IT IS a pity that tax reforms agenda in Pakistan, carried out at the dictates of the IMF, is causing extreme hardships to the people and its benefits, if any, are meant only for the rich and the mighty.
The IMF did not ask the rulers why they withdrew progressive tax like Wealth Tax [having potential of Rs 10-15 billion] and imposed 15 per cent GST on poor patients which would generate hardly Rs300-400 million after the exemption granted to life-saving drugs.
Undoubtedly, Pakistan badly needs tax reforms, but the CBR should first put its own house in order and new obligations should be imposed on taxpayers after mutual consultations. There is an urgent need to promulgate a taxpayers’ bill of rights, which should be the starting point of tax reforms.
The tax policies so far have failed to reduce the fiscal deficit. But if we were able to formulate a tax policy and implement it through consensus, there is every possibility that we may also get rid of the IMF. Moreover, the military regime has no mandate to carry out fundamental changes in tax laws and they should tackle such matters after October 2002 elections.
Our potential is much higher than the set targets, which can never be achieved with the present tax laws and incompetent, inefficient and corrupt machinery.
On the other-hand, taxpayers are the most humiliated beings in Pakistan, although, it is also a fact that a very few people pay their taxes honestly, but they too have no protection of life and property.
Others say that a government, which is incapable of protecting life and property of its citizens, has no right to impose or collect taxes.
The main emphasis of the tax reforms agenda should be on making the tax system equitable, growth-oriented and business-friendly and the CBR must, evolve an integrated system and should not indulge in piecemeal efforts here and there.
The most urgent task is to analyse the causes for inefficiency and corruption rampant in the tax departments.
A meaningful system that caters for a real life situations, cannot be “simple”. Even the USA has complex tax codes. We need “simplicity” yes, but that should be a state of mind wherein bureaucrats need to give up their attitude of Gora Sahibs.
The Bill of rights: The proposed bill of rights, apart from providing protection to taxpayers, should guarantee unfettered right of appeal through an independent appellate system. Audit methodology, both in terms of selection of cases and as the mode of conducting assessments, should be transparent and free of all kinds of hassles.
Economic policy: A new economic policy based on principles of inflow of foreign capital, particularly in the form of investments, de-regulated interest and exchange rates, higher economic growth, disinvestments of public sector equity, and reduction of fiscal deficit through increased revenues and decrease in public expenditure should be evolved.
The reforms strategy should focus on (i) resource management through appropriate re-designing of financial management systems, elimination of unproductive or less productive activities, and motivation of employees to be engendered through training and interaction with superiors.
A close look at the statistics would reveal that 40 to 60 per cent taxpayer population has not been filing returns of income, year after year. The reasons for such behaviour could range from lack of trust and laxity, low probability of being detected and penalised,to wasteful use of public revenues. Under the circumstances there is also a need to introduce tax intelligence system to tap untaxed resources. Use of penal measures: Except in case of recalcitrant taxpayers, payment of additional tax should be regarded as an adequate punishment, indiscriminate issue of penalty notices merely leads to harassment and corruption. Clear and categorical instructions should be issued setting forth conditions under which penalty and prosecution must necessarily be initiated.
Concerted efforts must be made to pursue the non-filers and tax evaders. This can be achieved by: (a) re-deploying the existing work force, and (b) augmenting the strength in certain cadres. Regular taxpayers need to be treated with respect and dignity.
Conclusions: Pakistan for the last many years has been grappling with the problem of raising revenue to survive as a viable economic entity. The ever-increasing fiscal deficit, coupled with mounting debt servicing, is posing a serious threat to the country’s economic revival while the economic managers have failed miserably to increase revenue.
Pakistan also needs to learn from the experience of many developing countries of the world that managed to raise revenue by improving tax administration. In 1992, Richard M. Bird and Milka Casanegra de Jantscher presented a marvellous book Improving Tax Administrations in Developing Countries (interestingly this was IMF publication based on a conference held in Spain in 1991).
Since 1992 there has been a growing awareness that more efforts are required to improve existing administration if a developing country is keen to explore new sources of revenue. The old saying “tax policy is only as good as its administration” is outdated.
Today’s consensus is that “tax administration is tax policy” [Stanley S. Surrey, Tax administration in underdeveloped countries, University of Miami Law Review, xii (winter 1958) at 158-88. Stanley S. Surrey at that time was the professor of
law and international programme in taxation, Harvard Law School].
Anyone who has worked in a tax administration of a developing country (like me in Pakistan from 1984 to 1995) can vouch for that. Many well-intentioned laws have been laid to rest by inefficient (which also include indifferent, corrupt and incompetent) tax administrations. Pakistan is a classical example of it.