FBR infighting caused misreporting of tax figures

Targets for fiscal year 2012 likely to be revised downwards.

ISLAMABAD:

As new details emerge of how and why the Federal Board of Revenue (FBR) overstated its tax collection figures, the blame game within the organisation has already started, even as experts warn that the FBR is very unlikely to be able to meet its revenue targets for fiscal year 2012.

Sources familiar with the situation say that the ambitions of various officials to obtain ‘lucrative’ government posts led officials to pursue wrong-headed policies that resulted in falsified figures being announced by FBR Chairman Salman Siddiqui at a press conference on June 30.

Siddiqui had claimed that the government had exceeded its revised revenue collection target of Rs1,588 billion, but was forced to admit on Friday that the real figure was Rs1,550 billion. The tax-to-GDP ratio for 2011 now comes to 8.6% of the total size of the economy, the lowest in the last two decades.

Siddiqui has blamed Khawar Khursheed Butt, the head of the Inland Revenue Service for the error, claiming that Butt gave him gross sales tax collection figures that do not take into account the refunds that the FBR owes to taxpayers rather than net collection figures, which subtract those amounts out.

Yet people close to Butt say that the chairman’s ire towards him does not have its origins in the most recent fiasco and animosity between the two men dates back several months. Siddiqui has reportedly been sidelining Butt, for reasons that have not become apparent.

On April 2, Siddiqui took away Butt’s powers to transfer officers within his own department and gave it to Tahir Raza Naqvi, a member of the powerful district management group within the civil service (most FBR officers come from the customs or income tax groups). Naqvi, in turn, made several transfers within the IRS of officials described to have “strategic responsibilities.”

The acrimony between Siddiqui and Butt was so blatant that even Finance Minister Abdul Hafeez Shaikh came to know about it.

It is against the backdrop of this internal politics that the FBR’s clandestine operation to meet its revised revenue collection target took place.

On June 15, the FBR chairman received a report that estimated that the government would miss its tax collection target by Rs59 billion, which sent the chairman into panic and sparked a flurry of activity to try and meet the goal by any means necessary.

Yet any move to collect more taxes would have to rely on the IRS, one of the most critical components of the FBR, since it is responsible for collecting sales taxes, the single largest source of government revenue. Siddiqui directed three FBR officials – Amina Khalifa, Zia Mahmood, and Israr Rauf – to begin coordinating with the regional IRS heads directly, bypassing Butt, who heads the IRS.

Rauf and Mahmood worked frantically over the next few days, receiving data from the regional centres by telephone and even text messages, violating the State Bank and National Bank reporting systems, with Khalifa joining their efforts on June 30. The goal was to push the regional heads of the IRS to get as close to the revenue collection target as possible by targeting large corporations who would be likely to have the kind of cash on hand to make quick tax payments worth billions of rupees.

However, in the words of a senior official at the FBR, this “hi-tech corporate collection clandestine operation” ended up over-reporting revenue figures by Rs45 billion.

Once it became clear that, despite the most frantic of efforts, the FBR had failed in meeting the government’s target, the government sent out an “SOS call” in the first week of July to large banks and state-owned corporations in order to obtain more revenues and have them deposited in bank branches in smaller cities, where the data entry systems are less automated, allowing for backdating of collection receipts.

The FBR obtained Rs25 billion in advance taxes, through the Large Taxpayers Unit in Karachi, from Habib Bank, United Bank, National Bank, Pakistan State Oil and Pakistan Petroleum. Most of the taxes were deposited in bank branches in Tando Allahyar, with the FBR trying to backdate the receipts to June 30, an effort that failed after the State Bank of Pakistan refused cooperate with the fudging.

A similar effort was made in Islamabad, with the Oil and Gas Development Company, Pakistan Telecommunication Authority and Pakistan Telecommunications Comp-any being asked to pay Rs18 billion that was deposited in banks in Attock.

The political infighting at the expense of national interests suggests that major changes in the FBR are around the corner, according to one of the two top economic managers in the country.

Meanwhile, officials say that, with a reduced 2011 base, the tax target for 2012 – at Rs1,952 billion already considered ambitious by most observers – is likely to be revised downwards.

“It will now be more difficult to achieve this year’s tax target as the base has reduced by Rs 38 billion,” said Hafiz Pasha, chairman of the revenue advisory council and a former finance minister.







Published in The Express Tribune, July 24^th, 2011.