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April 30, 2017

Reforming FBR again and again


April 30, 2017

Pakistan has achieved economic stability in result of its compliance with the IMF program and it could further improve through continuation of reforms in different sectors. This is what the IMF and other financial institutions have predicted.

This makes one curious about the IMF’s reform agenda being implemented in fiscal sectors as it has direct bearings on the overall economy. For that to answer, it is important to conduct analysis of the original program and the recommendations incorporated in its Letter of Intent signed by the government with the IMF in 2013 and in 2016 to see the net impact of the program.

On the fiscal side, the IMF’s 2014 report noted (i) Improvement in the FBR's access to third-party information; (ii) ensuring data matching between domestic taxes and customs to identify non-compliant taxpayers and minimize under-declarations; (iii) accelerating the implementation of risk-based auditing with a focus on high net worth individuals and large companies; (iv) broadening tax base and simplifying tax procedures. 

An integrated IT system was imperative for fetching data from 3rd party as well as cross-matching data of imports with local production and sales. But the FBR kept on experimenting with different models such as ITMS, CREST and IRIS. Are such changes unnecessary? The country head of the World Bank in Pakistan gave a frank reply. We are here to design things as per the wishes of the client and it appears that the client is not aware what he’s looking for.

Since 2013, the FBR has taken a number of measures which kept traders/retailers out of tax net. Sales tax is collected in VAT mode. There is a tax on value addition at every supply stage. Extra tax has been levied on manufacturers of all consumer goods in lieu of tax to be paid by retailers. Similarly, if manufacturers sell goods to unregistered person, he has to pay an additional two percent tax. 

Ask a manufacturer why he pays this extra tax, the usual reply: “We are left with no option as retailers or buyers refuse to pay. It is much easier for the FBR to milk a few manufacturers instead of taking the trouble of chasing thousands of retailers.” Besides, the rates of withholding taxes are being increased unchecked and such measures go unnoticed by the IMF which is otherwise opposed to the idea of compensating the weaknesses in its operational capacity through policy measure. 

What is the capacity of the FBR? The Supreme Court has paid ‘tribute’ in the following words in Panama case: “We cannot help but notice that even the initial steps were halfheartedly initiated six months after the afore-noted information came to light. It is astonishing to see that while the matter was being widely agitated and discussed in the Print and Electronic Media and the Courts were being approached by different parties who were clamoring for investigation and probe, the FBR had gone into deep slumber and failed to initiate even the preliminary steps towards ascertaining the identities and other antecedents of the persons named in the Panama Papers, let alone taking any action against them.”

Informal economy takes birth from commercial import. Commercial importer’s final liability is to pay extra tax on the value addition. It is convenient for him as goods are under-invoiced and after paying duty & taxes are sold at original price much more than the value on which the tax was paid. Being exempt from the audit means he has no fear of any audit. 

The FBR takes credit for penalizing non-filers. One prominent economist and former governor of the State Bank of Pakistan questioned whether different rates are applied on filers and non-filers anywhere? In fact, such ad-hoc measures are taken where potential tax payers can’t be brought in the net. Besides, these measures are strengthening the informal sector.  

The procedures for tax compliance are complicated and with which only a tax consultant can cope which is beyond the means of SMEs. They said reforms should have transformed compliance so easy that any person with limited knowledge could easily file returns or meet other formalities.  

People remain out of the tax net due to tedious tax compliances. Is it not convenient to stay out of the net and not be bothered to maintain huge record and audit hassle? This is a fact that FBR and IMF have not been able to involve some simple procedure to induce small and medium trigger to join the tax net. 

The international consultants, who generally come from academia side, are not aware of the ground realities and as such have limited capacity to plug the loopholes is what is stated by one of the Former Deputy Chairmen of Planning Division. 

The FBR’s resolve to do away with the exemption has succeeded to some extent. However, one former FBR officer pointed out that now exemption notifications have become the part of Acts or Tariff. Still, there are many exemptions available to different segments of society such as VVIPs, judges, top management of civil and military and lastly import under CPAC. 

The IMF has concluded program on the same note what it said in 2014. It could not achieve any of its targets but is happy that “Pakistani economy has turned around”. One has to find out which way it is treading after this “turn around”: to another IMF program or to another Implementation Commission? 

Author is a fiscal analyst & can be reached [email protected]

Twitter: @Chafqat

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