The story since then has somewhat followed the script but the climax is still to take shape. Public clamouring on taxation affairs has only now begun to heat up, following the announcement of budget FY20, which is when PTI's tax reform plans were really put into action. The party had inherited the budget FY19 when it really formed the government in late August 2018, and chose to play along with it, sans a few changes such as pro-Make in Pakistan revisions brought about through two mini budgets.
Ideally, the government should have started rolling out tax reforms through its first mini budget because the earlier any ruling party sows the seeds of reforms, the earlier it reaps the harvest, and the better its re-election prospects. But until as late as May 2019 the party could not find anyone suitable from within the Federal Board of Revenue, and eventually the government reached out to ShabbarZaidi, senior partner at accounting firm A.F. Ferguson & Co. And thus began the real story of PTI's tax reform - nine months after coming to power.
How has been the government's performance so far? Well, obviously it's too early to write a report card - except for pointing to the clear absence of a dream team as Imran Khan had claimed and lack of preparation to deal with the economic situation upon coming to power. But as far the recently rolled out reform-oriented steps, it's really been just two months since the budget FY20 was proposed. Even the much-expected public furore hasn't abated as yet. But furore aside; as far as specific reform measures are concerned there has been some noticeable progress.
Granted that on some accounts, the government hasn't moved much. This includes the effective implementation of the separation of tax policy from administration. In late CY18, the government separated policy from administration, but so far, the policy board is wanting, inter alia, in terms of structure, secretariat, and provincial representation. Nor has the government has moved towards getting professionals in FBR by delinking the tax body from federal Public Service Commission system. The very appointment of Shabbar was challenged, which is why he was appointed on honorary basis.
However, on other accounts, the government has moved quite fast; faster than many people would like even among PTI's inner circles. This includes the removal of zero rating on domestic sales of top exporting sectors. The move, aimed at both revenue generation and documentation, has been received with great deal of criticism over concerns of tax refunds. But so far, the government hasn't budged. Kudos for that, and for increasing the valuation rates of immoveable property.
The implementation of Benami law is another aspect. Following the end of this year's amnesty scheme, the tax body has started already sending notices to those who hold immoveable benami assets, while the government has increased the incentives for whistle-blowers who identify benami assets. The FBR is still struggling to figure out a way to get banks to provide data of benami accounts. This will be a tricky move given the secrecy laws that give legal cover to banks. But it's a matter of time before laws may be changed.
A 2006 OECD survey titled 'Tax Co-operation - Towards a Level Playing Field', reported that most of the 82 countries it reviewed have some access to bank information for tax purposes and "50 countries give their authorities access to bank information for all tax purposes", i.e. for the consumption of local revenue authorities as well as for exchanging information under bilateral tax treaties. And this is despite the fact that in all of these countries surveyed by the OECD, banks were obligated by law to treat customers' affairs as confidential. Ergo, if not this year, then next, the legalities could be sorted out here at home as well.
The government has also started taking steps to increase the number filers in a manner that was only paid lip service to in yesteryears. Notices to around 100,000 non-filers are in the process of being sent to those who own a house/vehicle above certain threshold. Notices are being sent to hospitals and doctors in Karachi, and there are reasons to believe that courtesy data analytics, this time will be different. Other measures of bringing more people into the system include simplified tax regime for traders, fixed tax regime for small shopkeepers, and submission of CNIC of unregistered non-ordinary buyers required for purchases above certain threshold.
It is feared that these measures will hurt economic growth this year and the next. But then economic growth has already been hit so hard that actually now may well be a good time to cast the net as do fishermen when the tides are low. Moves to increase the tax base would always hit economic growth and be politically difficult - so best to take those hits now when things are already bad and get it over with, rather than disrupting the growth phase as and when it begins.
In other long pending areas, the government has just begun to make amends, and it's too early to say whether these will bear fruit. This includes initiating discussions with Chinese state authorities to sign anMoU to fix the issue of misdeclarations in Pak-China trade, and the review of Pak-Afghan trade regime as well as Afghan transit trade where under invoicing and smuggling respectively has led to loss of customs revenue. This list also includes baby steps being taken towards automation, taxpayer education and facilitation.
In summary, three failures stand out from PTI's performance on taxation so far. First, the failure to start fixing the institution of taxation, if not the whole institutional structure ala a national tax agency.Second, the failure to provide evidence behind the policies or the reform measures being implemented. And third, the failure to create a buy-in for reform measures. On all these accounts, the government may be given a benefit of the doubt on the premise that the first year was all about crisis management. But with the IMF programme now signed, and immediate crisis averted, one expects the government to start working towards institutional reforms.
As far as the specific measures are concerned, things have begun to move in the right direction. There is of course public furore - some because of genuine troubles, some just crocodile tears. While the IMF does not have a huge list of structural benchmarks for taxation (just two really), the crisis itself demanded urgent actions that the government took without due consultation and research. Going forward these shortcomings need to be addressed by resorting to evidence-based policy making, creating a healthy debate and using strategic communication tools to create a buy-in for all the painful changes it is trying to bring out.
If the government fails to take steps to address these concerns over the next twelve months, then its seriousness to fix the country's tax system would be called into question. But as far as specific measures are concerned, it's good see those steps being taken, although of course it can be hard to spot stealthy change especially when one lives through it. There hasn't been a revolution in tax reform yet; but the implementation of politically difficult measures in budget FY20 deserves a small cheer.