Of the innumerable problems facing Pakistan's economy, the mother of all problems undoubtedly has to be the fiscal deficit. If we continue to spend more than what we earn, it leads to the need for borrowing, which causes the fiscal deficit to bloat further, leading to the current stubbornly high inflation.
Pakistan's capacity to mobilise taxes is greatly under-explored. With a tax-to-GDP ratio of 8.5% along with an undeclared economy almost the size of the official economy, the potential for tax collection is astronomical. With an estimated total economy twice the size of Rs1,000 trillion official economy at a modest tax collection of 16% puts a revenue of Rs 32,000 billion in sight, compared with the paltry Rs 9,400 billion being collected. Why, then, is Pakistan unable to collect the fair share of taxes its economic activity can generate?
Notwithstanding the role of subsidies and elite capture, the single biggest obstacle for our country to raise its earnings is an entity called the "Federal Board of Revenue".
With almost 23,000 employees and officers, including a plethora of members, commissioners and collectors along with their deputies and assistants, and a sea of support staff, the FBR intertwines with tax professionals and attorneys on a daily basis to partake in an unprecedented reign of rent-seeking incomparable anywhere else in Pakistan. The bulk of the due taxes are either evaded or go into the pockets of the FBR officials, resulting in dismal tax collection. An even bigger problem is the harassment in the business community that FBR proliferates, which causes an extreme disincentive for most taxpayers to disclose their income (and, hence, create undeclared wealth that is not taxed). This culture of harassment and blatant rent-seeking tarnishes the country's image and is a major reason for insignificant domestic and foreign investment (only $1.34 billion in 2022).
While there is great appetite and recognition for bringing reforms in Pakistan's complicated and jumbled tax policy, as well as in FBR itself, most reforms have been without essence and not well-thought-out. Understandably, with continuous non-performance by the government of Pakistan, IMF also finds it necessary to intervene to control the direction of FBR.
The recent FBR restructuring proposed by the finance ministry, approved by the SIFC and the cabinet, does not address core issues of eliminating harassment and corruption
For those who are part and parcel of the Pakistan economy, those who run this economy, and those who are victims of "doing business" in this economy, it is crystal clear that any meaningful reform of FBR must address the core issues of rent-seeking and harassment. While simplifying the tax policy and integrating technology are vital elements, any serious reforms would first address the core issues on-ground that continue to choke Pakistan's economy. Further, while restructuring FBR is vital, how it is done is even more vital. A bad restructuring will only advocate IRS officers' point of view that the existing structure is doing fine.
Keeping in view that the bulk of our tax revenue is paid by a few hundred corporates, and over 90% of revenue is collected through withholding at source, there is absolutely no point in maintaining a humungous bureaucratic entity that has continued to fail in delivering. A former chairman of FBR suggested that 18,000 out of the 23,000 employees of FBR should be told to get their paychecks while staying at home and not meddle with the tax collection system.
I have been advocating for almost a decade for a sleek, professional, efficient, competent and faceless tax authority that acts like a service provider to win the confidence of its customers (the taxpayers) while having the ability to use technology to identify evasion. Dealing with all existing taxpayers should be made the responsibility of this new entity, while the current FBR should be directed to focus only on bringing in new taxpayers to the net. The new entity should be assessed on the quality-of-service delivery to the taxpayers as well as plugging the holes in the identification and accountability of tax evaders. On the other hand, FBR's performance should hinge upon the number of taxpayers it brings to the table.
To eradicate the possibility of corruption, another crucial element in the new entity should be the elimination of any chance for the taxman to connect directly with the taxpayer or vice versa.
The recent FBR restructuring proposed by the finance ministry, approved by the SIFC and the cabinet, does not address core issues of eliminating harassment and corruption. Instead, it focuses on the creation of yet another board under the finance minister to be made responsible for tax policy. The Customs, with another additional board, would be bifurcated from the IRS to focus on international trade and protecting the borders. Each of the independent entities (IRS and Customs) will then have oversight boards headed by an army of Director Generals, their deputies, assistants and staff. How this heavily bureaucratic structure will fine-tune tax policy is incomprehensible. I agree with the separation of Customs and IRS but emphasize that this needs to be done through an acceptable procedure, as below.
In reality, tax policy should be written by experts representing the tax domain and must include the service recipient, i.e. the taxpayer. The policy should be seriously brainstormed and discussed in public and the media before being forwarded to the relevant parliamentary committees for thorough debate, after which it should be moved before the parliament for final arguments and enactment as law. The finance ministry can easily handle all of this, and there is no need to create a hierarchy of boards.
Then, there are questions about the legal authority of the interim government to approve a proposal like this. This authority was actually given to the interim government by a national assembly which was legislating while half of its members were not present and while the government (at that time) was extremely unpopular. This authority is not likely to survive whenever there is a fairly representative parliament in place. Our history is laden with examples of reversals of the decisions taken by governments that are not truly representative.
The current plan to restructure FBR will only confuse the "real" reforms that ought to be made in Pakistan's taxation regime. SIFC is strongly cautioned to revisit the advice it is getting since it is not broad-based and lacks credibility & acceptability. It is a reform program of the bureaucracy by the bureaucracy for the bureaucracy.
Meanwhile, an already lost FBR is likely to hit a dead end.