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March 21, 2015

Tax reforms being rolled back?


March 21, 2015

Income tax inspectors used to send shivers as and when they visited any business centre and that reform model on functional lines has eroded this authority. This is a popular line taken in defence of the old system. It also echoes in Tax Reforms Commission, Federal Board of Revenue and the media. Intended objective is to constitute the field formation on territorial grounds with structural changes in the tax system. The rationale offered is really astonishing. Do the officers of Inland Revenue Service want to display their muscles like their inspectors, a senior revenue officer was asked. Tax system on territorial basis was time-tested and revenue growth was then impressive, he said. “Reforms model have failed to bring any significant change in revenue.”
An analysis of pre- and post-reforms revenue collection will illustrate if the criticism is based on facts or mere an attempt preserve status quo allowing unbridled power.
Table: Structure of Direct Tax Revenue
In the decade of 90s’, statistics above indicates, total contribution from direct taxes had generally been less than 30% of the total revenue. FBR then used to asses under normal regime. The field offices were assigned territorial jurisdiction. There were massive discretionary powers for determining tax liability. Nevertheless, low collection earned the ire of the then government when Economic Survey 1998-99 noted: “Delays in key tax reforms contributed in fiscal predicament.” Incidentally, current finance minister now spearheading TRC was then holding the same portfolio.
Reforms in FBR were launched in 2001-02. Collection from direct taxes increased gradually but steadily as it rose from 31% to around 40% in 2013-14. Self-assessment was also introduced that resulted in bridging the trust deficit between business community and FBR. Taxpayer friendly culture contributed in impressive revenue growth. Corruption went down as FBR was ranked at fifth position in the Transparency

International’s list of departments notorious for corruption. This was certainly an achievement especially when fully functional model was not in place yet. The purpose of any revenue organisation is to increase collection and not “to dilute tax culture with discretionary power”. Be as it may, number in above-table providing empirical evidence as to which taxation system is better.
A brief look at reforms will put the whole issue in perspective. In standby arrangement with the international donor, FBR undertook massive reforms in the light of the recommendations of Shahid Hussain Task Force. The purpose of these reforms was to broaden the tax base, create functional model, developing IT system which could be in synch with IT systems of other taxes, minimising interaction between the tax payers and the tax collecting machinery and right sizing of the work-force. Functional models were created in line with these recommendations. Different wings were set up keeping in view the functions assigned to them. Quite a large number of tax offices were established for this purpose. Reasonable systematic arrangements were made.
In the functional model, specialised skills in every segments of administration were to be nourished. Exclusive audit, enforcement, legal wing and tax facilitation centres and IT portals were established in accordance with the best international practices.
It was expected that the person assigned the audit function would develop relevant expertise and prepare sectoral notes. The wing under renowned fiscal economist actually started doing analysis at macro level. Audit manual was developed to keep track of the audit proceedings. This could have helped the auditors identify any industrial unit showing negative profile.
However, with change in management in FBR, such analysis in revenue leakage was put on back burners. Fiscal economist was sent home and replaced with typical bureaucrat. Policy makers and management reverted back to deal with revenue in run-of-the-mill style. It reminds me of an interesting meeting in which the tax theft to the tune of billions of rupees was shown to a senior official, then working at a responsible position. He remarked: “What is the relevance of tax theft with me?” This reflects on the level of understanding of persons at the helm of affairs.
(To be continued)
The writer is former DG Automation FBR Email: [email protected] Twitter @Chafqat)

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