In the Sunday's published on these pages, we looked into structure of the FBR, its comparison with the tax systems in other countries. During the process, we identified the faultines and offered suggestions for making it autonomous and efficient. However, analysis will remain vague unless we analyze tax regimes.
Major chunk of the FBR’s revenue comes through levy of GST (Indirect Tax). It operates in VAT mode in Pakistan. Its standard rate is 17% but after input tax adjustment effective rate is roughly 4-5%. Then there are 17 different tariff regimes. Local zero rating was introduced to boost exports with marginal impact but such goods are being sold in local markets without any tax. For such aberrations, Ehtesham Ahmed, international tax expert termed Pakistan GST system “moth-eaten” which by its very designs bleeds at all its ends. We have different rates for the industrial and commercial importer on the industrial raw material. Rightly asked question is why to charge different rates when the end user is industry? Similarly commercial importers have also to pay value addition tax at 3% that is final liability. It is no hidden secret that they import at rate which much lower than the actual prices. Once they have discharged final liability they sell at actual values and generally to unregistered persons. Such goods are breeding ground for informal sector. Size of informal sectors is almost as big as formal sector but stays away from tax-net.
Sensing the FBR’s poor enforcement, Carlos Salvani, the World Bank consultant advised in 2009 collecting 1/5th of GST as withholding taxes that makes such sales unprofitable. Resultantly, businesses started under-reporting and sold in informal sectors. Another “novel” levy is 2% tax on sales to unregistered persons. One of the prominent taxpayers questioned its rationale as registering is responsibility of the FBR and not of businessmen.
On the GST, the input taxes adjustment, which is hidden form of refunds, still goes unabated. In different studies, one Ms. Rubina, found 80% paid tax than the payable tax. This is evident from the fact that VAT, tax collected on domestic as well as on import has to be in the vicinity of output tax (Tax payable). However as per published data for 2015-16, total collection is less than 80% of the payable. The GST tax is levied on value declared and the FBR has so far designed no tools to check accuracy of value.
Consequent to the 18th Amendment, the provinces started collecting tax on services without proper integrated systems with the FBR. Since then, row has been reported in provincial tax administrations on tax credits, besides businesses being chased by all of them.
On the income tax side, a limited regime of withholding taxes was introduced on the income tax side in 90s when the collection of direct taxes was merely 3% of the GDP. It kept on adding every year more such taxes or raising rates and now about 70% taxes are collected in the withholding regimes.
In income tax, one could find few taxpayers in major cities seeing mushroom growth of commercial skyrocketing plazas. But when asked how much tax is paid on such buzzing businesses, the FBR concerned authority admitted it being safe political constituency, we were asked to “look the other way”.
The FBR kept on increasing National Tax Numbers. Nobody cares whether NTN holder pays tax or not. What is the fun of issuing NTN if they are not payment filers, when asked, the concerned member FBR confided it is just for showcasing new tax payers for the media and IMF et al.
Annual income tax returns as well as monthly withholding statements are captured electronically. So far it has not developed any automated system for cross matching and field officers preferred to check manually. But it hardly makes sense when data is captured electronically but without any analytical automated system. Without automated basic matrix how could returns be analysed? Former chairman who introduced Universal Assessment Scheme admitted it’s difficult to change mindset. Whatever reason we ascribe, the fact remains that collection of income tax is much lower than theoretical tax liability.
The Customs collection too is not efficient though better than indirect tax streams. One perennial menace is of under-invoicing. There are different valuation in Sea Customs and at Inland Customs stations. Customs has introduced electronic payment but only through a bank which having a monopoly is not efficient besides creates hassles for the importers drawing amount and depositing at the bank. One discretionary power for appraising staff is to dispute declaration and insist on sending to laboratory. In most of the cases, declaration is found correct but importers have to bear demurrage charges. Problem is further confounded due to lack of standard notified laboratory. In short, importers avoid this and gleefully pay “services charges".
In Afghan Transit Trade, most of the goods, which have no use in Afghanistan, finally find their way back to Pakistan through porous border between the two countries. Also there is smuggling from inland routes and goods imported by Afghanistan, Iran and India. On export side, standard operating procedures have not been prescribed causing delays in expeditious exports.
One of the perennial evil in Customs is strong nexus between clearing agents and appraising charges. Why such irritants, consensus seems to exist indicating lack of initiative of collectors to differ with appraising staff and in some cases compromising approach for “obvious reasons”. On the pattern of IRS, Customs too introduced office of Chief Collectors is South, Appraisement, Centre and North without investing any powers
Simple Enforcement model suggests for making compliance easier and deterrent even prosecution in willful big fraud cases. Monitoring is to tailor as per revenue yield in descending order with the use of technology. Public recognition of compliant tax payers by way of inviting at public ceremonies, separate counters in banks and airports and at other utilities providing offices will create a sense of positive competition. Besides, the FBR should do away with distortions in GST and lower standard tariff. Income tax is levied on income and not on transition. Customs too needs to introduce uniform standard procedures.
Can FBR, if invested with political ownership, come out of its shell and perform optimally is a question that one will see in coming weeks.
Author is former DG (Reforms) FBR and fiscal analyst