Who makes the tax policy in Pakistan? The question has arisen in the context of two recent developments. First, the finance minister claimed that the Federal Board of Revenue (FBR) issued SRO 351 giving assessment and recovery powers to tax intelligence unit without his knowledge and approval. Second, the FBR chairman informed a Senate committee that the current year’s tax target was imposed by the ministry of finance despite his protestations about it being unrealistic. Tax policy and collection are distinct functions. In the federal government set-up, a division headed by a secretary is assigned policymaking functions. At independence, a separate revenue division was inherited. In 1960, it became an attached department of the finance division. In 1974, a separate post of the chairman was created in place of the ex-officio chairmanship with the finance secretary. The status of the revenue division was restored in 1991, discontinued in 1995 and again restored in 1998.
It is thus the responsibility of the revenue division to formulate and administer the tax policy, while the actual levy and collection of federal taxes is the business of the FBR. Headed by the same person, the two organisations are effectively one. A member tax policy also exists with a mandate limited to inland revenue. There is some confusion though. Tax proposals form part of the budget, the legislation for which is prepared and steered by the ministry of finance. The FBR’s frustration with the revenue target is repeated every year. Despite the shift of tax policy to the revenue division, the finance division continues to formulate the tax policy because it traditionally has the ear of the finance minister. In many cases, it does not bother to coordinate with the FBR. In the lone case of SRO 351, the FBR did not coordinate with the finance division. The result is that the finance minister has distanced himself from the FBR’s policy decision on tax evaders.
Pakistan is among the small group of countries who still have a fixed annual target for the tax collector. With tax collection and tax policy mixed up, the outcome is a tax-to-GDP ratio frozen in time. It will make more sense to set up an inter-ministerial forum together with nonofficial representation for tax policy. Issues relating to the nature and number of taxes, rates and base belong here. The FBR should focus on collection alone, with the freedom to come out with an indicative collection target and room for manoeuver for changes in view of the varying economic situation. When the going is not good, a fixed target puts collectors under pressure to bridge the gap, who in turn pressure taxpayers to pay more. In good times, a fixed target creates no pressure to mop up the full extent of the revenue. The FBR should work towards minimising the gap between a rolling target and collection on a monthly basis.
SRO 649, which was issued soon after the PML-N government took over, was a negotiated deal to increase the yield from excise duty. All it took advocate Salman Raja was to tell Judge Mansoor Ali Shah that aerated water companies fell under the third schedule of the Sales Tax Act. The question of levying a different tax, i.e., excise duty, did not arise. Tax policymakers and collectors conveniently forgot that the purpose of levying sales tax was to get rid of the multiplicity of indirect taxes. But who cares? The World Bank’s independent evaluation unit says that millions of dollars spent under the Tax Reform Administration project failed to achieve its objective, but the FBR counterparts claim it to be a great success.
Published in The Express Tribune, May 23rd, 2014.
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