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March 23, 2015

Tax-Reforms being rolled back?


March 23, 2015

As was noted in the first part published on these pages on March 21, there was significant improvement after the tax reforms were launched in 2001.
Self-assessment met with favourable response from business. Functional model, not fully functional then, gave rise to taxpayers’ friendly culture.The growth in revenue was much better as compared to the era when reformed units were not operational. However, raptures started appearing in the system slowly and gradually.
One redeeming feature of reforms was to train young CSS-qualified officers in the business analysis at IBM. Intended purpose was to defend the department before highly professionally expensive consultants that business entities could engage. Training was offered in the beginning and then stopped on the pretext that no such facility was available in other services.
For tax analysis, the revenue authorities use different tools to identify compliant and defiant tax entities. These tools are handy in tracking abnormal increase or fluctuation in turn-over of different commodities or sectors. It is also determined in direct taxes that what is gross profit and normal profit after adjusting expenditure in different businesses. This was not possible in the pre-reform system being administered area-wise.
Business entities, with the connivance of tax men and expert accountants, manage excessive losses for keeping tax liability to the minimum. They even go to the extent of claiming refund. Contrast this with the territorial model wherein tax behaviour of a business at best could be compared area-wise.
Will it make sense in utilising resources in comparing tax profile of business operating from circular road with those operating elsewhere? Obviously it will not. It was therefore agreed after thread-bare discussion to create functional model that compile vital data on all kind of businesses with the help of IT. Such information about tax-profile could be exchanged between different tax

Contradictions exist in the tax-system currently in vogue. One can notice cherry-picking in Inland Revenue arrangement at different tax offices. Zones have been constituted in most of the tax office and respective commissioners look after all functions, including audit, legal and enforcement.
However, in one large taxpayer unit, different sections like audit, enforcement and legal have been created considering it better option. Such approach can hardly transform in revenue growth. Revenue is a number game and can’t be achieved but through fudging the figures or holding back refunds payable.
In the functional model, it is argued, records relating the past history and compliance level of different tax-payers are not readily available. A very senior officer disclosed: “ready reckoners on tax-payers located in respective area of commissioner (Income Tax) were available for determining tax-liability.”
However, he conveniently ignored that the same can easily be retained in IT system. Even If no such system is developed, this omission could not be attributed to functional model. Question also arises if that system was efficient why revenue collection remained 2-3 % of GDP.
Information Processing (IP) wings were created to maintain records manually like returns and files on tax theft. It is relevant to point out that a lot of slots were created in IP against which substantial promotion took place even in senior grade. Will these be abolished in case such IP becomes redundant? This should be given serious consideration as majority of the senior as well junior officers opted for tax-model on territorial grounds in the survey conducted on social media.
The field management also complains that there is too much workforce, and it cannot be retained in existing offices. However, if the intuitional memory serve them right then they should note that one of the pre-requisites of the reform model was to have lean and mean workforce. Instead of right sizing the workforce, everybody jumped to the fray to enjoy and squeeze out what could be extracted from the state exchequer.
All over the world, the emphasis is on to interact with the faceless tax office. The reason behind such arrangement is to minimize corruption and save the taxpayers from the hassle of visiting tax offices. When this was pointed out to a senior officer, he replied: “What is the point of sitting in office if the taxpayer would not come there.”
One of the prerequisites of functional model was to put in place the IT system for following: 1) capturing the tax returns; 2) analysis of the returns; and 3) tracking the record for audit/recovery proceeding.
If this was done, the office would have spared from storing huge records.
Firstly, the IT system synched with the ground realities would have helped the field management in tracking the records of tax payers as well as of the tax officers. Secondly, system does the accountability on tax machinery as it maintains the log of different tasks performed by work-force against what was required to be done.
However, the FBR kept on experimenting with different half-baked IT systems In the name of integrated tax system, quite a large number of applications are working in silos in the FBR audit, legal and human resource sections. Such kind of IT serves no purpose other than increasing confusion.
The territorial model, referred as a type of tax model, is almost extinct now in developed economies and is considered anti-thesis to friendly tax culture. The core functions of the functional model were tax facilitation centres and tax broadening units.
If you talk to any tax officer posted in these set-ups, you will get to hear this: “These are the dumping grounds for officers who are not on the right side of the management.” In the best models like the ones adopted in Pacific-Asia and East Asia, tax facilitation centres are within the reach of potential tax payers. In Pakistan, they are generally located in the basements.
The flip side of tax collection is attributed to the switching over to self-assessment. Most of the senior officers remember with fondness normal mode of tax collection. “Self-assessment is now fait-majeure. The officers should learn audit techniques to detect anomalies,” remarked a very senior lady officer. Returns of corporate sector should be assessed under normal regime, declared another officer, relatively young.
In this context, it may be added that a return is open to scrutiny in the year it is filed but except for few officers. Generally no action is taken for business entities which are “greener pasture”. The reasons are obvious.
The sales tax and federal excise duty have been operating on functional lines. Asked how sales tax will be administered after the realignment of Income tax on territorial basis, FBR officers admitted without any hesitation that sales tax and federal excise is operating in “auto-mode”.
The lobby from within the FBR and outside advocating the restoration of pre-reform tax model needs to mull over the consequences. Should the government withdraw the pecuniary and logistics benefits accrued in the name of reforms and withdraw the extra pays they are getting? They should come clear on this aspect.
To sum it up, a robust taxation system needs to be put in place. This is only possible if we focus on the few central issues – those which are critical, solvable and doable. Questions arises whether to tackle the problem piece by piece? Or alternatively, accomplish reform quickly or slowly? Another question requiring answer is that who will do it. The TRC and FBR must address these points before firming up recommendation. However, the guiding principle for tax-system should be to make it easier and helpful for compliant tax payers and tough for defiant tax evaders.
Author is former Director General FBR
E.mail [email protected]
Twitter @Chafqat

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