In Pakistan, those who pay taxes are hardly 0.3 per cent of the country’s population. The government is aware of this fact and is working on reforms in the tax collection mechanisms in the Federal Board of Revenue (FBR), the body that collects these taxes.

Some declared goals of the proposed reforms are: broadening of the tax base, rationalising concessionary regimes, and eliminating privileges, reducing tax gap, increasing the share of direct taxes, improving the capacity of tax collectors, bringing behavioural changes in taxpayers and collectors, and so on.

Reforms were carried out in the past as well but these could not succeed in getting the desired results. What are the reasons of the failure of the previous reforms and what reforms are under consideration at the moment?

This time, there is a Tax Reforms Commission as well, which comprises of non-government members mostly and has been awarded the mandate to review and rationalise direct and indirect taxes, rationalise customs tariffs, review the autonomy and administrative structure of FBR, and work for creation of a border force to deal with illegal movement of persons and goods across the international borders, etc.

Shahid Hussain Asad, Member, Inland Revenue, FBR has recently served as the Acting Chairman FBR. He is a member of the team working on reforms. Talking to TNS, he says "people in the past have tried to impose foreign solutions without realising the local needs and culture. These included reforms to please the World Bank, without taking the local challenges into account."

He says there are plans to restore the circle system under which the whole country was divided into around 750 circles and headed by income tax officers (ITOs). "This system had been introduced by the British and had its strengths. It was done away with in the name of reforms and only 13 Regional Tax Offices (RTOs) were introduced to look after revenue collection. Later on, the number was increased to 18."

Asad says the commissioner-level officers who head these regional offices do know about the number of potential and existing taxpayers in the area and the cases that are under consideration or decided due to the huge size of the region. On the contrary, he says, "the head of a circle under the previous system would be the assessment officer and the enforcement officer at the same time besides having control over the records. They would know the exact number of taxpayers in their circles and also have knowledge of those falling different categories. These circle offices would maintain 29 registers."

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He informs that in the past the automation process was started without updating and preserving the manual record. "Highly valuable record was lost and many files were sold by the staff to those who benefitted due to the erasing of these records." However, he says, at the moment, the FBR is focusing on automation and trying to check corruption by asking people to receive only those notices that carry barcodes issued by the FBR. Otherwise, he says, "the corrupt officials would issue fake manual notices themselves and dispose them of after getting undue gratification from people."

Asad is against voluntary self-assessment schemes because he believes these are useless in overly-undocumented economies. "In Pakistan, the undocumented and cash economy is bigger than paying the tax voluntarily, therefore, the solution lies in documenting the economy and making tax evaders accountable."

Mubashar Bashir, a financial consultant based in Lahore, believes reforms will not be successful if the FBR does not stop considering taxpayers thieves and crooks. "The board has a large number of people and entities serving it free of cost and collecting withholding taxes on behalf of it but it treats them very badly."

"It’s a fact that 80 per cent of direct taxation is through withholding or presumptive tax. The whole tax machinery collects only 20 per cent of the direct taxes. This has made tax officials lethargic and addicted to direct tax collection in this manner."

Bashir says if there is some delay or a problem in filing documents, the collectors of withholding taxes are penalised by the FBR. "Even the dormant companies are asked to report on withholding taxes and dealt with strictly which speaks volumes of how FBR works."

"No doubt, there are certain benefits for tax return filers but these are neutralised by the negative impacts of falling into the net. To counter this perception the state will have to ensure that taxpayers get value for their money," he says.

Bashir explains that there is a concept of implicit taxation, which means people are paying money to get services which are supposed to be provided by the state for free. "When this happens, the citizens are not duty-bound to pay taxes. For example, when a complainant goes to the police station the police charges him for petrol, stationery, food, etc, from him citing shortage of funds.

He says the condition to submit returns online has made life tough for the intending filers who are unable to submit them if they are working on different operating systems. "The filer should be allowed to file manual returns if he wants to," he suggests.

Abdullah Yusuf, former chairman of FBR (previously CBR), suggests "reforms in the FBR should focus on the documentation of the economy through automation and putting an end to the discretionary powers of FBR officials in assessing tax amounts."

With the introduction of IT, he says, "it has become quite easy to track the economic activity of a person through his CNIC number and collect undeniable proofs of his expenditures/income/assets. All you have to do is to put a condition to produce CNIC at the time of carrying financial transaction of any sort."

He also calls for collection of taxes across the board, saying "the manufacturing sector contributes 21 per cent to the economy and pays 66 per cent of the country’s taxes whereas the agriculture sector also contributes 21 per cent to the economy but its share in taxes is less than one per cent. Why is it so?"

Hafiz Muhammad Yusuf, former president of the Institute of Chartered Accountants of Pakistan (ICAP), Punjab Chapter, stresses that the FBR must go for structural reforms and induct financial consultants and chartered accountants by paying them salaries that exist in the market. "Currently, a majority of the senior staff comprise of officers inducted through CSS exams and many not have an education in the field of economy, accountancy, etc. The example of SECP is there which was structured this way by its former head Khalid Mirza," he adds.

Asad agrees that "the human resource needs to be trained on modern grounds as very few of them are able to conduct audits and use the IT-based systems to assess taxes or track down evasions, etc." He says the audits were suspended during the tenure of a former head of the board just to appease the business community and gain cheap popularity. "As a result, the officials at the FBR hardly have any knowledge of how to conduct audit and depend on what the tax consultants tell them. Many consultants play the role of middlemen and manage ‘settlements’ between the tax authorities and the tax-payers."

An official in the finance ministry tells TNS on the conditions of anonymity that "practically a politician is heading the FBR nowadays. The government has appointed Haroon Akhtar as Advisor to the Prime Minister on Revenue. This guy is sitting in the FBR and has the designation above FBR Chairman. He chairs each and every meeting of the FBR and if he is not invited to any meeting, he calls explanation from the FBR Chairman. It is a major setback to the FBR that a politician is now taking decisions on tax policy and taxation matters."