The WB estimates Pakistan's tax gap at 10% of the GDP or Rs 3.8 trillion. Our current tax-to-GDP ratio is 12.6% that according to the WB should be 23%. Among the 13 federal countries, Pakistan is second to last on the performance of provincial governments on tax collection. While the services sector accounts for 56% of GDP, it contributes only 0.5% of the GDP to taxes and about 11% to sales tax collection. The WB analysis is that Pakistan has a complex tax system of over 70 unique taxes and at least 37 government agencies administer these taxes. Through $400 million lending, the WB is keen to help Pakistan develop a long-term tax policy. But there are concerns that the money may be spent on building new offices and procuring furniture as was done in the last programme. The WB is also pushing for decisively moving towards a functional organisational structure to overcome current fragmentation and inefficiencies in the Federal Board of Revenue (FBR). It is of the view that the functional system permits standardisation of similar processes across all taxes and facilitates simplification of procedures.
It may be recalled that the World Bank in 2004 extended to Pakistan $125.9 million, including IDA credit of $102.9 million and a UK DFID grant of $23 million, for Tax Administration Reform Project (TARP). The objective of TARP was to improve "the integrity and fairness of tax administration by improving organizational efficiency and effectiveness of the revenue administration". It was a national shame that for improving the integrity and fairness of tax administration we agreed to such heavy external borrowing/grant.
Tragically, tax-to-GDP ratio in 2012, the last year of extended World Bank funded TARP, dipped to 8.2% from 10.6% in 2005 when the programme started! The World Bank in its report, "Implementation, Completion and Result Report" on TARP observed that "the current narrow-base of general sales tax (GST) in Pakistan remained almost entirely unchanged throughout 2005-2012, despite efforts to overhaul the indirect taxation structure by introducing a reformed GST featuring few exemptions and wide coverage of goods and services".
The report while highlighting the poor performance of FBR noted that "different from other sources of tax revenue in Pakistan, administration of GST entails a full-fledged operation of major FBR functionalities, including: registration, monthly tax return processing, collection, refunds, audit and enforcement. GST operation also integrates joint effort from both internal revenue administration and customs since GST import tax is collected at the borders and zero-rating is targeted for export operations, besides other activities".
For evaluating FBR's overall performance during the five-year-long TARP, the World Bank used GST administration as an indicator. The result compiled is highly disappointing-GST productivity turned out to be only 23 percent, compared to an average ratio of 34 percent worldwide. According to the World Bank, "the estimation covering the project life reflected an overall decreasing trend during 2005-06 to 2010-11 suggesting feeble tax administration efforts throughout the reform period". Shockingly, during the reform implementation period, there was "a declining performance in both tax policy and administration". Even during the economic boom (2005-08), GST productivity index "showed a rather declining trend despite modest buoyancy gains in FBR revenue collection, signalling relatively poor tax administration performance amidst relatively favourable overall economic conditions," says World Bank.
The World Bank concluded that "during the economic crisis period and subsequent years (2008-11), GST productivity index declined at a higher rate compared to FBR tax-GDP despite a swift turnaround in project implementation and concomitant positive trends in some outputs by the last two years of project life." The report while pinpointing our weak compliance levels, lacklustre results in reform implementation, especially those related to short-term actions aimed at curbing evasion through more effective enforcement actions by the final year of project implementation, noted "performance from 2008 onwards, far from the project's objectives envisioned at the outset". This is the sordid story of tax reforms in Pakistan even when enormous funds-over 100 million US$-and best professional advice was available.
FBR ruthlessly wasted borrowed funds of millions of dollars-Pakistan with tax-to-GDP ratio of 8.5% was at 155th among 179 nations at the end of TARP in 2011. According to reports, tax-to-GDP ratio further deteriorated to 8.2% during the financial year 2011-12. Not only did FBR fail to implement tax reforms, there were unprecedented increase in tax frauds that were not taken into account by the World Bank in its report (Acts of deceit and frauds, Business Recorder, July 31, 2011). World Bank in its report did not mention mafia-like operations of FBR that include amongst others, missing containers, refund scams, smuggling of goods, currency and narcotics, under-invoicing, and abuse of the legal tool of issuing Statutory Regulatory Orders (SROs) to favour the rich and mighty.
Pakistan is facing multiple challenges on the economic front: reckless borrowing by successive governments for meeting its day-to-day expenses, lack of resources for rapid infrastructure improvements, trade deficits, fiscal deficit, inflation, balance of payments, and what not. In these challenging times, we want more loans, even from WB to reform our tax system! Faced with grave challenges to combat terrorism, money laundering operations funding the militants and criminals, and the problem of ever-growing black money, which according to independent experts is about three times of the documented economy, our political leadership and tax officials are planning yet another foreign-funded tax reforms.
Since 2004, in the name of tax reforms, FBR has been imposing more and more obligations on the citizens of Pakistan. The nation has been burdened with a number of cumbersome tax terms and over 65 withholding taxes without any compensation. Now the news that even the PTI government, contrary to its claims of finding indigenous solutions, wants World Bank-funded reforms (sic) is highly lamentable. What will happen-the same old modus operandi of hiring hand-picked foreign and local consultants to further destroy tax policy and administration?
The problem of Pakistan is that its tax system is not equitable. The burden of taxes is already less on the rich and more on the poor. In the face of this reality, the government of PTI, like its predecessors, is resorting to more regressive taxation. Our potential is much higher than targets achieved by FBR.
In all democratic countries, special house committees are formed by elected parliaments for conducting tax reform exercises. Here in Pakistan we are doing it through bureaucratic structures, which are outdated, inefficient, incompetent and corrupt. This is asking the troublemakers to do trouble-shooting. It reminds us of great Urdu poet Mir who aptly said for such situations:
Mir kya sada hain, beemar huay jis ke subub
Usi attar kay londay say dawa laity hain
(What a simple soul is Mir that he seeks medication from the healer's boy, who is the cause of his ailment).
Pakistan's tragedy is that things are always being done by people who are not eligible for that job. Military governments make constitutional changes and tax reforms are undertaken by tax bureaucrats, who have a proven track record of inefficiency, incompetence and corrupt practices.
Our present tax revenue potential, if monstrous black economy is dealt with iron hand, is not less than US $ 60 billion (Indonesia collected US$ 38 billion in 2018) provided that the existing tax base is made wider and equitable, black economy is discouraged, tax machinery is completely overhauled and exemptions and concessions available to some privileged sections of society are withdrawn. To achieve these goals, we do not need any loan from the World Bank or other donors. If we take money from them then we are bound to follow their conditions, as beggars cannot be choosers. Many local experts can do the reform work either voluntarily or at much less cost than what we intend to waste on foreign consultants at the commands of World Bank and others.
(The writers, tax lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)