Pakistan needs to learn from the experience of many developing countries of the world that managed to raise revenue by improving their tax administrations and using various automation tools. In 1992, Richard M. Bird and Milka Casanegra de Jantscher presented a marvelous book, Improving Tax Administrations in Developing Countries (interestingly this was IMF publication based on a conference held in Spain in 1991). Since 1992 there has been growing awareness that more efforts are required to improving existing administration if a developing country is keen in exploring new sources of revenue.
The old saying, "tax policy is only as good as its administration", is outdated. Today's consensus is: "Good tax administration is good tax policy" [Stanley S. Surrey, Tax Administration in underdeveloped countries, University of Miami Law Review]. Many well-intentioned laws have been laid to rest by inefficient (which also include indifferent, corrupt and incompetent) tax administrations. Pakistan is a classic example of this phenomenon. The Federal Board of Revenue (FBR), apex administrative body for federal taxes, is the most apt example of being one of indifferent, non-professional, oppressive and inefficient tax administrations in the entire world.
Taxation requires pragmatic thinking and is most effective when developed from a practical and possible agenda for building a sound tax administration, for which it is necessary to start its foundation from a Tax Intelligence System. The widest possible taxpayer base has to be identified for any tax to be equitably spread across the whole taxpayer population. Even a small tax at a lower rate spread over a wide taxpayer base will invariably yield more revenue than a higher tax on a narrow base. The levy of General Sales Tax (GST) at 17% in Pakistan (at import stage its impact after adding regulatory duty, customs duty, compulsory value added tax and income tax at source ranges between 35% to 65%) has failed to bring the desired results as it is a higher tax on a narrow base. Had it been 10% harmonised levy on goods and services across the board, it could have been enforceable/acceptable as well as successful in terms of yielding more revenue being a low rate tax spread on a wide taxpayer base.
The standard GST rate in Pakistan is 17% but the government has power to lower or increase rate through statutory regulator order (SRO). During 2013-2018, the elected government was levying even 35% to 45.5% GST on certain petroleum products. There were also many sectors paying less than 17%. The effective sales tax rate in 2015, according to a study, was only 4% because of exemptions and deep-rooted corruption in the FBR.
How can Pakistan succeed in improving revenue collection when it lacks basic data collection and its storage what to speak of developing a modern, fully automated system creating and updating the profile of every citizen/taxpayer? The efforts in the past to create a taxpayer's profile through National Document Survey failed. No software has been developed for achieving this goal till today by Pakistan Revenue Automation Limited (PRAL), a subsidiary of the FBR engaged in IT projects though a project under the name of NEXUS started way back in 2005 (CBR Quarterly Review, Volume 6, No. 2, October-December 2006).
The fundamental element of tax reforms is providing an efficient and competent administration. This is nowhere visible in Pakistan. Tax machineries at federal and provincial levels lack requisite level of digitization, professionalism and human skills. Any exercise relating to comprehensive tax reforms cannot be a time-bound affair and does not mean merely making changes in tax laws or suggesting cosmetic changes here and there. Reforms can be successful only if comprehensive analysis is made of the whole system, that is, tax structure, tax administration, state of economy, taxpayers' attitude, revenue needs of the country and many other allied aspects. Tax reforms, an ongoing process, require a fundamental structure in place. We are making reforms without first establishing a workable structure. The best example of an efficient tax structure is that of Sweden where tax agency, Skatteverket, has data base of each and every person, natural or juridical. Skatteverket is accountable to the government, but operates as an autonomous public authority. This means that the government cannot exercise any direct control over the tax authority and/or interfere in tax affairs of individuals or businesses.
The main functions of Skatteverket are collection of taxes, registration of population and estate inventories. Everyone who lives in Sweden is registered with Skatteverket. Everyone who is registered is issued with a personal identity number, which is used in contacts with government agencies etc. Each personal identity number is unique and is made up of the person´s date of birth and a four-digit number. The Swedish Tax Agency processes a great deal of data about private individuals and companies. Everyone has a right to know about data processing under section 26 of the Personal Data Act. You can always contact a tax office or the Head Office of the Skatteverket if any personal data is incorrect or incomplete or if you have any other questions about the processing of your personal data. Had we established National Tax Authority [Roadmap for tax reforms, The News, February 12, 2017 & Need for National Tax Authority, Business Recorder, October 20, 2017] on the pattern of Skatteverket today we would not have had any problem with census or collection of taxes or managing land records. This is the kind of innovation we need to debate and implement. The leakage of taxes of nearly Rs 3 trillion can only be plugged through such automation.
Reconfiguring and restructuring the tax system is a daunting task. Broad based tax reforms cannot be undertaken the way we have been doing. The 2016 Report prepared by Tax Reforms Commission (TRC) has yet not been made public-it is marked as confidential by the government! TRC was notified on September 25, 2014 for suggesting tax reforms in all areas-from tax administration to tax legislation and related matters. Till today, the FBR has reportedly not implemented any major proposal of TRC. It is strange, rather shocking, that even minutes of meetings of implementing committee of TRC have not been made public for comments and debate. Reforms cannot be a closed door affair. They should be formulated through public debate.
Tax Intelligence System is the area that should be given the first priority by the present government in improving tax administration. As far back as 1958, Professor Stanley S. Surrey of the Harvard Law School pointed out the advantages of building up a comprehensive taxpayer roll:
The beginning of tax administration lies in seeing that the taxpayers are on the tax rolls. Unless the tax authorities know who are the individuals or units subject to the tax, the whole machinery of administration must necessarily function with incomplete coverage of the taxable area .... The important tasks are to select among the various sources only those which promise to be productive of names likely to be taxpayers under the tax in question (thus in some places telephone books may be very useful, while elsewhere these lists may contain only more non-taxpayers than taxpayers); to gather only so much information as can be efficiently processed; and to devise an efficient system for correlating the selected information in a continuously current form usable for enforcement purposes.
Note: FBR realised the importance of preparing taxpayer roll in 2005! It confirms that we are at least 50 years behind the rest of the world in tax administration reforms.
(To be continued)
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).)