Tax evasion: Bring the pain

Why the FBR must not be afraid of getting tough in its crackdown.

If the Federal Board of Revenue is to be successful in its drive against tax evasion, it must understand one simple fact: its job is not to be the business community’s friend. The FBR must be a businessman’s worst nightmare.

It is a concept that seems to elude the government: it is neither illegal nor immoral for the government to use coercive force to collect taxes. Indeed, the very definition of a modern state is one that has a monopoly on the use of force within its jurisdiction, collects taxes from its citizens and offers services in return.

Most people who admit to being tax thieves argue that since the government of Pakistan is poor at providing services, it has no right to ask its citizens to pay any taxes. Others who actually do pay their taxes argue that they are overtaxed and that other people should be asked to pay more taxes.

Both arguments are bunk. Tax rates in Pakistan are reasonable and far lower than they should be considering how few people are actually eligible to pay taxes. And tax evaders have absolutely no right to complain about any lack of services. You get what you pay for, and people who do not pay anything should not be shocked when they get nothing.

But if the country is to move forward, this vicious cycle must end somehow. The government cannot expect citizens to have an epiphany that paying taxes is their civic duty. Even if the government were to begin offering first world services, hardly anyone would voluntarily start paying their taxes.

What is probably ideal is a carrot and stick approach: get brutal with tax evaders but then also make sure to facilitate people who do pay their taxes.

Make sure to reward good behaviour

The FBR estimates tax evasion to be equal to 44.1 per cent of all taxes currently part of the law. This amount comes to Rs1,270 billion rupees, which is equal to 8 per cent of the total size of the economy. Crucially, it is also almost equal to the fiscal deficit, which is expected to be Rs1,350 billion this year. In other words, 94 per cent of fiscal deficit in Pakistan could be erased through efficient tax collection.

While there may be merit to removing exemptions from sectors that currently enjoy them, what is equally necessary is tax machinery that is efficient and capable of collecting whatever the government levies. This requires a two-tiered crackdown.

The first crackdown starts within the ranks of the tax authorities to weed out the corrupt elements  without whose help most evasion would not be possible. The second should be on actual  evaders.

For the FBR to become a more efficient authority, three things need to happen: its collection processes need to be automated so that they become easier to track. Secondly, the authority needs to pay its officers better. And lastly, the government needs to simplify the process of paying taxes. All of these are interlinked.

In the past, the government has tried automation but was vehemently opposed by FBR officials themselves. This is because many of them derive much of their actual income from soliciting bribes in exchange for looking the other way while wealthy individuals and businesses avoid their tax obligations.

The finance minister would do well to show some political courage in this matter and force the FBR to accept the automation drive, if for no other reason that it would improve the efficiency of the refund system which would take away the single biggest argument most businesses have against the FBR.

Paying taxes in Pakistan is currently a pain. According to the World Bank’s study on the issue, an average business needs to make 47 payments a year (compared to an average of 14 in developed economies), a process which takes an average of 560 man-hours (compared to 200 hours in the OECD). The country ranks 145th in the world in terms of ease of paying taxes.

If the government were to simplify and automate the process of paying taxes, it would remove many of the complaints of taxpayers and reduce the workforce required to man the FBR, which in turn could then afford to pay its employees more.

There are several examples of organisations within the Pakistani government which raised the salaries of their employees and saw a reduction in corruption and an increase in efficiency. This is not just a hypothetical example from other parts of the world. It has worked even here.

One thing is clear, however. No government office can work well so long as it is manned by officers of the Civil Service of Pakistan. Only when each department is allowed to hire independently will we have bureaucrats who actually care about doing their job rather than building up their privileges.

Once the government has cleaned its own house, it get then get to the serious business of collecting taxes.

To make an omelette, first break some eggs

The government’s timid approach towards mounting a crackdown on tax evasion gets frustrating. There have been reports of some authorities hiring eunuchs to shame people into paying their taxes. Given the fact that most Pakistanis are completely shameless about their economic morality, that approach is unlikely to work very well.

The government, instead ,should try a more physically intimidating approach. If a few doors need to be broken down in the middle of the night and a few thieving business tycoons need to be dragged out of their beds by armed policemen kicking and screaming in front of their mothers, wives and children, then so be it. The IRS is not scared to do it.

The government is perfectly within its rights to use such coercive tactics. It would not even need to do this with every person who does not pay their taxes. But a few unannounced raids on the most prominent and egregious of violators should go a long way towards sending the message that anyone could be next.

The acronym “FBR” must become simultaneously the most feared and reviled name in the country. Pakistan must acquire its equivalent of the American saying about the famous 1920s Chicago gangster, Al Capone: “He got away with murder, but they got him for taxes.”

Published in The Express Tribune, April 4^th,  2011.