The CBR had touched the Rs400 billion tax collection figure for the first time in 2001-02, and marginally surpassed the target for July-September 2002-03, too.

But it remained short of the original target of Rs457 billion, envisaged in 2001-02 budget, and most probably it may remain below the target this year,as well. The question is whether this achievement was due to some administrative improvement, collection mechanism, or on account of other factors. As a matter of fact the CBR was helped by the government through new measures. The imports and exports did rise but the administration was not as efficient as it should have been.

The tax administration plays a vital role in the success or failure of any reform. Many such attempts have failed in the past because the administration was influenced by the faulty tax structure — though both are interdependent and correlated to each other. The additional resource mobilization fell short of expectations as the inherent weaknesses in tax structure, and the vested groups’ ploys in administration foiled such attempts.

The major weaknesses in the tax structure include; i) narrow and punctured tax base because of wide ranging exemptions and concessions and, rampant tax evasion; ii) as a result of this, tax rates have been pitched at high levels which created a vicious circle of tax base erosion and higher tax rates; iii) over dependence on indirect taxes, which until the end of the 1990s, accounted for around 68 per cent of the tax revenues, and as such increased regressivity of the tax system which imposed a higher burden of taxes on poor souls; iv) within indirect taxes, there had been over-reliance on levies on international trade which had promoted inefficiencies, distorted the allocation of resources and encouraged smuggling;and v) the tax system has been complex and tedious which along with high rates of taxes, has breeded corruption and encouraged tax evasion.

The combined result of these weaknesses has been low stagnant tax-to-GDP ratio at one hand, and the low tax elasticity and buoyancy on the other. The tax-to-GDP ratio which represents the country’s fiscal effort has remained stagnant at around 12 to 14 per cent over the last two decades. Such structure is bound to hamper resource mobilization efforts, despite new measures taken in every budget in the nineties to reduce the gap between the revenue and the expenditure. The demand for rise in expenditure was not supported by the commensurate increase in revenue. Consequently, fiscal deficit has averaged 7 per cent of the GDP over the last two decades and has emerged as one of the most serious problem of the macroeconomic management in Pakistan today. No country can sustain such a high fiscal deficit for two decades.

Governments too, have often resorted to administrative tools to make for the shortfalls. As a result of which the energy costs in Pakistan have reached to unsustainable level and are mainly responsible for lower investment rate in 1990s. Pakistan’s fiscal problem is structural in nature and limited efforts are being made by the successive governments to undertake wide-ranging structural reforms in tax and expenditure sides. Every government has tried to delay the day of reckoning by borrowing or through innovative resource mobilization tools. Perhaps every government, since the 1990s have been implementing tax and tariff reforms on paper sans implementing the same in letter and spirit.

The focus of these reforms was on international trade taxes, but it has now shifted to tax on consumption and withholding tax regime. As a result, the composition of revenue has changed drastically in the last few years. The share of direct taxes has doubled from 18 per cent in 1990 to 35 per cent in 2002, and the share of indirect taxes has correspondingly declined from 82 to 65 per cent. Within indirect taxes customs duty has declined from 55 per cent in 1990 to 19 per cent in 2002; sales tax (which is tax on consumption) has increased from 18 to 63.5 per cent, and the central excise decreased from 28 to 18 per cent during the same period. Notwithstanding these changes, the tax revenue in relation to the GDP remained stagnant at 12-14 per cent. Ours is a unique country where tax collection is independent of the economic growth.

What is required is a second-generation reforms with focus on better enforcement, bringing more payers into the net, reducing the number of taxes and, strengthening administration, and streamlining laws to make them payer-friendly. The immediate aim should be to reduce fiscal imbalances for achieving macroeconomic stability, and to secure more durable improvements in fiscal performance in the long run. Making revenue mobilization more efficient requires reforming tax and tariff systems and their administration while, on the expenditure side, fiscal consolidation is needed to re-orient public spending towards growth promoting investment in physical infrastructure and in social and human capital.

Though in the past, the motive had been to broaden tax base,improve compliance, minimize corruption, streamline laws, and strengthen administration, but everything failed. The launching of a tax survey and documentation of the economy in 2000 was the key reform measure and the government attached high expectations but nothing substantial came out of it. The impact of tax survey on direct collection is quite negligible but its disastrous impact on investment is visible. The collection of income and corporate taxes through voluntary payments has remained vulnerable. The system remained highly reliant on withholding tax regime. The number of individual income taxpayers and corporate taxpayers has remained stagnant at 1.9 million and marginal increase in number is also because of keeping exemption limit at the lower side for an extended period of time. The survey was ill-planned and ill-designed, and wrong sequenced. There were other ways to collect information on income and consumption.

Tax administration plays a vital role in the success or failure of any reform. Unfortunately, in Pakistan any reform receives stiff resistance from the tax administration. There is a need to redesign administration on modern lines with a focus on computerization and accountability. Experts from the private sector in consultation with the stakeholders could be of great help in reforming the Central Board of Revenue (CBR). There are reports that the CBR is planning to hire consultants from abroad, but it has already been examined by Shahid Hussain whose report has identified areas of improvement. The hiring of foreign consultants would be a waste and would delay the reform programme. A time-bound reform agenda on war-footing is a must and the starting point may be the available recommendations by various tasks forces. There is a general consensus among experts over high degree of computerization with effective checks and balances. Why such things are not being implemented instantly.

The tax amnesty schemes have also played a detrimental role in evasion and non-documentation. The potential payer has less incentive to pay taxes than wait for another amnesty scheme which might be more beneficial. The lack of accountability of official and taxpayer has served the cause of evasion and massive corruption in administration.

The New Income Tax Ordinance has already expanded the scope of universal self assessment schemes with system-selected audits, minimal exemptions, and more equitable rates, and established uniform tax rates for all companies. The self-assessment scheme (SAS) was made effective from July 1, 2002. The business community especially has been demanding the SAS for quite sometime. However, its success now depends on a vigorous system of accountability of both the taxpayer and the tax official. Large units are being established in major cities to facilitate payments for large taxpayers. This is a vital step in the right direction. The institution of the Tax Ombudsman also needs to be strengthened and the small taxpayers given priority in getting their grievances resolved through this institution. They are the main victim of high handedness of the officials and are further compelled into disputed claims by the taxation staff. The Tax Ombudsman can be of great help to them.

The government is already in the process of adopting the accountable fiscal management framework (AFMF) that specifies assurance of accountability and transparency of the fiscal management. The better and accountable fiscal reporting demands regular publication of income tax payments for the information of general public. The perks and privileges of important public office-holders, parliamentarians, ministers, president, prime minister and privileges are tax-free, which is corruption prone. Pakistan’s tax structure needs major surgery but this should be done by the local experts rather than the imported high-cost consultants. The problems have already been identified and the treatment is well known. Therefore, we should make a beginning by making new tax reforms with reforming the administration first.