There is no doubt in anyone’s mind that taxation reforms are the need of the hour in Pakistan and such efforts are going on (with a few gaps) for almost three decades. Why is it so hard for Pakistan to revamp its taxation whereas our neighbours in South Asia have comparatively much better tax to GDP ratio than us?
We know from political economy literature that every reform that is undertaken has winners and losers. If the losers of the reforms are strong and organized enough, and if the potential winners are not organized to outweigh the interest groups politics, then reforms are resisted and subverted by the powerful lobby that is going to lose out if the reforms are carried out. The story of taxation reforms in Pakistan fits into this pattern.
In recent developments, according to the press reports, the government has decided to revamp the FBR and replace it with a centralized Pakistan Revenue Authority (PRA). The new proposed Authority will collect the GST in a centralized manner and will remove the ambiguities that arise due to conflicts of inter-provincial jurisdictions and problems the provinces face in the collection of GST on services. Provincial jurisdiction and conflict of interest issues complicate collection of GST on services that this proposed centralized Authority aims to overcome. Of course, the GST on services falls under the ambit of provincial governments under the Constitution. Hence, the new proposed taxation Authority needs to envisage ways for the collection and distribution of GST while upholding the principle of provincial autonomy as per the Constitution.
The press has also reported that officials who constitute that present tax machinery are up in arms. The Inland Revenue Service (IRS) chief commissioners have opposed the revamping of the government proposed taxation reforms and have threatened it with a pen down-strike.
Even if small individual taxpayers find it difficult to deal with the taxation process, just imagine how much more difficult will it be for small and big businesses, whether documented or undocumented
Under the proposed government reforms, amongst others, 23 chief commissioners who lead the regional tax offices and large taxpayers units will be abolished and it will lead to all 174 commissioners to report directly to member Inland Revenue operations. Another proposed move is to appoint PRA’s chief executive in order to speed up the automation process.
Though, Inland Revenue Service Officers’ Association might be in support of a unified Pakistan Revenue Authority in principle, it strongly disagrees with the proposed administrative structure of such an Authority that it finds “half-cooked” and “vague”. It also opposes implementation of the proposed administrative structure before the Authority is formally set up. The Association also wants all concerned stakeholders to be meaningfully consulted on the proposed reforms. In response, the Chairman FBR has stated that all stakeholders’ feedback will be taken into account regarding the restructuring of FBR.
More details need to be shared by the FBR to merit a discussion on the detailed nature of proposed taxation reforms and resistance to it by the Inland Revenue Service officers. It is difficult to establish on the basis of available details whether the resistance of incumbent tax officials is due to fear of losing out on their privileges or whether they have genuine grievances! Of course, all stakeholders must be consulted without them sabotaging the taxation reforms.
However, what is obvious from a personal experience of having revised the previous tax returns and filed the new returns that taxation is not practiced keeping the best interests of its end-users. In our country where literacy is so low, filling out the tax returns should be a fairly easy exercise. However, on the contrary, even a PhD cannot fill the tax returns easily. The reasons to make this process so complex are beyond comprehension.
To begin with, there is no ‘frequently asked questions’ section on FBR website that explains some of the nuances behind the taxation rules. There is a need to explain that for a Pakistani, one must declare global assets and income and some people have only found out about it after reading about political cases in newspapers.
Why should there be emphasis on documenting assets and change in assets of current year compared to the previous year? The government’s goal must be to raise revenue by taxing income. The major focus of a tax form should be to tax income whether it comes from a business, salary (that is in any way deducted at source), agriculture, or any other occupation/source of income. Why complicate it further by documenting the assets?
Even if assets have to be documented, then there must be provision to document their yearly appreciation. There is no provision in the tax forms that takes care of appreciation of an asset in a country like Pakistan where even a 3 or 5 Marla house in urban areas appreciates considerably with time. Why have no provision to record appreciation or depreciation of Pakistani Rupee? The “Others” category cannot substantially take into account property or Pakistani Rupee appreciation and depreciation. It almost seems that tax authorities want the taxpayers to misstate figures on their assets whereby they can be reprimanded in the future, if need be. A high-profile politician’s case springs to mind who had declared a house in a prime sector in Islamabad at its original cost of some decades ago and was held due to it at some “opportune” moment in his political career. If the tax form does not provide for appreciation, what else is the potential taxpayer supposed to do?
One understands that there is lots of tax fraud such as the fake and flying invoices presented by the businesses in GST refunds and the tax authorities need to be vigilant. However, this vigilance does not mean that they should design overly complicate tax forms and fuss over the assets details that keep on changing and whose true valuation is difficult to ascertain year to year. Moreover, lack of space in the tax form to cater for appreciation of property/currency is just ridiculous. If the focus of the taxation is to raise the revenue, why not spend all the energy doing so and meaningfully tax the income rather than busying the taxation efforts to document all other details.
Similarly, a well-thought out and well-explained “Frequently Asked Questions” section should address all the potential queries of the taxpayer regarding the whole process. There is scant information available whereas it should be detailed and presented in a user-friendly manner. Right now, its trial and error and overt dependence on often unreliable tax consultants that runs the system, and it needs to be changed to a more systematic process.
Taxpayers like myself are very small fries in the overall cogwheels of taxation. Even if small individual taxpayers find it difficult to deal with the taxation process, just imagine how much more difficult will it be for small and big businesses, whether documented or undocumented. It is true that taxes are evaded and interest groups protect their non-payment of taxes. However, it is also true that the taxation process right now is not end-user friendly and it seems to be geared to find faults with the end-user at some point rather than fulfill its larger purpose of raising the revenue through well thought-out and easy to follow taxation procedures. Any taxation reforms must not only focus on the administrative structures, they must also revise the taxation process from the point of the view of the end-user.
The writer is an Islamabad-based social scientist