A member of the Central Board of Revenue (CBR) informed the Adhoc Public Accounts Committee: “We have to withhold the repayment of refunds through discreet manner in the national interest.

We are given a net target of tax collection and we are bound to implement the government policy about tax revenue collection and refunds.” No reactions. Perhaps, the committee will come up with its considered views when it submits its report to the government but the public will remain unaware of the outcome, due to lack of access to the report of the committee and the reaction of the ministry.

The tax refund issue had been a controversial subject for the last many years. The government had been regulating the policy of refunds in the light of three basic principles:

a) refunds are taken as deduct revenues and are not properly reflected in the annual budget as expenditure;

b) refunds are mainly regulated through the SROs i.e. by administrative law and not by public law; and

c) refunds are managed through a non-transparent policy and in a discreet manner.

A discussion will reveal the impact of policy framework on the overall public-sector financial management.

Article 78 of the Constitution of Pakistan provides that all revenues of the federal government shall form part of the Federal Consolidated Fund. Article 83(3) further provides that no expenditure from the Consolidated Fund shall be deemed to be duly authorized unless it is specified in the Schedule of Authorized Expenditure or authorized by the Federal Government as prescribed in Article 84.

The above provisions thus require that all revenues and expenditures of the government shall be recorded in the books of accounts on a gross basis. The only specific exceptions to this principle are the share of the net proceeds of taxes allocated to each province under Article 160(3) and the net proceeds of federal duty of excise on natural gas levied at well-head. There is no third exception and these exceptions are provided by the Constitution. Otherwise the Constitution specifically requires that all transactions in the government accounts be recorded on a gross basis. This is necessitated by transparency. Hence the policy of the government to treat refunds as deduct revenue is not in conformity with the Constitution.

The policy is also neither prudent nor transparent. It is not transparent as tax collection is exhibited in the federal budget on a net basis, thus hiding the actual magnitude of refunds. Why the magnitude of refunds is not made public and kept a state secret? Why refunds are not properly classified and distinguished according to their nature and impact? Why refunds do not need a legislative authorization? What national interest is served by a clear violation of the constitutional provisions? The principal accounting officer of the ministry of finance may be able to respond to these questions but the fact remains that the present policy is not transparent.

Prudence and transparency, by definition, are attributes of public finance that are supportive of each other. A prudent public manager has nothing to hide and as such has nothing to lose by being transparent. A transparent financial system, on the other hand, has to be prudent; otherwise it may be subject of criticism by the stakeholders. The policy of treating the refunds as deduct expenditure is not prudent because it leaves much to the discretion of managers. A regulatory framework must delineate a prudent policy.

What to pay; how much to pay and when to pay are the issues which are not clearly spelled out and which are being decided on day-to-day basis and hence lack consistency. Discretion and corruption co-exist in a tax system. Hence the present refund system is plagued with corruption at each tier of the management.

The regulation of refunds through administrative laws that are subject to abrupt and frequent changes without an open debate is equally questionable. It provides the mechanism of corruption and political interference at the highest echelons of the government. It thus negates the basic principles of good governance. There is no doubt that the government is facing a resource crunch and its cash flows are not quite satisfactory, despite resumption of foreign inflows most of which are only meant to provide the balance of payment as well as the budgetary support. It, however, does not justify the ping-pong game that the government and its functionaries continue to play with the business community, especially those in the export business. What the government pays back to the exporters as refunds is their due. It is not government’s money by any definition. Government is only a trustee and a trustee does not find excuses to deny payments to the rightful claimants. As a matter, it is immoral on the part of the government to use this money even temporarily for any other service.

The solution, therefore, lies in providing the refunds as expenditure and not as a deduct revenue and regulate it by a public law to make it transparent and minimize the discretion of the tax official. The public law should specifically provide for the time schedule of payment and any failure of the government to do so should be taxed through a mark-up.

If the CBR officials maintain that they use their discretion in the national interest, they only live in fool’s paradise. They do not deceive any one except themselves, and who knows it better than the Mr Beg, Chairman of the Adhoc Public Accounts Committee, who himself had been a tax-professional all his life.