The caretaker government has recently announced its decision to separate Pakistan Customs and Inland Revenue Services (IRS). This action has reignited the rivalry between these two tax groups, leading to a renewed exchange of rhetoric after a gap of 14 years. Back in 2009, a significant reform separated sales tax from customs, and its operation was handed over to the IRS.

Despite facing opposition, the government went ahead with this move. Subsequently, both groups established departments aimed at facilitating career progression. However, it is important to note that the expected outcomes of these reforms have yet to materialise and remain largely theoretical.

Background interviews and talks with top officials from both tax groups demonstrate their tax groups’ career possibilities and successes. Instead of improving the tax-to-GDP ratio, enforcement, and compliance, the discussion focuses on why certain policies seem to benefit some individuals while placing others at a disadvantage.

The revenue target for FY24 falls short of paying the country’s debt servicing commitments. Given the current economic climate, can our nation afford to finance debt repayments through loans while disregarding vital development projects? Any suggested reforms must prioritise generating revenue over interest to meet our nation’s financial requirements.

Reliance on aid, import collection hit domestic tax realisation

Many commissions in past have proposed similar proposals. These reports do not emphasise the reforms. The priority of building infrastructure, replacing office furnishings and vehicles, or revamping the tax system is unclear. The remaining two sectors made little improvement because prior efforts focused on infrastructure and tax administration officers’ and officials’ well-being.

Pakistan’s tax-to-GDP ratio has remained unchanged at 9.5pc since 2009, compared to 31.4pc in OECD nations, 21pc in China, 18.2pc in Vietnam and 16.4pc in Thailand. This metric alone does not prove that the previous reforms had any effect.

FBR chairmen have given importance to collection from imports. The chairperson comes from the IRS or Customs group, the focus remains unchanged. Between FY09 to FY23, there has been an increase in import tax collection, rising from 38pc to 54pc while domestic tax collection remains neglected. This has had an impact on Pakistan’s border trade and export speed score, which has been declining for several years now.

Pakistan lags behind Turkiye (91) and China (86) and stands at (68) in cross-border trade. Pakistan’s time to export indicator — a measure of port shipping time — is at 58 hours.

According to statistics, countries with lower import taxes facilitate exports and cross-border trade better. These indicators show that reliance on import-stage tax collection can lead to tax policy imbalances, inconsistencies, and a lack of domestic tax mobilisation.

As Pakistan collaborated with the West in the Afghan War and the post-9/11 attacks, FBR officials did not see the need for domestic tax realisation. Pakistan has become the highest recipient of aid over the past 40 years. Due to a decrease in aid, bilateral and multilateral loans were sought to finance the budget deficit. Therefore, former FBR chairmen and finance ministers did not prioritise domestic tax collection.

Recent events have revived proposals for a splitting of the customs and IRS boards. This attempt shows a lack of creativity. India’s customs and sales tax collection fall under the same board. However, China, Vietnam, Indonesia, and Malaysia have customs-only boards. Pakistan’s sales tax transfer from customs to the IRS has failed to produce the desired results.

The reform team must examine and quantify how this new board-level segregation of functions will operate to achieve the desired results. The tax administration faces significant challenges in enforcing legislation to encourage compliance. A few pages citing out-of-date studies from international financial institutions may not be enough to justify this huge decision.

Reform and integrity are interlinked. The reforms to succeed examine both parts. Integrity in finance demands incorporating efficient people. Tax department promotions and postings must be performance-based to maintain trust. Currently, few taxmen have been accused of corruption but have maintained their powerful ties and top positions. Reforms relied on disentangling postings from political connections and network connections.

Customs-IRS separation may complicate data sharing. Nadra is not providing enough data to FBR. Given the current situation, a national data centre must be considered. Departments can share data and meet their operational needs. Currently, the 73pc workforce in tax machinery is below grade 17. Recent data reveals that lower-level employees are less productive than higher-level ones. There are concerns about segregation that might lead to a further increase in low-grade employment.

Tax management may be improved if the government takes its time to assess potential reforms rather than acting hastily. The goals of well-rounded reforms that have been absent from previous efforts are smuggling compliance, recordkeeping, and the expansion of the tax base.

Published in Dawn, December 10th, 2023

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