salvani, as these different reports preach different strategies for reforms.
The whole premise of the merger stands on availability of data to the Sales Tax and Income Tax authorities for better tax collection, Had this automation been done, there was no need to even discuss the merger, as data could have been made available to whoever wants it. Is this 57 million USD wastage an omission or commission? Was any inquiry held and heads rolled?
In addition, around 90 million USD (9 billion Rs) have been allocated for procurement of office equipment, vehicles and training and we say we are a poor country? Interestingly, at the same time that the country is begging for dollars, the HRM wing of the FBR (see FBR website) has launched more than hundred short, foreign-training courses in spurious foreign universities.
The officers are not getting visas of Europe/USA/Canada etc, while, the HRM wing has already paid thousands of dollars for these courses. Most of these courses are totally irrelevant to the nature of jobs of the officers and are only for three to four days duration. Incidentally, most of these courses could have been planned at local universities like LUMS and IBA, at an iota of the price tag of the foreign universities.
However, the HRM wing thought otherwise in this critical era of economic crunch. The criterion for selection in these courses is that whoever has not gone for training in the last three years as if it is a foreign tour programme rather than a training program.
The rationale was to utilise the TARP funds before December 2009, so that World Bank does not declare the program 'unsatisfactory' again. However, this is a 'loan' that the people of Pakistan shall pay forever. The simple conditionality of the IMF to extend this free riders programme is to create an 'Inland Revenue Service' on the pattern of some African and South American countries. This is cruel for this poor nation, to say the least.
It is worth mentioning that the FBR has already lost the revised revenue target of the first quarter of the year by Rs 10 billion. If the government decides to bulldoze all arguments, then the FBR should be ready for multiple lawsuits from different stakeholders, including the provinces, trade bodies, officers and employees both from the Income Tax and Customs group.
Already, some 300 Custom and Sales Tax officers are in the High Courts against the IRS notification of the government and have got stay orders. The whole FBR machinery is paralysed and is involved in multiple litigations, and resultantly, the revenue collection is suffering and at the same time, the baboos are having a joy ride in the name of foreign training.
A highly reliable source did not rule out the possibility of strike by FBR employees, which would mean complete jamming of economic wheels. Such court cases, stay orders, strikes and individual service cases shall destroy the holding environment in the FBR on the one side and play havoc with the already pre-carious economic conditions. It is hoped that the Government and IMF have adequate preparations for such a scenario.