FBR’s technology initiative: Solution or confusion? (Part-II)

In the first part published on these pages on April 15, questions were raised about the flawed use of technology by Federal Board of Revenue (FBR) for tax collection. At the heart of debate were the problems taxpayers face during the registration of the NTN as well as electronic filing of tax return and the processing of tax refund.
Whether the US$100-million World Bank-funded project achieved the objective of putting workable technology in place was also under scrutiny. This automation project was also examined with reference to its impact on tax-to-GDP ratio.
Technology has at least computerized the data of FBR. It was expected to help increase the rate of tax payers and will make non-compliance very costly. That the faulty legacy systems for retrieving information shall be disrupted was also expected at the advent of automation. An example will suffice what is done contrary to these expectations. Although the sales tax return is designed to document transaction-wise details, the refund claimant is nevertheless asked to separately provide the information provided. This duplicity hampers the verification of refunds. In a number of top-level meetings of the FBR, an officer confided to me, has termed this duplicity as professional sickness but unfortunately such malady continues to be the order of the day.
Amendments in the sales tax returns every year has virtually marred good work done for simplification. The format of the tax returns in the developed countries remains same for decades even when tariff is changed on different heads. No senior manager cared to think that such changes, besides creating hassles for returns filers, also, renders technology less effective in accurate analysis.
Let me simplify it further: What analysis can be made if serial no 6, for instance, denotes the amount of tax one year and demand the contact information of the taxpayers the next year. Some senior officers involved in making changes in the return have their own justification dismissed by many as ridiculous argument: “Don’t we switch over to new dress designs every year.”
Another aspect worth exploring is if the technology has contributed in improving the tax collection. The answer is in negative if we go by the tax-to-GDP ratio. This is despite the fact that FBR is collecting with-holding tax virtually on every transaction.
Apart from capturing tax returns, one primary reason behind this failure to improve tax collection is the absence of any in-built tools to cross-match the information on purchases, import, with corresponding data of sale tax and customs.
There is no automated process available even within the income tax department to check from with-holding statement whether the withheld money has been deposited or not. Lack of such verification could be hazardous in the self-assessment regime.
A reform expert, Rub Nawaz in collaboration with LUMS conducted a survey inter-alia on direct tax system. Sixty seven percent well informed people found the collection process difficult to understand and 60% feared that their financial information will be misused, according to the survey.
Such findings must ring the bell at FBR headquarters. The FBR should simplify technology and take measures to address such apprehensions. Here comes another question: is the procedure of registration is easy? The answer is in negative again. It takes 20-30 days. There are 30 different kinds of information which have been prescribed for new systems, according to an FBR official deputed to facilitate the applicants for registration. “Only marriage certificate is missing from the requisite documents, he said jokingly. Such complicated system discourages potential tax-payers from enrolling themselves. This should be worrying for an organization which has less than one lac sales-tax active tax payers.
One success story is the development of Computerised Risk Based Evaluation of Sales Tax (CREST) and this author humbly claims to be its key architect. It has been acknowledged by others. Let me reproduce a portion of Letter of Intent March 12, 2015 as a testimony of our work:
Our new IT system for processing GST refund claims is helping to identify invoice discrepancies at different stages and to put an effective check on many fake invoices and inadmissible refund claims. The CREST verification system has allowed us to reject false claims worth about PRs 10 billion in the first half of FY 2014/15…….”
Such assertion implies that if Rs. 10 billion refund was not payable in just six months, a fat sum might have been paid under this head in a fraudulent manner before the CREST was commissioned in 2013. One leading exporter confided to me that there are expert refund-financed exporters who knew the “role of technology” got their refund easily and those who did not had their huge sums stuck up even in otherwise genuine claims.
The FBR has gone a long way in developing and experimenting technology solutions. However one can notice that a project sent packing or hit the snags before any system is matured. Interestingly all technology application are claimed to be end-to-end solutions.
How such claims are made when technology systems of customs, sales tax and direct taxes are not interlinked, let alone 3rd party data?
Critics opine that the policy of not inter-linking is by design as it otherwise will herald a new era of transparency and accountability. Had this been shared in FBR, the fudging of revenue collection in 2011-12 (for which around six chief commissioners were made OSD as scape goats), would not have taken place.
Similarly, around Rs.10 billion that was over-reported in 2013-14 would not have gone un-noticed had the inter-linkages been established.
It is no hidden secret that STARR system basically designed to capture data was willfully used in the payment of fraudulent refunds. In 2004-05 the then chairman, Abdullah Yousaf wondered as to why Rs. 42 billion were sanctioned against the tax payment of Rs. 35 billion.
Similarly, the technology was not introduced in the payment of refund on the income tax side. Skeptics say that these are willful endeavor to let lose nuts and bolts of systems to create a smoke screen behind which phony transaction of billions of rupee takes place directly sledging the flesh of state exchequer.
It is a legitimate concern as to why a genuine end-to-end solution is not allowed to develop when the FBR has the capacity as well as authority. To generate much needed revenue for investing in human development, the state has to get rid of the technology footloose approach and fix the nuts and bolts in the existing IT structure instead of having revenue miscarriage cyclically. Concluded.
Email: shafqatanand@gmail.com
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