Tax administration needs overhauling

The kind of tax measures that Finance Minister Ishaq Dar announced have in past only given a fresh fillip to smuggling

Half-way through one financial year, the government of the day was confronted with a very heavy shortfall in tax revenue collection. Projections for the second half were also very disappointing. It was, therefore, decided to overcome the shortage by enhancing import duties on ‘non-essentials’. This had happened during the second stint of the late prime minister Benazir Bhutto. And Pakistan at that time was, as usual, going through one of the so-called customary IMF structural programmes. But at the end of the fiscal year, while the imports had grown significantly in value and volume terms, the collection from this head had seriously stagnated.

After the ritual of the post-budget press conference, a small group of journalists were invited by the then prime minister for a more detailed discussion on the proposed budgetary measures for the incoming year. During the course of the discussion, the prime minister was asked why collection under the import duty head did not show any improvement for the outgoing year despite the enhancement of import duties half-way through the fiscal year and that too when imports had increased considerably, both in volume and value terms.

The prime minister was gracious enough to concede that she too was puzzled and would like to find out why. Then she proposed that three of us (she proposed the names) should call on the chairman of the Central Board of Revenue (CBR) — the earlier version of FBR — to find out the answer. So we called on the then CBR chief and kept on calling on him every other day for almost a month without getting a satisfactory answer. Finally, one day, perhaps fed up with our pestering, he said: “Actually, the increase in import was due to items that we do not show on the books and which carry no duties.” Being patriotic Pakistanis we meekly accepted the explanation without a question and never went back to the CBR to complete the prime minister’s assignment.

Perhaps the new tax measures announced the other day by Finance Minister Ishaq Dar — ostensibly under duress from the IMF to collect Rs40 billion of tax revenue to bridge the estimated gap between the target fixed in the annual budget and expected collection by the end of the current financial year — would, one hopes, not meet the same fate. However, such measures in the past have been known to have only given a fresh fillip to smuggling, depriving the exchequer of even that amount which it would have otherwise collected, had the government not enhanced the import duties.

It is, indeed, so easy to make wishful plans rather than take the bull by the horns. And this is what successive governments in this country, both military and civilians, have been doing all these years.

Perhaps no gaps would have occurred in the first place, between what was proposed in the budget and what was estimated to be collected by the end of the year, if only the audit aspect of the tax system had been reformed. Tax audit is the core function of any revenue authority and should have received the maximum focus and attention.

But the prevailing structure of the Audit Wing and its field formation are not geared to undertake the required task. The staff of the wing numbers about 650. This means a workload of about 400 audits/assessments per officer, per year. Therefore, it is not surprising that an overwhelming number of tax audits are conducted in haste and are perfunctory creating space for tax evasion and avoidance. The system needs a complete overhaul to cater to the complexities and diversities of tax audit. Modern-day tax audit requires resources in auditing, accounting and information technology, together with specialised sectorial knowledge.

For example, transfer pricing, sale and purchase of properties, benami accounts and undeclared assets held outside the country and so on, are all very lucrative sources of direct taxes. But unless the tax administration is geared to probe these fields, the vast resources covered by these activities would always remain out of the tax net.

In addition, the audit function should be completely separated from rest of the FBR. A separate audit division needs to be created, to plan and execute the work of audit. Experts have suggested formation of a semi-government, autonomous body, hiring accounting and audit professionals instead of Civil Service Academy-trained CSP officers.

Published in The Express Tribune, December 5^th,  2015.

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