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Challenges for new FBR chairman

Restructuring the dysfunctional FBR and revamping the entire tax system is key to generating more revenues

Challenges for new FBR chairman

Appointment of Syed Muhammad Shabbar Zaidi, a renowned tax expert and seasoned chartered accountant, replacing Jehanzeb Khan, grade 22 officer of Pakistan Administrative Service, belonging to 15th Common Training Programme (CTP), on May 9, 2019, as Chairman Federal Board of Revenue (FBR), was welcomed by business and professional circles. As expected, it caused resentment amongst officers of the Inland Revenue Service (IRS) and Pakistan Customs Service (PCS) as for them anybody not belonging to their cadre is an outsider and not acceptable.

It is a matter of record that political appointments in FBR in the past, has turned things from bad to worse. Cronyism and incompetence has been reigning supreme. It is, thus, not surprising that FBR as an institution has lost its credibility — there exists huge trust deficit between tax collectors and taxpayers.

The FBR has been frequently accused of highhandedness, freezing accounts without waiting for judgement from Tribunal, raising unlawful and excessive demands, misreporting collection figures, blocking bona fide refunds, taking advances etc. Time and again, different chairmen of FBR have admitted before the Standing Committees of Parliament on Finance & Revenue that tax reforms had miserably failed.

The biggest challenge before the new FBR chairman is how to restructure the dysfunctional organisation he is asked to head on honorary basis/pro bono and revamp the entire tax system. We wrote about it extensively in these columns — see for example an article, Revamping tax system, written way back in 2014 which is still relevant. The most recent ones that need the attention of Shabbar Zaidi and others are: Overcoming Fiscal woes, Ending non-filers regime and Actionable Plan for tax reforms — just to mention a few. All these and many others can be accessed at: http://tns.thenews.com.pk/writers/dr-ikramul-haq/

The real challenge for new chairman FBR is how to restructure the existing oppressive tax system. It imposes undue incidence on the poor and middle-class people e.g. 17 percent sales tax (in fact 30 percent to 50 percent on many finished imported/manufactured goods after levy of all kinds of taxes), takes away larger portion of low-income groups compared to high-income groups. On the contrary, the rich and mighty enjoy tax-free perks and perquisites, exemptions and concessions on their colossal income/assets and are also offered generous amnesties frequently. They make enormous profits through rent-seeking, speculative transactions in stocks and real estate but do not pay due taxes. They flout tax laws with impunity yet FBR expresses satisfaction with collecting just a little more from them in the capacity of “non-filers” without determination of their actual incomes.

The provincial governments are also guilty of protecting the rich and mighty by not collecting tax on “agricultural income” as per prevailing laws and imposing progressive taxes shifted to them after 18th Constitutional Amendment. The rich and mighty in Pakistan do not file tax returns but FBR issues notices to filers alone! For the last many decades, FBR and provincial tax agencies have miserably failed to improve voluntary tax compliance through strong deterrence system. Tax culture will never improve unless deterrence is created [see details in Comprehensive tax reforms, The News on Sunday (Political Economy) September 9, 2018] along with assurance to people that taxpayers’ money is actually being spent for public welfare and not for a few privileged ones.

There is a need to dismantle the existing oppressive tax system and reconstruct it to restore public confidence in the State. But even a good tax system will not work if the machinery to run it is incompetent, corrupt and inefficient. The biggest challenge before the new chairman is to work on a rational tax policy that is growth-oriented and make FBR an efficient tax authority that facilitates taxpayers but at the same time acts firmly to recover taxes where these are due. Tax policies should encourage investment, especially for all those who generate more goods and services, leading to greater employment opportunities. A higher economic growth will automatically increase taxes.

The new FBR chairman has full backing of Prime Minister Imran Khan and his Adviser on Finance and Revenue Affairs Dr Abdul Hafeez Shaikh. It is a golden opportunity for Shabbar Zaidi to press the government to undertake the much-needed fundamental structural and institutional reforms discussed in detail in Actionable plan for tax reforms, The News on Sunday [Political Economy], December 30, 2018.

It needs to be emphasised by the new chairman FBR to the PTI government that transparency and fairness are the most essential attributes of good tax administration. These cast a great impact on the taxpayers’ attitude of voluntary compliance in meeting their tax obligations. The following six elements that determine tax equity and fairness are missing in Pakistan:

Horizontal Equity and Fairness — Similarly-situated taxpayers are taxed similarly.

Vertical Equity and Fairness — Taxes are based on the ability to pay.

Inter-group Equity and Fairness — No group of taxpayers is favoured to the detriment of another group without good cause.

Compliance Equity and Fairness — All taxpayers pay what they owe on a timely basis.

Exchange Equity and Fairness — Over the long run taxpayers receive appropriate value for the taxes they pay.

Process Equity and Fairness Taxpayers have a voice in the tax system, are given due process and are treated with respect by tax administrators.

It is high time that FBR stops harassing the compliant taxpayers and protecting the cheat. It should have zero tolerance for non-filers and tax evaders. Mass scale evasion of taxes is not possible without the connivance of tax administrators. Every now and then FBR recommends amnesties that confirm its uselessness as an organisation. The failure of FBR is well-established because of which the nation has to suffer as taxes of billions are compromised. FBR has become a tool in the hands of the corrupt, tax evaders and looters of the nation’s wealth.

We cannot come out of prevailing fiscal mess if the present tax system and outdated structure of FBR persist. We need tax policies that encourage investment, especially leading to greater employment opportunities. Growth-oriented tax policy should be prepared and enforced through Policy Board envisaged in section 6 of the FBR Act, 2007 — best brains should be included in it after fulfilling all the requirements mentioned therein.

Taxation should serve as a catalyst for industrial expansion and economic growth. In Pakistan, the ill-directed, illogical, regressive and unfair tax regulations have been causing a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets, without evaluating its impact on the economy, has crippled our trade and industry, especially since we have started submitting completely before the dictates of the foreign donors. Had the successive governments concentrated on economic growth and industrial expansion, there would have been substantial rise in taxes. It is impossible to enhance revenues with stagnation in economy, and over-taxing such economy, as has been done in Pakistan, has in fact destroyed our tax system as well.

The new chairman must convince the PTI government to concentrate on sustainable higher economic growth that will automatically increase taxes. The solution is not regressive taxes but people-friendly taxation system, implemented through a reinvigorated tax authority, comprising professionals and competent personnel.

As elaborated above, the challenges before the new FBR chairman are enormous — the most daunting one is how to undo the ugly legacy of inefficiency, corruption, cronyism, favouratism, nepotism and mediocrity. Will he be able to rise to the occasion? Only time will tell. His first action of putting embargo on freezing accounts of taxpayers without his approval definitely gives the impression that he is on the right path.

 

Dr Ikramul Haq

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