The pace of tax reforms

By Nasir Jamal

http://www.dawn.com/2007/04/23/ebr1.htm

Fearing delay in the release of loan tranche of $100 million from the Asian Development Bank, the Punjab government has finally ramped up the pace of reforms meant to restructure the existing inefficient, archaic and cumbersome tax administration in the province.Though the pace of change in the tax collecting agencies still remains very slow, it nevertheless has shown signs of picking up in the recent months, say finance department officials involved in the restructuring and reorganisation of the tax collection system.The situation relating to tax administration reforms, they say, began changing, and the tax collecting agencies and the bureaucrats managing them woke up to the “urgency” of reorganisation of tax collection system after the provincial chief minister and the chief secretary intervened to prevent further delay in the release of the Asian Development Bank tranche.The Punjab government has initiated the tax reforms with the assistance from the Asian Development Bank under its Punjab Resource Management Programme (PRMP), launched back in 2003 to undertake wide-ranging governance and financial reforms to improve public service delivery and poverty alleviation.The Asian Development Bank has provided $500 million soft term loan as budgetary support for the reforms programme. Impressed with its performance, the Asian Development Bank is said by the officials to have offered a similar support upto to $1 billion or so to ensure continuation of the PRMP for undertaking second generation reforms.“The Asian Development Bank has given us a blank cheque. But the Punjab government is yet to determine the size of loan it requires. It will be finalised in the next few days,” the PRMP officials say. It means the multilateral lenders are quite interested in seeing the reforms process in the largest province continue till the attainment of desired results, say the officials.The tax administration reforms programme was initiated with the ADB assistance , which promised to advance $100 million for undertaking reorganisation of tax collection arrangement. The work on tax reforms began with a report prepared by a consultant hired to look for options for the proposed taxation reform..The consultants studied and documented the existing tax administration structure, which was later shared with the relevant departments of the Punjab government, including finance, excise & taxation and Board of Revenue. Gaps were identified in the existing tax administration of the Punjab government vis-à-vis international best practices.Tax revenues of the provincial government consist of taxes collected and levied on assets and properties located in the province, such as stamp duty, mutation fee, urban immovable property tax and motor vehicle tax. Other sources include taxes levied on income generated in the province, other than those collected by the federal government such as agriculture income tax. Furthermore, the provinces are also allowed to levy provincial excises, such as excise on liquor, hotels etc.Tax collection under the present system is distributed between the Board of Revenue and the excise & taxation department. The existing distribution of tax administration to each of the respective department depends on historical practices ..“One of the conceivable basis of allocation of administrative function is that taxes related to land holding or ownership such as stamp duty, mutation fee and Agriculture Income Tax are administered by the Board of Revenue. It is so because the Board of Revenue maintains the base records of the land ownership and its use. In principle, all other taxes and duties fall within the ambit of the Excise and Taxation Department,” the report says.Hence, in its report, the consultant had proposed creation of a single, central revenue collecting agency for the province as a long-term tax reform strategy on the pattern of the Central Board of Revenue by merging the excise & taxation department and the Board of Revenue. The proposed tax collecting agency is supposed to work as part of the provincial finance department to address the issue of distribution of responsibility and administration. The proposed single revenue collecting agency was to be created by 2009, and was to be preceded by reorganisation of the excise & taxation department and the provincial Board of Revenue.However, officials say, the establishment of the proposed single tax collecting agency would be delayed beyond the stipulated time by at least one year to 2010 because of a very slow movement so far on the restructuring of excise & taxation department and the reorganisation of taxes like agriculture tax collected by the Board of Revenue.By the time the excise & taxation department is merged with the Board of Revenue to create a single tax collecting agency, the consultant had proposed reorganisation of the two tax collecting agencies on functional lines --- that separation of functions of assessment, collection, audit and recovery. The restructuring of these agencies is supposed to also streamline data and tax collection procedures within these organisations so that consolidation could be undertaken at a later stage.“The consultant had proposed that till such time that the merger of the revenue collecting functions of the Board of Revenue and excise & taxation takes place, the organisational structure, human resource capabilities and procedures for inductions, database and collection processes within each department should be gradually improved by reorganising them on functional distribution of work. This improvement should include streamlining the data and tax collection procedures within these organisations so that at a secondary stage consolidation of the two entities could be undertaken seamlessly,” the officials say. In addition it has also proposed to revamp certain provincial taxes, with a huge potential for revenue generation, like the agriculture income tax. It has been proposed that the agriculture tax must been collected on the income of farmers, and the existing land mode of computing this tax should be scrapped. The revamping of this particular tax is expected to generate substantial additional revenue for the province.The purpose undertaking the tax administration reforms, according to the officials, has been to improve efficiency of tax collectors and facilitate taxpayers by reducing discretion, minimise interaction between taxpayers and tax collectors and encourage self assessment with effective audit. Therefore, the reforms focus on improving “business processes” rather than laws governing the taxes.Another major objective of initiating reforms in the tax administration area, the officials say, has been to plug leakages because of rampant corruption owing to concentration of all functions in one person and inefficiencies of the present system. This, they hope, will strengthen collection and improve province’s own tax revenue, and consequently reduce its dependence on federal transfers, which form a very big part of its revenue.Nevertheless, as is insisted by a former provincial finance secretary, there is little chance for the province to significantly improve its tax revenue to the level of actually reducing its reliance on the federal transfers. Unless the provinces get the sales tax on services, a major potential source of revenue for them, they will continue to look towards the federal government for meeting their revenue needs, he says.