Daily Times

The government of Pakistan Tehreek-i-Insaf (PTI), like its predecessors, has no definite action plan for tax reforms though independent research studies are available for achieving the desired goals mentioned in its First 100-Day Agenda. The modus operandi of bureaucrats (which has now successfully trapped the PTI government) is known to all – it disconnects leaders from the masses and convinces them to defer the much-needed structural changes for good governance as it would end their perks and perquisites, plots and privileges. By constituting task forces and committees – this is the worst one can do as too many cooks spoil the broth – the PTI government has conceded that it had not done its homework as what to do when in power. The Prime Minister and Finance Minister need to be reminded that tax reform is too serious a matter to be left to the economists!

General Musharraf after the unconstitutional takeover of October 12, 1992, constituted an expert group to suggest changes in tax system to suit the ‘new economic agenda of the chief executive’. The output was Tax Laws (Amendments) Ordinance, 1999, promulgated on 16 December 1999. It showed the shortsightedness of group members as the only thing they highlighted was revenue targets. They did not bother to consider the plight of the officers and staff that had to administer the laws. This exercise proved counterproductive.

The same thing happened under the six-year long (2000-6) World Bank-funded Tax Administrative Reforms Programme (TARP). The government of Pakistan People’s Party during (2008-2013) and that of Pakistan Muslim League (Nawaz) during 2013-18 constituted many economic advisory committees, task forces for tax reforms and even Tax Reforms Commission in 2014, but all failed miserably. The main reason for failure was that none of the economist consultants had specialization or experience in taxation. They had no idea of the ground realities in Pakistan to offer workable reform action plan.

The so-called experts invited from abroad were not capable of understanding the mundane realities prevailing in Pakistan. They might be very competent and sincere too, but the task of tax reforms in Pakistan could not be successfully carried out by them. The same is true for our IMF-trained economists/experts or the bureaucrats sitting in FBR. Dr. Vaqar Ahmad in a recent article aptly observed: “Perhaps, it would be best to take some urgent executive decisions now, based on the available research and not resort to a task force approach to tax administration. Time is of essence here; forming more committees for providing the same advice received in the past goes against the new government’s ambitious first-100 day’s agenda”.

The undeniable reality is that no agenda for the rationalization and simplification of tax system can substantially improve tax compliance, unless there is substantial improvement in the public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to relentlessly pursue and punish tax evaders without fear of political victimisation

For meaningful reforms, solutions have to be found for issues that have been sidetracked for years. One problem that affects personal taxation significantly relates to tax brackets, exemptions, tax rates and fairness of the system. The case for adjusting the structure of personal income tax to inflation, to retain the same levels for taxation and collections in real terms, should receive the first priority to enhance the credibility of the system. Policy decisions concerning tax incentives should be based on firm footing. Tax concessions erode the revenue base and increase the quantum of work for officers in the tax department. The more tax concessions that are granted, the higher the rates are on the remaining base to raise the requisite revenue. Where rates cannot be raised to sufficient levels, revenue shortfalls exacerbate existing fiscal imbalances and contribute to macro problems.

The Federal Board of Revenue (FBR) has been running after small fry to broaden the tax net. For example, a person with a telephone will have to file the return whether he has a taxable income or not. Such an exercise generates tremendous infructuous, unproductive and wasteful work without any significant gains to revenue. It strengthens the feeling that the government, unable to tackle the hardened tax evaders; is unduly harsh on salary and wage earners. A feeling goes around that they are made to bear the major burden of taxes. The consequence is that ordinary people who generally think of themselves as honourable and honest end up in participating or advising others to practice evasion of taxes! Can such measures be called tax reforms?

The administration of a tax system is highly complex. Proper input from tax officials is vital for making the system successful. Unfortunately, this aspect of the problem, which deserves utmost priority, has been neglected for no ostensible reason.

All the tax reform committees in their reports failed to consider this matter important enough to merit full-scale attention. Even if they recognized it as a problem they decided to leave it for the relevant quarters. The undeniable reality is that no agenda for the rationalization and simplification of tax system can substantially improve tax compliance, unless there is substantial improvement in public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to relentlessly pursue and punish tax evaders without fear of political victimisation. The PTI government must listen to tax officials who are facing many problems and solve all their genuine grievances.

Every successive government in Pakistan has conveniently overlooked the fact that tax reforms are proposed by the Finance Minister, legislated by Parliament, implemented by tax administrators and finally suffered, for better or for worse, by the taxpayers. Unless everyone in this chain extends his full support, there is little hope that the ultimate outcome will be favourable! If tax reforms are to be carried out through committees and ‘commissioned’ studies, as we did in the past, nothing is going to change.

The spasmodic approach to tax reforms through task forces, comprising of ‘experts’ from outside and bureaucrats sitting in the Ministry of Finance and FBR cannot work. They will suggest patchwork here and there, which is not the answer. The previous reports presented by them testify to it. The only exception is a comprehensive study, Towards Flat, Low-rate, Broad and Predictable Taxes’ (2016), published by the PRIME Institute, that according to Dr. Arthur Laffer offers “a tax reform plan that would dramatically change the structure of taxation in Pakistan by correctly aligning incentives to promote economic growth and voluntary tax compliance”. This study, as noted by Dr. Laffer, suggests a workable proposal to raise revenue of Rs. 8 trillion through the lowest possible tax rate on the broadest possible tax base. This system will have the least incentive to evade and underreport taxable income. The adoption of the recommendations given in this study will launch Pakistan onto a new trajectory of economic growth and prosperity for all. It is strange that PTI did not consider this study while finalising its 100-Days Agenda and now while in power is seeking input from those who have no practical experience in tax administration or framing fiscal policies!!

The writer, Advocate Supreme Court, is Adjunct Faculty at LUMS. Email: ikram@huzaimaikram.com; Twitter: @drikramulhaq

Published in Daily Times, September 9^th 2018.