An incentive package for dishonesty
GIK's understanding of economy is perhaps the single-most important reason why we are in such socioeconomic mess today
The writer served as Executive Editor of The Express Tribune from 2009 to 2014
The proposed amnesty package for the non-filers of income tax returns, offering them to declare their hidden assets of up to Rs50 million by paying a nominal one per cent of the declared amount in taxes is likely to take Pakistan back to the Ghulam Ishaq Khan days — the super-duper civil bureaucrat whose undergraduate understanding of economy is perhaps the single-most important reason why we are in such a socioeconomic mess today.
When the going was good and the second Afghan war-related dollars were pouring in, we had a banker as our finance minister and he frittered away these unencumbered dollars by sending the nation on a heightened spree of consumerism.
Now when the country is undergoing an acute phase of resource crunch, we have a chartered accountant as our finance minister whose understanding of the economy is limited to no more than balancing the books, which he accomplishes with borrowed resources and by cutting down on development expenditures.
Earlier in June this year, with outstanding power dues of the private sector rising to Rs343 billion, the federal government approved an amnesty scheme for defaulters of electricity bills and waived 30 per cent of their arrears on payment of the remaining dues. This was once again an attempt to balance the books and was not a reform measure. Since Ghulam Ishaq Khan’s days, the only excuse the non-filers have been using for tax evasion was their legitimate fear of the corrupt-to-the-core tax collector. Even today it is the same fear that keeps the non-filers from documenting their real incomes. Intriguingly, no government since the GIK days has done anything so far to save the non-filers from this corrupt-to-the-core tax collector. In this age of digitisation, it has become so easy to eliminate the physical interface between the taxpayer and tax collector. But those whose focus is overwhelmingly fixed on balancing books can hardly be expected to spare a few moments to explore this possibility.
Interestingly, the recently constituted Tax Reforms Commission has identified tax amnesty schemes as one of the major factors causing distortions in the system. Indeed, these schemes have been identified as incentives for dishonesty.
Along with this scheme, the following have been identified by various studies on the subject as the major reasons for crisis in the taxation system: 1) extremely poor compliance levels and awful enforcement; 2) presumptive taxes and lack of documentation; ad hoc-ism in terms of economic and fiscal policy and a flawed tax system; lack of consideration for values and integrity; serious under-performance by the IT support; the SRO culture; exemptions, concessions and reduction in the tax rate; inadequate facilitation of taxpayers; adversarial relationships; training of FBR staff — serious capacity issues when it comes to FBR personnel; weaknesses in terms of integrity of data and its ownership; no effective concept of taxpayers’ rights; inadequate focus on technology and training of users; lack of research and analysis.
Revenue collection is influenced by the administrative capacity to perform key functions, the existence or absence of a comprehensive, coherent tax code and adequate systems of registering taxpayers, as well as monitoring, recording and controlling payments and declarations in a timely manner. The FBR does not even notify taxpayers when they fail to file or pay on time. There is no system of selecting and performing audits and collection activities effectively. Overall organisational development and management training in tax administration is ignored blatantly. In audit selection, no clear criteria based on automated systems and good data is used. Revenue forecasting for each tax type, taxpayer type and geographic region is not done at all.
What is, therefore, needed to be resolved on a priority basis is improving the culture and management capacity of the FBR to willingly support a reform programme, mitigating the unsettling effects of frequent and adhoc legal and administrative changes. These frequent changes provide opportunities for increased discretion and corruption, insufficient knowledge of taxpayers on their tax obligations and decreased motivation to comply with tax demands. This in turn reinforces adversarial relationships between taxpayers and tax collectors. What is needed is public advocacy in terms of enhancing taxpayers’ education and facilitation, encompassing a well-coordinated communications programme, promoting development of greater compliance and a user-friendly, supportive interface between the FBR and taxpayers, incorporating best international practices, including transparency, fairness, simplicity, automation, cost-effectiveness, a quality assurance monitoring programme, easy-to-comply-with forms and document requirements compatible with a computerised operation.
Published in The Express Tribune, December 19th, 2015.
When the going was good and the second Afghan war-related dollars were pouring in, we had a banker as our finance minister and he frittered away these unencumbered dollars by sending the nation on a heightened spree of consumerism.
Now when the country is undergoing an acute phase of resource crunch, we have a chartered accountant as our finance minister whose understanding of the economy is limited to no more than balancing the books, which he accomplishes with borrowed resources and by cutting down on development expenditures.
Earlier in June this year, with outstanding power dues of the private sector rising to Rs343 billion, the federal government approved an amnesty scheme for defaulters of electricity bills and waived 30 per cent of their arrears on payment of the remaining dues. This was once again an attempt to balance the books and was not a reform measure. Since Ghulam Ishaq Khan’s days, the only excuse the non-filers have been using for tax evasion was their legitimate fear of the corrupt-to-the-core tax collector. Even today it is the same fear that keeps the non-filers from documenting their real incomes. Intriguingly, no government since the GIK days has done anything so far to save the non-filers from this corrupt-to-the-core tax collector. In this age of digitisation, it has become so easy to eliminate the physical interface between the taxpayer and tax collector. But those whose focus is overwhelmingly fixed on balancing books can hardly be expected to spare a few moments to explore this possibility.
Interestingly, the recently constituted Tax Reforms Commission has identified tax amnesty schemes as one of the major factors causing distortions in the system. Indeed, these schemes have been identified as incentives for dishonesty.
Along with this scheme, the following have been identified by various studies on the subject as the major reasons for crisis in the taxation system: 1) extremely poor compliance levels and awful enforcement; 2) presumptive taxes and lack of documentation; ad hoc-ism in terms of economic and fiscal policy and a flawed tax system; lack of consideration for values and integrity; serious under-performance by the IT support; the SRO culture; exemptions, concessions and reduction in the tax rate; inadequate facilitation of taxpayers; adversarial relationships; training of FBR staff — serious capacity issues when it comes to FBR personnel; weaknesses in terms of integrity of data and its ownership; no effective concept of taxpayers’ rights; inadequate focus on technology and training of users; lack of research and analysis.
Revenue collection is influenced by the administrative capacity to perform key functions, the existence or absence of a comprehensive, coherent tax code and adequate systems of registering taxpayers, as well as monitoring, recording and controlling payments and declarations in a timely manner. The FBR does not even notify taxpayers when they fail to file or pay on time. There is no system of selecting and performing audits and collection activities effectively. Overall organisational development and management training in tax administration is ignored blatantly. In audit selection, no clear criteria based on automated systems and good data is used. Revenue forecasting for each tax type, taxpayer type and geographic region is not done at all.
What is, therefore, needed to be resolved on a priority basis is improving the culture and management capacity of the FBR to willingly support a reform programme, mitigating the unsettling effects of frequent and adhoc legal and administrative changes. These frequent changes provide opportunities for increased discretion and corruption, insufficient knowledge of taxpayers on their tax obligations and decreased motivation to comply with tax demands. This in turn reinforces adversarial relationships between taxpayers and tax collectors. What is needed is public advocacy in terms of enhancing taxpayers’ education and facilitation, encompassing a well-coordinated communications programme, promoting development of greater compliance and a user-friendly, supportive interface between the FBR and taxpayers, incorporating best international practices, including transparency, fairness, simplicity, automation, cost-effectiveness, a quality assurance monitoring programme, easy-to-comply-with forms and document requirements compatible with a computerised operation.
Published in The Express Tribune, December 19th, 2015.