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Battle against SRO culture

January 13, 2013

The Public Accounts Committee was informed last month that as many as 4,500 Statutory Regulatory Orders have so far been issued by the Federal Board of Revenue to grant favours in matters of taxation to individuals and entities belonging to the elite class, or to some political favourites of the incumbent government.

Some senior officials present in the meeting were frank enough to admit that FBR has appropriated parliament’s power of taxation through this notorious instrument.

But the fact remains that parliament itself lacks the moral muscle to play an effective role and, as such, has never challenged the FBR’s encroachment into its domain because it suits the interests of many of its members coming from the feudal class who have succeeded in this bargain by getting themselves virtually exempted from any tax on their income. That the PAC has chosen to raise this issue is a departure from the past practice.

It was under the Customs Act of 1969 that parliament had delegated powers of issuing the SROs to the FBR. But since it is more than manifest now that these powers have been and are being misused, the parliament should revisit the law and, if found necessary, it should be repealed.

The SROs were meant to be an instrument for running the day-to-day affairs but, unfortunately, over the years these have assumed the status of a policy in the country. According to the FBR website, 39 SROs were issued in 2012 alone.

The SRO culture has, according to an estimate, caused some Rs650 billion worth tax exemptions in the country. The result is that the tax- to-GDP ratio in Pakistan remains around nine per cent, the lowest in the world, with the number of tax-payers not exceeding 0.8 million, nor the revenue volume registering any significant increase, leading to dependence on external borrowings, grants and aid. The SROs have also enabled many inefficient entrepreneurs to thrive at the expense of innocent consumers.

The PAC has, meanwhile, formed a committee headed by Planning Commission Deputy Chairman Dr Nadeemul Haq to give suggestions to end ‘the culture of SROs’ which is now seen as a major source of corruption in the country.

There was a suggestion that the finance bill should be redrafted in a manner that it tends to eliminate the SRO culture after its passage.

Besides, matters relating to allowing or withdrawing tax exemptions or changes in rates of duties should first be thoroughly debated by the standing committees on finance and commerce of both the houses and then passed by the two houses.

It is interesting to note that the FBR chairmen had themselves been strong critics of the SRO culture while issuing the SROs as well. On December 29, Ali Arshad Hakim, the incumbent FBR chief, informed the Senate’s standing committee on finance that ‘powerful lobbies’ have been given huge tax exemptions through SROs and that the whole tax system is now like an NRO for the elite class.

He is of the view that the concessions and zero rating allowed through SROs should be routed through parliament and it should be the discretion of the latter to maintain or drop these concessions.

The FBR is currently reviewing the impact of all the SROs on national exchequer to determine which ones should be made part of an act of parliament for the sake of consistency in policy.

A former FBR chairman, Mumtaz Haider Rizvi, recently stated that the existing taxation system has become flawed with the issuance of multiple SROs, schedules, multiple rates and slabs, and promised to check the SRO culture.

The FBR, he said, has identified the sectors enjoying specific duty exemption. “We will apply these concessionary duty rates to all users through customs tariffs, instead of SROs to some specific taxpayers, and reduction in the number of SROs will lead to reduction in corruption automatically in the tax machinery.”

It is worth noting that since most of the legislators do not file tax returns and wealth statements required under Income Tax Ordinance, 2001, they were least keen on blocking the tax amnesty bill tabled on December 17, 2012 aimed at whitening black money. The controversial bill strongly opposed by the opposition parties faced little opposition when it came up for discussion before the NA standing committee on finance on January 4 and was approved. Now it will be debated in the house.

Meanwhile, the Planning Commission has launched a major exercise to eliminate the curse of SROs under which each and every tariff line would be reviewed. It would be complete by the end of the current month.

Hopefully with support from the right quarters, this could lead to an overhaul of the tax system and also do away with the practice of discrimination, exemptions and misuse of powers by the authorities. Had the tax system been fair, small businessmen would not have been reluctant to pay taxes.

Another reason for the perpetuation of the SRO culture has been the pressure that FBR faces to meet the usually large targets of tax collection set every fiscal year and which are difficult to achieve. Quite often, FBR opts to make up the shortfall as much as possible by issuing SROs, many of which hit the weaker sections of society.

The problem arises from the fact that members of parliament are often reluctant to approve a raise in tax or impose a new tax for the fear that they may be labelled as anti-people. Besides, the subjects that are considered sensitive are also dealt with through SROs.