Money Matters

Cleansing Augean stables of FBR

Money Matters
By Mehtab Haider.
Mon, 03, 19

Pakistan Tehreek-e-Insaf- (PTI) led regime is left with no other option but to deliver on the economic front and the most pressing issue at hand is the exhaustive overhaul of the apex tax authority that is mired in jobbery, inefficiency, and controversies.

Pakistan Tehreek-e-Insaf- (PTI) led regime is left with no other option but to deliver on the economic front and the most pressing issue at hand is the exhaustive overhaul of the apex tax authority that is mired in jobbery, inefficiency, and controversies.

Federal Board of Revenue (FBR) is currently increasing making headlines for all bad reasons that beg drastic countermeasures, but cleansing the Augean stables of corruption necessitates Herculean solutions instead of draconian damnation.

Over last two decades, a stagnant tax-to-GDP ratio has reached a stage where it’s posing serious threats to the country’s economy, mainly because the expenditures were considered limited maneuvering space in the wake of persistent rigidities.

On expenditures side, debt servicing, defence, and government affairs were the biggest ticket items, while development became the ultimate victim whenever efforts were on cards to slash expenses in the name of “so-called” austerity drive. It should be labeled as so because no efforts are being done to find out-of-box solutions to make this drive work.

So in case of Pakistan, it is considered that reforming the FBR is the only hope to broaden the tax base, otherwise the fiscal woes of the country are bound to multiply with every passing year as the board’s inability to generate desired revenues is increasing debt burden at a cut-throat rate.

The tax-to-GDP ratio is the lowest in the region where out of total 206 million only 1.6 million people filed returns.

With geopolitical factors-led continued high defence expenditure and considerably higher debt servicing liabilities than in any comparator country due to past fiscal imprudence, a low tax-to-GDP ratio implies that Pakistan spends much less than its comparators on key public services, and/or runs a much larger fiscal deficit.

The former adversely affects development of physical and human capital, while the latter, as mentioned above, inflicts recurrent macroeconomic instability and retards economic growth. These fundamental problems have remained unaddressed despite commitments given to domestic investors and the international community.

The question is what should be done to fix the problem? Tax policy should have a medium to long term horizon and should not be changed every year as it creates uncertainty for businesses. The annual budget exercise that announces changes in tax policy for the next year is not an appropriate document to provide guideline for medium- to long-term tax policy direction.

The long-term objectives of the tax policy should be too broad and general to provide useful immediate guidance. The appropriate solution to the need for guiding principles for tax policy guideline is a Medium-term Tax Policy Framework, that should be updated every year and indicate the direction of tax policy over the next few years.

A Medium-term Budget Framework is prepared each year, but it does not contain details of the tax policy.

The annual budgetary proposals, currently formulated more or less in an ad hoc manner, would have to be consistent with the more medium-term direction of the tax policy. This will allow pre-budget vetting of proposals to ensure consistency between the two. For that the medium-term tax policy document should be in place. This is an important recommendation. The government will suggest the institutional framework (FBR will not make tax policy; setting up a tax policy board/ commission) for it upfront rather than later in the document.

Tax policy has to balance the revenue objective with equity and growth objectives. Presently tax policy has a predominant revenue focus and as such is likely to create distortions in the economy which can adversely affect the growth and equity objectives. In addition, even the revenue objective is compromised by large-scale exemptions.

There is need to fully understand the phenomena of under-invoicing and underreporting of imports. The FBR must undertake a study aimed analysing the extent, methods of, and revenue from under-invoicing of imports. The study should provide recommendations to tackle the problem.

Along lowering input tariffs, it should also take steps for making it easier to track the use of imported inputs through better links between the customs data and the sales tax data.

Withholding taxes become regressive if people, who are not liable to income taxes and/or if firms treat them as consumption taxes, pay them and they are passed through to consumers. A study should be conducted to analyse these various factors and categorise different withholding taxes according to the desirability of maintaining, amending or phasing them out.

A major review of tariff, including additional regulatory duties is required in the light of these considerations and in most cases, it is best to let the market determine the most efficient allocation of resources. If 50 percent of imports are cleared at 3 percent tariff and another 22 percent at 11 percent, it is even more important to review the rest of the slabs. In this regard regulatory and additional duties will be included in this scope.

As far as stuck refunds are concerned, this is a key area where greater and better use of technology can help detect fraudulent claims and speed up the process for honest taxpayers. Using these techniques prompt issuing of refunds within a strict period of time should be ensured. Once this issue is resolved, there would be no need for taxing domestic sales at low rates. The standard tax rate for domestic sales should be introduced gradually and may start with high value products first.

Building data analytics capacity to utilise available information involves identifying and pursuing individuals outside the tax net through third-party information on consumption patterns, utilising data from income, income tax returns and expenditure data. These stats could be gathered from various sources such as travel, bank account, car ownership, property ownership, children studying abroad, children studying in expensive schools etc.

Since FBR does not have adequate capacity to utilise this data using latest techniques available, it would be necessary to collaborate with researchers and experts to develop efficient and effective analytical tools. The government has also promulgated a law so as to allow FBR to access these third-party databases.

Without increasing tax-to-GDP ratio by expanding the narrow tax base, Pakistan’s fiscal difficulties cannot be overcome over medium- to long-term. So far the PTI government has failed to come up with prescriptions. They must devise clear cut roadmap and start implementing it without wasting any further time.

The writer is a staff member