Money Matters

A spoke in the wheel

Money Matters
By Shahnawaz Akhter
Mon, 12, 15

Strong internal control guarantees success of an organisation. According to experts internal control is the integration of activities, plan, attitude, policies and efforts of the employees of a department working together to provide reasonable assurance that the department will achieve its mission.

Strong internal control guarantees success of an organisation. According to experts internal control is the integration of activities, plan, attitude, policies and efforts of the employees of a department working together to provide reasonable assurance that the department will achieve its mission. Explaining further internal control is what a department does to see that the things they want to happen will happen…and the things they don’t want to happen will not happen.

When applying this mechanism the Federal Board of Revenue (FBR) one finds it to be in complete disarray. The FBR on December 10 and 11 restored performance allowance of about 814 employees of BS-16 out of 1,280 officials belonging to Inland Revenue Service (IRS) and Pakistan Customs Service (PCS). The performance allowance of these officials was discontinued on September 9 for not filing their annual asset declaration, which is a mandatory requirement while working in the government organisation.

It is interesting to note that still around 450 employees of this cadre were non-compliant, challenging the FBR’s internal control, especially at a time when the tax body was endeavouring to broaden the tax base and adopting carrot and stick policy forcing people to file their income tax returns.

The statistics revealed that on September 9 the FBR stopped performance allowance of 806 officials of Pakistan Customs and 474 of Inland Revenue. The allowance was stopped after repeated warning to the officials directing them to file their asset declaration. Some of the officials reportedly have not filed their asset declaration since joining the service.

Asset declaration is the key requirement to gauge an employee’s financial position and accumulation of assets/money during a year. The requirement for government servants was made mandatory with an aim to create deterrence against corrupt practices.

All the stakeholders are unanimous that quantum of corrupt practices in the tax machinery is much larger than it appeared. Unfortunately, it has remained unabated despite changes introduced in the FBR on the administration side. Some senior officials in the FBR believe that thrust for money has weakened the working capabilities of tax men.Therefore, one can conclude that without strengthening internal control, the FBR cannot achieve results aiming to boost revenue collection and broadening the tax base.

Estimating the quantum of tax evasion and corruption in the taxation system, Tax Reform Commission (TRC) in its interim report referred to the study conducted by Lahore University of Management Sciences (LUMS). The LUMS study concluded that from every Rs100 potential duty and taxes, the government gets only Rs38 and the remaining balance Rs62 goes to taxpayer, tax collector and intermediaries. On the basis of the study, the TRC guesstimates the ratio of ill-gotten money divided at 70:25:5 among taxpayers, tax collectors and intermediaries.

The FBR in fiscal year 2014/2015 collected Rs2,590 billion whereas, as per the study, the revenue collection for the year should be around Rs6,800 billion. Further, as per study during the year taxpayer, tax collectors, and intermediaries jointly robbed the nation with Rs4,210 billion. The study further explains that over Rs1,000 billion was pocketed by corrupt tax officials during the year. Interestingly, the shortfall of revenue against the actual target was Rs220 billion in the last fiscal year.

Isn’t it self explanatory why a large number of tax officials are reluctant to file their asset declaration?

Some past and present senior officials of the FBR said that corrupt practices increased following the Tax Administration Reform Programme (TARP) started under the World Bank. The officials are used to sitting in their offices, and operating through their privately hired persons to settle cases of taxpayers.

These officials pointed out that there are two types of employees commonly found in the FBR: one is totally corrupt spend most of the time finding illegal ways in the tax laws to help out taxpayers; the other ones are honest, but useless having no contribution in making things better. The officials said there is also a third type but in very small number considering the size of FBR employees. Such officials want to change the perception but external and internal forces always discourage them in going forward.

In the year 2014, the Member Administration of FBR took very aggressive steps and removed a large number of employees from services on charges of corruption, misconduct, and inefficiency. However, the practice suddenly stopped. Sources said that the well wishers of tax officials involved in corrupt practices used their influence to counter the sweep.

The corrupt practices in Pakistan Customs and Inland Revenue can be witnessed easily by visiting the departments. Specially, the cadre of BS-16 who are sitting in the same place for years and have managed to find several avenues of corruption. Some time back, the FBR made it mandatory that one official cannot remain posted at a place for three years. But the employees have found alternate solutions to come back to the same position after serving some time at another place.

The magnitude of corruption in Pakistan Customs is much larger than Inland Revenue. The TRC also mentioned that On Customs Side of operations, the area of unethical practices is very wide and modalities are quite creative at times. The unethical practices on Customs wing of FBR are a lot larger, wider, and deeper than on the Inland Revenue side. The loss of revenue is also larger in the Customs wing of FBR. On the Inland Revenue side, sales tax refund remained a source of corruption. In the past, some officials even established fake companies to obtain illegal refunds.  The FBR has evidences of such criminal activities yet there has been no action against those culprits.

In this scenario, expecting FBR to collect revenue for the country to reduce fiscal deficit and provide room for social development is all but a dream.

The State Bank of Pakistan (SBP) in its latest Annual Report 2014/2015 exposed the weaknesses of the FBR. The SBP observed: “Sluggish tax collection, in turn, squeezed the space for development expenditures: in order to consolidate fiscal account and to keep overall deficit within target, the government could increase public sector development expenditures by 14.1 percent instead of the target of 35.8 percent (fiscal year 2014/2015)”.

In fact, a shortfall in revenue has a direct bearing on development expenses. As public development expenditure stimulates overall investment and growth, the shortfall in tax revenues eventually hurts economic growth, the SBP said.

It further noted: “Although FBR takes a number of measures every year to increase tax collection, it could not improve its achievements. As structural problems in the taxation system persist, the FBR tax-to-GDP ratio remained stagnant in the range of 8.5 percent to 9.5 percent over the last ten years.”

The SBP has rightly pointed out the weaknesses in the tax machinery as it took measures to bring the persons into the tax net, but did not take measures to strengthen the internal control, which is the key to reform the system.

The present situation calls for setting up vigilance teams comprising tax officials and other law enforcement agencies to root out corruption and unethical practices. Further, it should be ensured that officials involved in illegal activities are penalised and employees working for the betterment of tax rewarded.

The writer is a staff member