This is an insult to the collective wisdom of the chosen representatives of the 170 million people of the country, as if they lack the insight or vision to decide what is in the best interests of the nation. By following the World Bank/IMF line, the FBR high-ups have chosen to bypass the Parliament instead of taking it into confidence on this important national issue.
Secondly, the step was taken to the complete exclusion of stakeholders, namely taxpayers, employees etc from the decision-making process, which seems difficult to justify, given the repercussions of the decision from the stakeholders.
Thirdly, the backward-forward linkages of the Customs law, procedures, documentation and business procedures with the Sales Tax/Federal Excise administration have been completely ignored. Customs, Sales Tax and Federal Excise are the indirect taxes on goods and services.
Their methodology of classification of goods/services, the collection procedures and the legal basics over-lap and have nothing in common with Income Tax, which is a tax on income (not on goods and services). The measure lacks any sound taxation paradigm and has been taken in a vacuum.
In India, there are two separate Boards of Revenue - one for Direct Taxes and the other for Indirect Taxes. Through better tax policies and enforcement measures, India has taken its tax-to-GDP ratio up from 8.2% in 2001-2 to 14% in 2008-9. On the contrary, due to our flawed reforms, the Tax-to-the-GDP ratio had slid from 11.5% in 2001-2 to 8.8% in 2008-09.
Fourthly, the data shows that out of approx. 148000 registered sales tax entities, about 40,000 are registered as importers, about 12,000 are registered as exporters and approx. 36,500 are registered as manufacturers. Leaving these important sectors of the national economy at the mercy of a tax group, which has absolutely no experience or skill of running indirect taxes is a step which would shake the taxation system as well as the country's fiscal foundations.
Besides causing resentment among the Officers and Staff of the Sales Tax and Federal Excise, who have made great contribution in developing these taxes on the most modern taxation concepts, the so-called reform scheme would also badly affect the taxpayers.
The exporters would suffer the most, as processing their refunds requires a deep understanding of the customs' procedures and documentation, which, as already stated, the income tax staff completely lacks. Fifthly, the measure has been taken on the diktats of the IMF/World Bank report, without regard to the ground realities of our country. The measure lacks any sound basis or reasoning.
Sixthly, the Income Tax administration or its workforce, is no role model to merge the sales tax administration with it. The World Bank reported a massive failure of Income Tax to get compliance from 60% of Legal Entities (private and public limited companies) who remain inactive still, in addition to another 364,342 NTN holders, who could not be compelled to file returns. The collection of Income Tax for the current Financial Year remains dismal.
Seventhly, the measure has affected the officers/staff of Customs and Excise Group causing them dismay with a sense of betrayal and disappointment. With a much smaller number of officers and staff, the Customs and Excise Group cannot only take credit for successfully introducing the GST on the VAT mode, but has also all along managed these taxes on modern taxation concepts in a reasonably efficient and effective manner.
Given the tremendous resistance which the department faced when the GST was introduced in the 1990s and the relatively meager resources available, the amount of progress that has been made over the years in terms of revenue collection, complete automation of systems/procedures and taxpayer facilitation is simply outstanding.
Eighthly, compared with the relatively lean organisational setup of the sales tax, the Direct Taxes side (which largely depends on the withholding tax regime for its collection) is a disproportionately huge organisation as compared to the contribution of tax it makes to the total revenue.
Whereas only 400 officers of the Customs and Excise Group are collecting 75% of the taxes, about 1100 officers of the Income Tax account for about 25% of the total collection. Instead of rightsizing the Income Tax department to make it leaner and efficient, a reason for further expansion of its size is being created through the creation of the Inland Revenue Service.
It may be recalled that in Shahid Hussain Report (2001), which presented a home-grown solution for reforming the tax administration, the organisational strength of indirect taxes was set at 9,000, whereas on the direct taxes side it was proposed to be only 5000 personnel. Ninthly, the measure is against the basic principles of management and would concentrate extraordinary authority regarding the three taxes in one hand. This would increase incentive for corruption manifold.
Tenthly, there has been no accountability of the millions of dollars spent on the TARP project. Funds have been misused to please favourites in the name of hiring consultants, awarding construction contracts, trainings etc. There is a need to get audit of the project done through the AGPR, covering the full scope of the project and its achievement vis-à-vis the stated objectives.