Together with the plethora of problems that need fixing in Pakistan, the one that ought to be on top of the list for the current government, and indeed for the one that will take charge in 2018, is tax reform.
It is a pity that, while our taxation laws are among the finest – albeit most complex – of taxation laws that currently exist in the world, their letter and spirit often gets defeated because of administrative hurdles and lack of political will to enforce them. At the centre of the problem of course is the state’s need to improve the health of the exchequer by ensuring maximum collection from the tax base, being its primary source of revenue in an embattled economy that has experienced a chronic slump in the past two decades, has traditionally relied on external and internal borrowing to stay afloat and which is a net importer of goods.
The pressures these factors create on the economic machinery are compounded by the fact that our tax base is not expanding. While some positive measures have been attempted by the current government such as introducing the concept of filers and non-filers – with punitive consequences in the form of higher tax rates for the latter – the fact remains largely unchanged that the bulk of taxpayers in the small to medium size corporate and business circles wish to operate under the radar and do not feel morally obligated to pay taxes.
The first problem this has created is that of urgency being imposed on the tax authorities to meet revenue targets, which result in the tax authorities assuming an almost hostile approach towards taxpayers who are filers and are therefore part of the ‘good’ tax base, routinely compliant with the procedures and regulations imposed on their businesses and incomes under tax laws. These taxpayers complain of the routine receipt of harsh unsustainable assessments from the tax authorities, often devoid of legal substance, drawn up in haste with a deliberate disregard of facts and pushed onto the taxpayer without the latter being given a chance or enough time to present arguments and collect facts to contest their positions.
Once such tax demands are received, the onus is immediately on the taxpayers to defend their position, and convince the tax authorities that the revenue has not been negatively affected, through either the short collection or evasion of tax. Relief, traditionally, was available at the appellate forums in the tax department. However, since the first appeal forum, that of the commissioner Inland Revenue-Appeals, is a departmental forum, relief is usually denied here.
This leaves the taxpayer with the right of being heard by the next appeal forum, the Appellate Tribunal Inland Revenue. While traditionally this was fair and efficient in delivering justice, of late taxpayers have felt frustrated as they are denied a fair assessment at this quasi-judicial forum, which it appears is also held under sway by the tax department, which enjoys fifty percent representation on it. This results in taxpayers routinely seeking relief through the courts, not only on points of law, but also to overturn harsh notices by going into legal writs against the tax department. Since courts are routinely busy, relief is delayed and this has escalated the costs of compliance for taxpayers astronomically.
As taxpayers struggle to attend to such harsh assessments, another source of frustration is the refunds process. The administrative lethargy and lack of will in processing and delivering refunds to aggrieved taxpayers often means the accumulation of long outstanding receivables from the tax authorities in the books of taxpayers. Engaged in establishing their right to refunds, taxpayers are simultaneously engaged by the tax authorities through additional demands, which is again negatively perceived as an attempt by the revenue to deliberately deny the legal relief available to the tax payer under the law. On an average, the time taken to process refunds and reimburse the taxpayers may range from three to six years.
Then there is the generally high incidence of taxes that must be considered. It is a gross misperception to imagine that the Pakistani public, or that section of it that remains out of the tax net, is not being taxed. Through successive finance bills, the state has introduced the concept of indirectly taxing expenditure. We pay taxes on our utility bills, on the use of the internet, on mobile phone services and on banking transactions. In addition, taxpayers are confronted with multiple taxation regimes – minimum taxes on turnover and withholding taxes, alternative corporate taxes, super taxes and normal and final tax regimes accompany the non-routine imposition of additional taxes through finance bills.
Consider also the problems introduced into the domain of sales tax through the 18th Amendment. While the spirit of the amendment sought to introduce more provincial autonomy, not much thought was given to the procedural ramifications of creating multiple taxation authorities in the provinces and in the centre. Since the amendment, each province is bent upon following its own policies and there is no harmonisation of procedure or tax rates between provinces. Jurisdictional disputes are manifold, with taxpayers having to contend with inter-provincial disputes and between the federation and provinces, owing to the imposition of a sales tax on services in the Islamabad Capital Territory, a full-scope tax that almost seems to suggest that the ICT is a province of its own for sales tax purposes.
Finally, there is the problem of corrupt practices, which can be seen as being enabled through non-routine tax audits and coercive tax measures aimed at illegal collections, which raise the costs of doing business for taxpayers through litigation handling and ultimately serve to tarnish the image of the FBR. A reforms agenda would need to holistically acknowledge and tackle all these problems that are largely administrative in nature. In the past, reforms have aimed at improving the infrastructure and technology of the tax department, but have failed to address the equally important requirements of raising the quality of human resources staffing the tax departments.
Tax is a specialised subject, and left in the domain of generalists who arrive in the department – through a civil services examination that does not contain the rigor of study required to achieve expertise in tax law – it can only create conditions conducive to malpractice. There is an urgent need to introduce a scheme of lateral entry into the tax department, where tax practitioners, who are qualified professionals from the fields of commerce and accountancy, are able to find employment. To address the problems of delayed relief and disputes arising from multiple sales tax authorities, a central forum to resolve tax disputes together with a special bench in the high court to deal with taxation matters is highly recommended and may accompany the creation of a single tax collecting authority as was the case in the pre-18th Amendment days.
Attention must also be given to reforming and refining the process of auditing taxpayers who need to be provided with sufficient time to respond to the tax authorities, and who must be supported through a strengthening of the concept of self-assessment which lies at the heart of our taxation laws, and through the speedy processing of refunds. Some quick measures on these lines and to address the key problems discussed above would go a long way in securing the confidence of the business community and inspire and attract foreign direct investment, which has experienced a downturn not only because of security issues but also owing to Pakistan’s difficult tax environment.
The writer is a freelancecolumnist.