In the current fiscal year (2014-15), the Federal Board of Revenue (FBR) is assigned the target of Rs2810 billion—the required growth is 24 per cent over the purported collection of6 Rs2266 billion in 2013-14. All experts are of the view that it is not achievable in view of weak enforcement capabilities of the FBR.
The track record of the FBR shows that it has perpetually missed targets for the last six years—the last time it marginally exceeded target was in fiscal year 2007-2008. In fiscal year 2013-14, the FBR registered a shortfall of Rs209 vis-à-vis original target of Rs2475 billion and for 2012-13 it was as high as Rs444 billion.
Performance of the FBR during the PPP-led coalition government was disastrous. It missed all the collection targets and corruption increased many fold. There were multibillion tax refund scams—Saleem H Mandviwalla who served shortly as finance minister revealed on March 17, 2013 that the FBR added “Rs190 billion as sales tax in the exchequer but then gave Rs600 billion fraudulent refunds to influential people.”
From 2008-2013, no concrete efforts were made to impose fiscal discipline, reduce inflation and induce investment for rapid economic growth. No strategy was devised to mitigate risks of falling foreign reserves and rising debt burden.
Since the FBR failed to collect even revised targets, fiscal deficit jumped to nearly 8 per cent of GDP by May 30, 2013 and debt-to-GDP ratio rose to a dangerous level of 65 per cent. Resultantly, the government of Nawaz Sharif on coming to power in June 5, 2013 was left with no option but to go for another IMF programme. However, it has also made no efforts to enforce tax obligations on the rich—their number is about 15 million. It is also resorting to reckless borrowing.
Failure of the FBR can be determined from the following facts:
Only 840,000 income tax returns were received in 2013 whereas in 2009 the number was 1,282,118.
Out of 2.5 million retailers, it has managed to register only 8,000 outlets.
In 2013-14, income tax collection through efforts of officers (by creating demand) was only Rs80.58 billion. It was Rs89.4 billion in 2012-13. It exposes the efficacy of IRS as collection on demand fell to 8.7 per cent against 11.5 per cent in the previous year.
Out of 118,000 persons/entities enrolled in sales tax about 15,000 pay any tax. 82 per cent of total sales tax and federal excise duty comes from 100 companies.
Tax-to-GDP ratio in 2013-14 at 8.9 per cent was one of the lowest in the world.
According to official study, there is tax gap of 70 per cent [in reality it is 150 per cent, see details in Taxation challenges, The News, June 9, 2013].
There are 130 million mobile users in the country, out of which one million pay hefty bills—they must be compelled to file tax returns and pay due income tax. Non-filing of returns by them and those possessing huge assets testifies to the FBR’s inefficacy. The FBR is taking credit of extra few thousand declarations filed after issuance of notices. However, it is completely silent about its failure to force all taxable persons to file their returns.
Chairman FBR told Senate way back in 2012 that as per available data, there were 3 million ultra-rich not paying taxes and out of them 300,000 were super-rich who would be served notices immediately, but till today no such action has been taken against them.
The average net worth of a Pakistani parliamentarian is $900,000, yet few of them pay due income tax.
In 2013, 1020 officers of the FBR did not file income tax returns in time and same callousness was shown by some high-ranking officials of others groups, parliamentarians, general and judges.
The FBR, according to all indicators, symbolises an institution wrought with corruption, inefficiency, sleaze and wastefulness. The recurrent occurrences of mega scams—fake refunds, flying invoices, under-invoicing, excessive payments of export rebates, just to mention a few—confirm the existence of a strong mafia—an unholy alliance between corrupt tax officials and unscrupulous societal elements—that is depriving the nation of billions of rupees and criminally shifting the incidence of taxes onto the poor.
The overwhelming majority of the FBR’s recently recruited lot through Public Service Commission is incompetent, inefficient, disgruntled, and dissatisfied—it lacks courteous manners towards taxpayers and even seniors. The mindset of tax officials needs a total metamorphosis, making it friendly towards taxpayers but stringent against tax evaders. The FBR has yet not identified skill gaps in its present workforce, not initiated anything in terms of improving human resource management and shifting its entire focus on IT development.
Also read: Dysfunctional FBR
At operational level, the challenge is creating a corruption-free, efficient, result-oriented, tax apparatus. Though the World Bank and other donors gave a lot of money and consultancy to Pakistan, things have changed only for the worse. There is an urgent need of IT and human resource improvements in the FBR coupled with a transparent tax policy and development-oriented tax reform agenda.
The FBR, instead of improving capacity to detect tax evaders through Tax Intelligence System, is imposing more and more tax obligations on organisations and individuals in the form of irrational withholding tax provisions. Everyone knows that fault does not lie with the tax laws but with the people who are implementing them.
If the FBR wants to improve its efficiency, administrative pragmatic reforms are the need of the day—a successful model of Mauritius Revenue Authority (www.mru.gov.mu) can be studied, debated and adapted after making necessary changes to suit our peculiar conditions.
At enforcement level, the biggest challenge is how to bridge the huge tax gap—collection by the FBR is one fourth of actual tax potential [Fiscal fiasco, The News, 12 May 2013]. Issues of documentation and tax compliance are lingering on for years even after completion of a costly $100 million World Bank funded Tax Reforms Administration Programme (TARP).
The only way to check massive evasion in customs, income tax and sales tax is to implement an integrated Tax Intelligence System, which is capable of recording, storing and cross-matching all inflows and outflows. All in-bound and out-bound containers should be scanned/x-rayed to check evasion of customs duties and taxes payable at source.
However, no reform agenda can succeed unless the FBR is insulated from outside pressures. It should be run by an independent board of directors, selected jointly by House Committees on Finance of National Assembly and Senate. The FBR should be answerable to them rather than political headquarter of the ruling party. This alone can improve tax compliance and tax-to-GDP ratio.