FBR's New Chairman And Tax Reforms

The people of Pakistan, especially the taxpayers, are convinced that for them the mere change in the top person at FBR does not matter unless the tax system is thoroughly reformed

FBR's New Chairman And Tax Reforms

"Restoring economic security to the working class will require tackling monopoly power, sweeping reforms to our tax code, labour laws, and trade and housing policies and more"—  Stephanie Kelton in The Deficit Myth 

On August 8, 2024, Rashid Mahmood, a junior (23rd CTP) officer of Pakistan Administrative Service (PAS) in grade-21 assumed the charge as the chairman of the Federal Board of Revenue (FBR)—a grade-22 post. On August 12, 2024, another notification conveyed that he "assumed the additional charge of the post of Secretary, Revenue Division….for a period of three months or till the posting of a regular incumbent, whichever is earlier".  

Rashid Mahmood's profile is not available on FRB's website even a month after taking command of one of the most important federal government organisations. On the FBR's website, his name appears only on a list containing the names of all the previous chairmen/chairpersons and includes the word "Langrial" (this represents a caste of both clans of Jatt and Rajput in Punjab) at the end of his name, whereas his official name is Rashid Mahmood, appearing in gazette notifications related to charge assumption. The temporary additional charge of Secretary Revenue Division for three months casts some doubts about his suitability and/or seniority for such a powerful post in the Ministry of Finance.   

The unceremonious exit of Malik Amjad Zubair Tiwana, forced to take early retirement, and replacement with a grade-21 PAS officer, ignoring many senior officers of FBR, as always, has attracted criticism from many quarters. As expected, it caused resentment amongst officers of the Inland Revenue Service (IRS) and Pakistan Customs Service (PCS)—for them, anybody not belonging to their respective cadres is an outsider and not acceptable!  

The people of Pakistan, especially the taxpayers, are convinced that for them the mere change in the top person at FBR does not matter unless the tax system is thoroughly reformed to help produce higher and sustainable growth and generate revenue as per the country's real potential, which at 17% of formal plus informal economy comes to around Rs32 trillion.

There is a consensus that the new captain of FBR will also not stop field formations from arbitrary orders and negative tactics to squeeze the existing taxpayers, as was done in the past by his predecessors. He has to meet the target of Rs12.913 trillion set for the current fiscal year under 37-month Extended Fund Facility (EFF) Programme of the International Monetary Fund (IMF), approved on July 12, 2014, at the staff level. It is still not included in September's timetable for IMF's Executive Board. However, Pakistan has imposed the worst (oppressive) possible taxes in the federal budget 2024-25 as one of the harsh pre-conditions for availing a new bailout from the IMF. The government set the FBR a tax target of Rs12.970 trillion in the budget.

Known for his close ties to Prime Minister Shehbaz Sharif, the new FRB chairman, immediately on assuming the charge, had to face the daunting task of collecting a formidable amount of Rs898 billion as a monthly target, reportedly "dictated" by the IMF for August 2024. With no relevant experience in tax administration and policy, Mr Langrial failed to comprehend what his predecessor did in July 2024.

The outgoing FBR chairman, Mr Tiwana, deliberately fixed a low target for July 2024 to show extraordinary performance (sic). Based on a 40% increase in overall target this year, the target for July 2024 should have not been less than Rs735 billion, but it was fixed at Rs656 billion under the tight noose of the IMF and sharp eyes of the Federal Minister for Finance and Revenue, Muhammad Aurangzeb

Historically, the FBR collects around 5.7% of its annual target in the first month of the fiscal year. Since in July 2023, FBR had collected Rs534 billion, its target for July 2024 should have been not less than Rs735 billion. Contrary to these facts/trends, the target for July 2024 was deliberately under-fixed and exceeded (sic) it by Rs3.2 billion! It was bound to increase the burden for the coming months, making it even steeper! Had Mr Tiwana collected Rs735 billion in July 2024, the target for August 2024 would have been only Rs819 billion and not Rs898 billion.

The first quarter budget for FBR, as set by the IMF, is Rs2.652 trillion. Thus it requires a further collection of (Rs1.196 trillion) in September 2024 to keep pace. Keeping in view the performance in August 2024, even after taking enormous advances, though not yet due and blocking refunds of billions, it appears near to impossible, especially when the economy as a whole is struggling to survive. According to a press release from the FBR, during the months of July and August 2024, it "collected Rs1,456 billion in net revenue and refunds of Rs132 billion (44% more than last year) were issued to the exporters to resolve their liquidity problems".

It was reported in the media that the Minister of State for Revenue Ali Pervaiz Malik, has recently "instructed the FBR to resolve the Rs138 billion in deferred refund cases from previous years, affecting both exporters and local industrialists". He further urged the FBR "to ensure that all exporters' refunds are processed through the Fully Automated Sales Tax e-Refund (FASTER) system". Contrary to the instructions of the Minister for State for Revenue, the FBR is reportedly "slowing down" the process of issuing bona fide refunds. In the meantime, in a rather disturbing move, "the federal government "suspended a commissioner and a deputy commissioner for issuing a Rs2 billion refund to Gas & Oil Pakistan Ltd (GO), a fuel pump and retail store operator". This refund was purportedly issued on the instructions of the federal finance minister.

Every new head of FBR, on assuming the charge, vows to tax the untaxed but ends up protecting the rich and mighty. He also assures payment of blocked refunds but, in the end, discourages those who issue bona fide refunds. Since 1977, tax incidence on the rich has decreased drastically whereas it has increased unbearably on the poor. The rich, especially absentee landowners sitting in assemblies, have not paid even a single penny as agricultural income tax though having substantial income. This class also includes mighty generals who have received agricultural lands as grants and awards.  

Would the new FBR chairman enforce the law by taxing the rich and mighty or, like his predecessors, just pay lip service to FBR's motto of vision, mission and value? The maxim, Nullum tributum sine lege expresses the requirement that the rule of law must be applied to the assessment and enforcement of taxes. FBR must comply with the enacted laws (e.g. it should issue refunds as promptly as it collects taxes at source) and citizens must be able to predict in advance the consequence of their transactions. In case of non-compliance with the rule of law, legal remedies must protect the individual or the corporate body concerned. There is an immediate need for enacting the Taxpayers' Bill of Rights. Faith in the system requires enforcement of the rule of law for both the tax machinery as well as the taxpayers.

The incumbent tax system imposes undue incidence on the poor and middle-class people, e.g. 18% sales tax (in fact, 35% to 60% on many finished imported/manufactured goods after levying all kinds of taxes), taking a larger portion of low-income groups compared to high-income groups. The rich and mighty enjoy tax exemptions and concessions on their colossal income/assets. They make enormous profits through rent-seeking, speculative transactions in stocks and real estate but pay nothing or little to the state. They flout tax laws with impunity, yet FBR is content with collecting just a little more from them in the capacity of "non-filers" without determination of their actual incomes.

Since the days of the so-called Tax Administration Reforms Programme (TARP) and the Pakistan Raise Revenue (PRR) Project of the World Bank, all we have had every year are growing fiscal and revenue deficits, decline in tax-to-GDP ratio and huge revenue leakages. Under the watchful eyes (sic) of the World Bank and IMF, tax concessions for the rich, and increasing burden on the poor have been the salient features of tax reforms!

In the last 40 years, tax incidence on the poor has increased manifold, whereas the absentee landowners (including mighty generals who have received lands as grants and awards) have not paid even a single penny as agricultural income tax. The crooked businessmen-turned-politicians — many of whom are beneficiaries of loan write-offs — unscrupulous traders and corrupt ruling classes continue to violate tax obligations with the result that the nation has been indebted to the extent that more loans are required only to pay interest —debt servicing is now consuming an overwhelming share our total revenues. How ridiculous that even for reforming ourselves, we need foreign loans and grants!

TARP—prepared, designed and monitored by foreign consultants—from the very beginning lacked proper remedies for our ailments—its aims and objectives were ambiguous and flawed and has taken us from bad to worse. The same will be the fate of the task assigned to McKinsey et al for digitisation. Foreign tax experts (sic) wanted us to wait for 10 years to come at par with many developing countries in achieving a desirable tax-to-GDP ratio of 15% (presently it is just 9.5%). On the contrary, many local experts have suggested some radical changes—like broadening of the tax base and reduction of the exorbitant sales tax rate, simpler and fairer tax codes — for encouraging investments and savings that could ultimately bring in more taxes. They argue that Pakistan is in dire need of long-term policies to re-prioritise its tax goals, improve tax-to-GDP ratio, attain better compliance and collections, coupled with rapid industrial and business growth.

From 2002 to 2010—during TARP (many call it (TRAP)—the FBR paid just lip service to its "mission" of broadening the tax base—the mighty generals and civil servants, politicians, traders and big absentee landlords were and still are reluctant to pay income tax according to their ability. Lack of political will to tax the rich and wastage of taxpayers' money by the rulers is the root cause for the absence of tax culture. People justify non-payment of taxes by saying why should they bear the burden for the luxuries of the corrupt rulers and inefficient government officials.  

Our crisis is public non-acceptance of rotten and oppressive tax system. In order to create trust and public confidence in the tax system and officials, we need rational policies, simple tax codes and procedures, coupled with radical restructuring of the entire tax administration, both at federal and provincial levels. Even the best system copied from abroad will not work, if the prevalent negative mindset of the tax official persists. There is, thus, an immediate need to improve both the system and the human fabric that controls it.

FBR and all existing provincial tax apparatuses are destroying business growth. It is high time they should stop harassing the compliant taxpayers and protecting the cheat. Tax policies should encourage investment, especially for all those who generate more goods and services, leading to greater employment opportunities. A higher economic growth will automatically increase taxes. There is a need to dismantle the existing oppressive tax system and reconstruct it to restore public confidence in the state. The solution is not in changing the heads of the FBR, but in a new national tax authority (NTA), comprising professionals and not bureaucrats.

The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)