Documenting the economy

May 12, 2019

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THE new chairman of the FBR has laid down his priorities immediately upon arrival and put special emphasis on the documentation of the economy and broadening of the tax base. This is the right place to begin, though he will require a great deal of policy backing from the finance ministry as well as the office of the prime minister in order to make progress on this important objective.

The fact that there is an FBR chairman properly sensitised to the need for broadening the tax base is a step forward since it is the tax bureaucracy that has traditionally been a major obstacle in this area.

If Shabbar Zaidi can manage his end of the proposition, and is suitably supported at the policy level by the government, there could be renewed hope.

What is critical is to ensure that existing taxpayers are not made to bear the brunt of the enhanced revenue target that the government will have to pursue under an IMF programme.

It seems Mr Zaidi is aware of this since his first directive upon taking up his assignment was to prohibit the attachment of the bank accounts of businesses without prior approval from the office of the chairman. This practice had become too rampant of late, and FBR officers were undoubtedly getting overzealous in shaking down those in their clutches as pressure to bridge the revenue shortfalls mounted.

But beyond this, pursuing the undocumented transactions is going to be far more complicated than simply bridging the trust deficit between taxpayer and tax authority. There is no doubt that the new chairman knows this since there are ample public utterances of his own that testify to this. The leakages from the Afghan transit trade, to take one example, are commingled with the supply chain of consumer durables across Pakistan’s wholesale and retail sector. Even if the retailers wanted to declare the true value of their merchandise to the tax authorities, the fact that much of it has been purchased from smugglers would prevent them from doing so. There are other complications too, and at some point a stick will doubtless be required to urge people into compliance.

Automation of filing processes and minimising contact between taxpayer and tax collector are necessary steps, and will pave the way for more robust documentation efforts. But alongside these steps, policy support will be required.

In time, Mr Zaidi will need to speak more frankly with the government that appointed him, and explain to them the importance of acting independently of vested interests when crafting policy. He might also face political headwinds, especially if he begins to make genuine headway towards his goal. These could come from any direction because the rackets that will be impacted are agnostic to political affiliations. Let’s hope he is prepared and serious.

Published in Dawn, May 12th, 2019