December 18, 2006	Monday	Ziqa'ad 26, 1427

THE Central Board of Revenue (CBR) is withholding genuine refunds of billion of rupees. Neither NAB nor the Public Accounts Committee of Parliament or Auditor General of Pakistan, has taken the responsible officers to task.

In its Year Book 2005-06 [page 11], CBR has claimed to issue sales tax and income tax refunds amounting to Rs32.4 billion and Rs34 billion respectively during 2005-06. It has not been disclosed how many refunds payable to the taxpayers were withheld to show collection of Rs712 billion against the target of Rs690 billion for 2005-06.

The claim of surpassing the collection target stood exposed a few days back, Prime Minister Shaukat Aziz directed the CBR to immediately release Rs22 billion withheld sales tax refunds of the textile sector. The directive among others came during the second meeting of the National Textile Strategy Committee (NTSC) to review the proposals of the sub-committee regarding framing of future textile policy.

The meeting was informed that the current zero rating policy of the government was defective and needed immediate redressal. The textile exports recorded decline during July-October FY07 due to over-shipment during the same period last year for exhausting of the duty paid inputs for claiming refunds.

The CBR has now asked exporters to file all necessary documents till December 31, 2006 for getting their sales tax refunds pending with the sales tax department. The Sales Tax Rules, 2006 effective from July 1, 2006 required that no refund claim shall be entertained if the claimant fails to furnish the claim on the prescribed software along with the supportive documents within 60 days of the filing of the relevant return. This created problems for those exporters who were looking for their refunds due prior to July 2006.

In 2005-2006, even Wapda was denied sales tax refund of Rs6 billion. Although input tax adjustment is not admissible on ‘transmission and distribution losses’ of Wapda under the existing Value-Added tax (VAT) regime, the government gave special dispensation to Wapda for claiming adjustment on these losses. In view of this special dispensation, CBR was required to pay Rs6 billion refund to Wapda during 2005-06, as it was incurred during last fiscal year. However, the same was paid in 2006-07.

In 2005-06, according to CBR, its revenue collection position was very strong (sic), but it is not understandable why it withheld huge refund of Rs6 billion payable to Wapda. The CBR could not achieve the assigned target of Rs690 billion had it issued undisputed refunds of over Rs40 billion relating to 2005-06.

In 2005-06, the CBR showed Rs224.8 billion as collection under direct taxes. According to independent sources, the total refunds withheld by the Income Tax Department were not less than Rs20 billion. Thus, the actual net collection was only merely Rs204 billion which was short of target fixed at Rs215 billion. More or less, the same position was for sales tax, so net real increase in collection of taxes after taking into account the inflationary rate was quite nominal or may be even negative.

The same pattern is going on in 2006-07. According to a press report, income tax department withheld Rs18.694 billion as refund of taxpayers in 16,275 cases during the first four months (July-October) of FY07, which helped the department in surpassing the tax collection target set for the same period.

According to the report “this amount of refunds might be even greater than the reported one as the department did not have any effective automated system for compilation or issuance of the refunds to taxpayers”.

Official statistics compiled by the CBR reportedly showed that the income tax department had also collected an advance tax of Rs22.208 billion from big taxpayers during the July-October 2006 to reflect higher growth in revenue. The CBR has been hiding its inefficiency rather than conduct any audit after the announcement of the universal self-assessment scheme.

The statistics showed that the Large Taxpayers Unit (LTU), Karachi, was on top of the list in withholding the refunds, which stood at around Rs7.906 billion during the period under review in 111 cases. This was followed by the northern region, which held up around Rs5.486 billion refunds during July-October 2006-07. The LTU, Lahore, withheld an amount of Rs3.962 billion during the period; an amount of Rs368 million by the corporate region; Rs318 million by the southern region; Rs168 million by the eastern region; and Rs486 million by the central region.

This negates the policy of the government that reforms of tax administration would help in facilitating the taxpayers in getting their refunds at the earliest. The CBR had already zero rated all inputs and import of the leading export-oriented industries from the levy of general sales tax for its failure to develop a mechanism to collect and release due refunds to exporters within the stipulated time.

In the reform process as well, the CBR is missing the targets and goals. The country at the end of reform plan will be further indebted by over $100 million. The World Bank provided $102 million assistance. There is $23 million grant by DFID, while remaining funds to be given by Pakistan for the implementation of the Tax Administration Reforms Project (TARP). It is admitted now that the CBR is going to miss the end-December deadline for converting medium taxpayers units (MTUs) into regional tax offices (RTOs), which allow collection of income tax and sales tax under the same roof.

Pakistani tax officials had held out an assurance to the World Bank and IMF to roll out at least three RTOs, one each in Rawalpindi, Abbottabad and Peshawar by December 2006 besides, the establishment of the third large taxpayers unit (LTU) in Islamabad. The remaining nine RTOs are to be in operation by end-June 2007. The World Bank review team during the recent interaction with the tax officials raised concerns over the slow pace of the reform process, particularly in the area of information technology, which constituted more than 70 per cent of the whole reform project.

Under the reform process, the CBR was even beyond the target on the non-developmental side like appointment of consultants at market rates for various sections, purchasing of vehicles, furniture and new computers. Besides, these CBR consultants have appointed five revenue members from the private sector on market-based salaries for the last five years. Initially, these members were appointed for a two-years term to help the tax officials in devising the tax strategy.

They were given another two years extension, which expired in Feb 2006, for they could not come up with their targets and goals. Following the expiry of their contract in February 2006, another extension for indefinite period and elevation from MP-2 to MP-1 has been awarded to these members with additional perks and privileges.

Under the reform process, the CBR has recently appointed a consultant on market-based salary to help devising a media strategy. Interestingly, a full-fledge member in MP-1 scale was already working for the last five years to devise media strategy besides, promoting taxpayers facilitation. Moreover, an officer of information group in BPS-19 was also working on double salary in the same media section. It is thus clear that the maximum portion of the reform process has been allocated for the non-development side, the cost of which would be re-paid to the donors by the taxpayers of this country.

The CBR is also lagging behind in the merger of function of the sales tax with the customs following the resistance from the Customs group, which is also violation of the original agreement of tax reforms signed with the World Bank.

In the face of these realities, the CBR stalwarts are entrusted with the job of tax reforms, whereas it should be through the parliament. The irony of the situation is that hand-picked reform experts and CBR officials are getting full support from the international donors.