The present working of tax appellate authorities under FBR and Ministry of Law is against the principle of independence of judiciary enshrined in the Constitution
By Huzaima Bukhari
and Dr. Ikramul Haq
According to news reports, the Tax Reforms Coordination Group (TRCG) headed by the Finance Minister, in its meeting held on October 17, 2010, expressed deep concerns about the poor performance of the Federal Board of Revenue (FBR) in implementing Reformed General Sales Tax (RGST). Dr. Abdul Hafeez Shaikh reportedly criticised FBR for its lack of preparedness to implement RGST. The TRCG was astonished to learn that FBR wanted to continue with the existing General Sales Tax (GST) and simultaneously wanted to introduce RGST.
It is lamentable that even after completion of five-year World Bank-funded Tax Administration Reforms Project (TARP), the fundamental issues like reducing the pending refund claims, creating a warehouse of third-party data to broaden the tax base, reducing the tax gap and implementing a credible process from the submission of returns to the automatic transfer of refunds to the taxpayers in their bank accounts are still persisting. Obviously, the FBR lacks skilled manpower, a dependable automation system and sustained commitment from senior management for reforms. After spending billions of borrowed funds, FBR is a symbol of failure-- corruption is rampant in ranks and file, tax-to-GDP ratio is getting worse, out sourcing of audit has proved to be a fiasco and tax evasion and avoidance are order of the day.
The TRCG, like many such reform committees in the past, is doomed to fail as well. The fact that the meeting was attended by the Deputy Chairman of the Planning Commission, the Governor of State Bank, the Finance Secretary and many other high officials would have little impact on tax reforms process as none of them seems to know the mundane realities of Pakistan. The bureaucrats and IMF-World Bank trained professionals are incapable of bringing any positive change in our tax culture or system. They are completely alienated from the masses. Sitting in air-conditioned rooms, they float "brilliant" and "innovative" ideas but have no clue how to give them a practical shape.
Their closed-door bureaucratic discussions without involving FBR's workers, who have to ultimately implement these ideas, testify to their faulty approach. FBR's field officers and their staff are incompetent, corrupt, unwilling and inefficient. Thus no reform agenda can succeed unless the workforce in FBR undergoes complete metamorphosis.
On November 25, 2008, the International Monetary Fund (IMF) approved the $7.6 billion standby arrangement for Pakistan to be delivered over 23-month, which was later enhanced to $11.3 billion in July 2009. One of the demands of the lender was introduction of Value Added Tax (VAT) from July 1, 2010. It was deferred to October 1, 2010 and now IMF has suspended release of the last tranche unless it is implemented as FBR failed to introduce RGST after lapse of the deadline fixed by the government in the budget speech of Finance Minister.
FBR contends reluctance of Sindh to give it right to collection for its failure to implement VAT (now called RGST). Sindh says it has established its own Revenue Service and would collect VAT on services independently, which is its Constitutional right. This tug of war has serious political and economic repercussions. FBR's highhandedness in taxation matters is destroying relations between the federation and the federating units as well as destroying business growth in Pakistan.
The zeal of the tax officials in collecting taxes at the moment is motivated by self-interest as they are more interested in meeting their individual targets than those fixed for the State. Corruption cannot be checked by just paying them double-salary. They should be given best possible housing facilities within special purpose built tax complexes -- having own schools and hospitals -- so they can perform their duties with peace of mind. We need to train them like FBI and IRS agents in USA but at the same time have severe penalties if anyone of them is found guilty of corruption and/or inefficiency.
Over the last many years, the need for tax reforms is stressed and reiterated by all quarters including the government itself. However, each attempt in this direction has proved to be a complete failure, the main reason being that search for rationalisation and simplification of our tax laws is misdirected as we are living in an era of complex and intricate economic environment. Neither the official policymakers nor the professionals hired on behalf of IMF/World Bank possess the required vision for this gigantic exercise, as they lack understanding of everyday realities of Pakistan -- stress for introduction of VAT being a classic example. A low rate GST between 4 to 6 per cent across the board could bring better results in a country where business houses are still not equipped for managing sophisticated VAT. People are already over-taxed while there is no accountability for those who mercilessly plunder the national kitty.
Our tax justice system is one of the worst ones in the world. Honest taxpayers are the victims of arbitrariness. Those who do not pay taxes in connivance with tax collectors flourish. For them, not paying to the State is better than paying the tax collector for his self-aggrandisement. This is a pathetic state of affairs. The tax collectors want easy ways to achieve targets without bringing into tax net those who do not pay. Under these circumstances, the existing taxpayers bear the burden of the non-filers as well. They get notices for arbitrary tax demands and no justice system comes to their rescue.
The members of TRCG when at the helm of affairs -- heading the FBR -- were responsible for destroying this organisation. Now they have been called again to further compound the problems. There is no political will to tax the rich and mighty. They have not pointed this out in their recommendations (sic). Instead of more taxes we need reduction in excessive marginal tax rates making them compatible with other tax jurisdictions of the world, especially Asia. Elimination of GST on production, machinery and equipment is the need of the hour to promote industrialisation, but they have advised otherwise.
This shows their level of understanding of our economic realities. USA is reducing interest rates and giving tax breaks for economic revival while we are increasing them both in an ailing economy. We must go for substantial reduction in corporate tax rate that is the main stumbling block for new investments which is drying up day by day. Pakistan needs openness and accountability in the government to enable citizens to understand and participate fully in the process of national integration. This includes live telecast of the assembly proceedings and scrutiny of every single penny of tax spent.
The present tax culture is based on "bad faith" between the taxpayers and the tax collectors. Both are victims of self-interest and their main aim is to cheat one another. This culture can only be changed if an effective tax justice system is introduced and properly implemented. All appellate tax authorities should be part of judicial service working under the control of the respective High Court. The present working of tax appellate authorities under FBR and Ministry of Law is against the principle of independence of judiciary enshrined in Constitution. The Tribunal as well as first appellate forum (commissioner/collector appeals) should work under the High Court of their territorial jurisdiction.
It is the need of the hour to free the tax justice system from the administrative clutches of the Ministry of Law and FBR. True business growth cannot be achieved by just announcing policies and concessions and forming Tax Reforms Coordination Group. The system must work on ground ensuring taxpayers of their rights and punishing tax collectors for their highhandedness. An independent tax justice system alone can enforce Taxpayers' Bill of Rights--we have yet to enact this vital law that is in vogue in all democratic countries--to guarantee business expansion as well as the proper collection of revenues in Pakistan.