Celebrating 'success'

Source: http://jang.com.pk/thenews/jul2008-weekly/nos-20-07-2008/pol1.htm#8

The FBR is trying to take credit for something it has not done


By Huzaima Bukhari and Dr Ikramul Haq

The bosses of the Federal Board of Revenue (FBR) are taking credit and getting kudos for collecting more than Rs1 trillion for the first time in the country's history. The FBR has wasted a lot of taxpayers' money on media advertisements, congratulating the public and the tax officials for this 'extraordinary achievement'. It is strange that the FBR is trying to take credit for something it has not done -- 98 percent of the tax collection was made possible through withholding agents or voluntary payments. Secondly, there is no occasion for self-praise, because the FBR is duty-bound to collect revenues -- this is for what the whole army of collectors gets paid out of the taxpayers' money.

For exceeding the revised tax collection target of Rs990 billion by Rs10-14 billion, tax officers are getting special rewards. This is a mockery of reason and logic. The apex revenue authority is making a fool of everyone. The real potential of tax is not less than Rs3 trillion, while the FBR has collected only one third of that and is posing as if wonders have been achieved. It is shameful that the indirect tax-to-gross domestic product (GDP) ratio in 2007-08 was about six percent and the direct tax-to-GDP ratio only 4.5 percent. The latter comes to even less than two percent if withholding taxes are excluded.

The tall claims of broadening the tax base in the last decade are now proving to be false. The strategy devised by top managers at the apex revenue body is faulty and isolated from the ground realities. There has hardly been any effective co-ordination between policy-makers and field formations. The issues of motivation, integrity and efficiency are still lingering on despite the FBR being only months away from the last year of Tax Reform Administration Project (TARP), launched with borrowed funds without any public debate or support of stakeholders.

The FBR chairman recently said: "Though we are happy to cross the psychological barrier of Rs1 trillion in revenue collection in 2007-08, still there is a gap of Rs400-500 billion. This gap cannot be bridged until and unless we enhance our tax-to-GDP ratio from the existing 11 percent to 15-16 percent. It is not impossible unless we have the will, commitment and tools to do it."

It is sad to note that even the big boss of the FBR is unaware of the real revenue potential of the country. Our real tax potential at the federal level is not less than Rs3 trillion. It is sheer lack of will and incompetence on the part of the FBR that we have failed to collect the potential revenues where these are actually due -- unprecedented benefits are available to the rich and foreign companies are remitting huge untaxed profits through abusive transfer-pricing transactions. For the last many years, the government has been extorting money from the people who are not supposed to pay any taxes, and granting unprecedented concessions and exemptions to the rich -- a 20-year tax exemption has been give to operators of the Gwadar port as if they will be engaged in some charitable work.

For tapping our actual potential, there is an urgent need for taxing the rich, bringing undocumented economy in the tax net and distributing the incidence of various taxes judiciously among all the segments of society. The tax loss due to one section alone, [section 111(4) of Income Tax Ordinance, 2001] granting complete immunity from probe and taxation to untaxed money fictitiously remitted through normal banking channels by paying a very nominal commission to any money exchanger, is in billions.

The cost of exemption under just one head alone -- capital gains on stock markets -- in the financial year 2006-07 was Rs112.45 billion, according to government's own admission on page 262 of the Economic Survey 2006-07. Had this exemption not been granted, the total collection for the financial year 2006-07 would have been Rs953.85 billion. For the financial year 2007-08, it could easily have been Rs1.5 trillion. This exemption continues in the financial years 2008-09 and 2009-10 with negative revenue impact of about Rs250 billion and Rs350 billion, respectively.

The people of this country are accused of not paying income tax; whereas the reality is that even a petty shopkeeper in a village (whose total income is much below the taxable limit of Rs100,000) is paying as high a tax as Rs720 per annum. On the other hand, a rich absentee landlord having agricultural income of millions of rupees does not pay a single penny as income tax.

A person making millions in speculative transactions (shares and property) is enjoying tax exemption, whereas a widow on her meager income of Rs90,000 from a bank savings account pays full and final tax of Rs9,000. Interestingly, there is no tax on business or any other income falling under normal tax regime of Rs120,000. In case of salary, the non-taxable limit for the financial year 2008-09 is Rs180,000; for women, it is Rs240,000. Why a widow, being female, is subjected to discrimination, whereas she actually deserves more tax concession?

The collection of taxes from speculative transactions, taxing income avoided by big foreign companies through transfer pricing (cost of revenue is about Rs100 billion) and withdrawal of exemptions can easily increase our tax collection to Rs3 trillion. However, this requires strong political will, which is completely lacking as those in power have vested interest in safeguarding the landed classes, the rich and the mighty. The unwillingness to tax the rich and mighty reflects in pathetic state of affairs vis-a-vis tax-to-GDP ratio from 1990-2000 to 2007-08. The tax-to-GDP ratio of direct taxes is appallingly low. It may be noted that in the official figures, huge amount of indirect taxes is shown under the head of income tax. The actual tax-to-GDP ratio of direct taxes for the financial year 2007-08, after excluding presumptive taxes, is only about 1.4 percent, whereas officially it is projected at 4.5 percent.

It is an established fact that despite resorting to all kinds of high-handedness, illogical policies and unjust withholding taxes, the FBR has failed to improve the tax-to-GDP ratio. The burden of a number of presumptive taxes levied under the income tax law (which are nothing but crude forms of indirect taxes) has been shifted from income earners to consumers and clients. These presumptive taxes have not only distorted the whole tax system, destroyed economic growth and made the consumer / client the ultimate sufferer, but these despotic, short-term, myopic and figure-oriented measures have also failed to bridge the fiscal deficit. Of the total collection of Rs1.04 trillion by the FBR in the financial year 2007-08, regressive taxes were to the tune of Rs800 billion (after making adjustment of indirect taxes collected under the name of income tax!).

The rich and mighty, who do not pay personal taxes despite enormous wealth and incomes, are the real culprits. If the government removes all exemptions and concessions, brings big absentee feudal landlords into the tax net, manages to get taxes from the influential people and succeeds in imposing general sales tax (GST) across the board (preferably with a low rate of three percent at one single point), there will be a record collection of Rs3-3.5 trillion in a year. This goal can only be achieved if the government simultaneously addresses issues related to wasteful expenses, tax evasion and rampant corruption.

(Email: ikram@huzaimaikram.com)