Are Tax Reforms Delivering?

The 1973 Constitution provides for eliminating all forms of exploitation on the basis of, ‘from each according to his ability, to each according to his work.’

Deviating from this fundamental principle, our successive governments have failed to develop a fair taxation system.

The tax system is defined by three factors: capacity to tax, ability to collect taxes, and the willingness to tax.

Capacity to tax is the potential an economy has for taxation. Usually measured by the tax-to-GDP ratio, it depends upon the type of government, the nature of the state, the role it wants to play in the individual life of its citizens, the type of economy, etc.

Currently, the tax- to-GDP ratio hovers between 9-10 per cent, well below the potential of 60 per cent increase in revenue at the current GDP level. The ability to tax is a mix of law and tax administration. The best tax policy will be a failure if implemented badly.

Willingness to tax is essentially a political question. The majority in our legislatures belongs to a class which itself does not pay any tax. It want ‘others’ to pay taxes. The ‘others’ are not selected on the basis of their ability to pay but because of their lack of ability to resist unfair taxes.

The willingness to tax is directly influenced either through bilateral ‘aid’ agreements or through institutions like the World Bank and the IMF. The lenders have their own agenda which badly hurts local businesses and employment environment. But millions of dollars are received as ‘loan’ to carry out tax reforms recommended by the so-called ‘donors’.

The latest round of reforms began in the initial years of the last decade. How much change is visible because of it in the Federal Board of Revenue? A lot! Costly foreign-aided training to almost all the important bank officers, expensive vehicles for the only route—- home-office-home—- and internet for social networking. Facilitation of the workforce is a welcome step. But for what?

The purpose was to enable the workforce to achieve fair taxation which could generate enough resources for the national welfare. Have they achieved their goal? Are they on the right path to achieve it? Unfortunately, the answer is a big ‘NO’.

Our ex-finance minister is on record admitting corruption of Rs600 billion annually in the FBR. However, the present finance minister states innocently that there was no corruption last year. When the head of the fiscal team is not aware of the rampant corruption, how will he take measures to eliminate it?

The finance minister needs to study the latest figures about maladministration in the FBR as released by the Federal Tax Ombudsman (FTO). In 2010, the FTO received 1446 individual complaints. Of these, 1261 (87 per cent) complaints were decided by December 31, 2010, 83 per cent in favour of the taxpayers.

As against refunds of Rs94 million in 231 individual taxpayer complaints in 2009, the amount refunded in 685 individual cases during 2010, on the FTO intervention, exceeded Rs1,972 million, up more than 21 times. After presenting these figures, the FTO states that problem is systemic and needs concerted efforts on the part of the FBR.

The FBR requires taxpayers to file a number of statements and returns, etc. online for increasing its efficiency and facilitate taxpayers. This should result in reducing the time taken to make decisions. Alas! That is not the case. The FBR has become more lethargic and the lethargy is inbuilt in the tax law.

In the Finance Act, 2009, the period required to pass order on online refund application was extended from 45 to 60 days.
The officers did not feel satisfied and yet another provision was added through which the FBR was empowered to condone delay. Even otherwise, the period provided is ‘directory’, so its non-compliance does not lead to any accountability of any tax authority.

For taxpayers, on the other hand, the date of filing of return has been brought forward from September 30 to August 31 in a large number of cases. As expected, the FBR has to extend this date always ‘on the request of their taxpayers.’ They like that the taxpayers feel obliged to them for such ‘benevolent’ favour, a typical colonial power mindset.

Sales tax returns are a source of perpetual nuisance. Format of returns is defective, and the system not integrated. You revise one return, and you will have to request your tax collector for all the subsequent returns manually despite computerisation of records. It is their sweet will (called Commissioner’s discretion) whether they allow you that or not. In one case, due to technical glitch of the online system, a taxpayer has so far been denied refund of millions of rupees.

There are two paradigms in tax compliance; one treats taxpayers as criminals who never abide by tax laws unless deterrence of fines, penalties and prosecutions is in the field; the other treats taxpayers as clients who are to be facilitated. Tax facilitation centres have been established which is commendable. But when a taxpayer wants to fulfill his/her tax liabilities, he/she starts facing hurdles. And most of the hurdles owe their presence to the men working for the FBR.

For example, previously taxpayers used to get National Tax Numbers with ease and any change in the particulars was a matter of hardly two days. The process has been made cumbersome and time consuming under the pretext of ‘verification of particulars.’ If verification of particulars from the concerned officer was at all necessary, in the computerised environment, it should have been a matter of hours, but thanks to red-taps it takes weeks and months.

No objection certificate is sought for minor changes. What causes harm to the FBR if a new person gets a National Tax Number? Previously, only sales tax registration was a source of corruption, now a new source in the form of issuance of/change in National Tax Number has been added.

Similar is the case with other miscellaneous tasks. Guess what could be the reason for not passing an order by the commissioner even after two years (against prescribed period of 30 days), on the application of a big taxpayer seeking permission to make a payment to a non-resident without tax deduction for valid reasons given in Section 152 of the Income Tax Ordinance, 2001. Such cases include:

* delaying the approval, for more than two years, for change in the name of an approved provident fund in line with change in the name of the taxpayer company.

* not issuing advance ruling to a non-resident by the FBR itself, even five months against prescribed time of three months.
The ‘reformed’ FBR should understand that such actions do not promote tax culture.

Taxation policies affect business decisions. Before a measure is taken, the FBR should conduct an impact assessment. For example a few months back, the FBR withdrew zero-rating available to local manufacturers of power generation plant and machinery while sales tax levy on the same machinery, if imported, continues to be exempted. It has rendered the local production uncompetitive, particularly when foreign governments like South Korea give export subsidy on plants and machinery. The local manufacturers are closing down their businesses, resulting in unemployment; the time spent on import of power generating units delays projects.

A request was made to the FBR either to exempt local manufacturers or also levy sales tax on the imports to provide a level-playing field for domestic producers. Was it an unjust demand? Certainly not! But the FBR prefers losing revenue by keeping the files, ‘pending for decision.’

When a taxpayer gets an unlawful treatment, he approaches the Commissioner (Appeals) who is also departmental officer with a departmental bias. No doubt, the best orders of the department are quashed, not on merit but for a ‘nazrana’. If you fight on merit, the worst action will follow dubbed as, ‘in accordance with law and facts of the case.’

There is no meaningful monitoring of these decisions. Second tier of appeal is the Appellate Tribunal whose benches can be categorised into ‘Usooli’ (principled) and ‘Wasooli’ (‘facilitation fee’). It is your luck where your case is fixed.

Some taxpayers manage to get their case fixed in the bench of their choice by paying ‘fixation fee’ to the concerned officials. If a case is fixed in a ‘Wasooli’ bench and the taxpayer does not pay them ‘their money’, the order will be written in such a manner that it becomes difficult even for the High Court to frame a question of law. What a tyranny is our system of tax law!

Will the FBR mend its ways?

You can contact the author at taxopinion@gmail.com