“The FBR is giving me a hard time, but I will persist, and when it becomes unbearable, I know where to go.” I am blamed for destroying the FBR, a symbol of national pride, but my aspirations are to increase the dismal FBR tax-to-GDP ratio from 8.5% to 20% in two years through digitisation, ending exemptions, and improving governance.”—Dr. Shamshad Akhtar, caretaker finance minister, address to a seminar organised by the National University of Science and Technology (NUST) on January 18, 2024
The caretaker finance minister, Dr. Shamshad Akhtar, is extremely angry with the high command and officers of the apex revenue authority at the federal level, Federal Board of Revenue (FBR). She has finally threatened them of going to her High Command, the makers of the caretakers, if their resistance to restructuring plan, approved by the Special Investment Facilitation Council (SIFC) on January 3, 2024, continues. It is indeed a bizarre situation where the command of those who matter in the land for implementation within one month is facing open defiance!
The details of the proposed restructuring plan of FBR are already available in various media reports and articles. This is for the first time that Dr. Shamshad has made “public disclosure regarding the FBR’s restructuring.” According to a news report, she “urged boldness and dismissed criticism from vested interests, underscoring that the public supports her endeavours.” She further reported to have said, “You receive abuses day and night for touching the FBR, but I will continue the struggle to reform it until the last day in my office.” Dr. Shamshad reportedly challenged “those who claimed she lacked the mandate to restructure the FBR, urging them to step forward and take charge.”
It needs to be recalled that International Monetary Fund (IMF) linked its first year Pakistan’s Poverty Reduction and Growth Facility (PRGF) Programme with the Structural Performance Criteria (SPC) including complete restructuring of then Central Board of Revenue (CBR) by the end of February 2002.
It is time to remind Dr. Shamshad about the sordid story of FRB reforms in Pakistan as highlighted in a book published by Pakistan Institute of Development Economics (PIDE) and an earlier article in these columns.
It needs to be recalled that International Monetary Fund (IMF) linked its first year Pakistan’s Poverty Reduction and Growth Facility (PRGF) Programme with the Structural Performance Criteria (SPC) including complete restructuring of then Central Board of Revenue (CBR) by the end of February 2002. It also demanded application of standard General Sales Tax (GST) penalty regime to retailers through March 2002, implementation of universal self-assessment scheme, establishment of large taxpayers’ unit by July 2002.
The conditionalities of IMF amongst others included new organizational set-up for then CBR headquarters per approved plan till February 28, 2002. As expected, we missed all the deadlines agreed! Hence, no harm would cause if deadline of SIFC is also not met!
At that time, toeing the IMF commands, then finance minister Shaukat Aziz announced in Karachi on December 29, 2001, while addressing the tax collectors, “massive tax reforms are on cards.” He specified outline “heavy investment in Information Technology (IT) to facilitate collectors and massive surgery in tax system through human resource development and use of computers, which would increase the efficiency and image of the department.” He promised “a big change of culture” in the apex revenue authority in just 12 months’ time. Now our caretaker finance minister is making the similar promises! Anybody who does not know the fundamentals of thana [police] culture would never be able to restructure FBR, notwithstanding possessing complete sincerity and commitment!
On September 13, 2001, the then military regime ultimately managed to promulgate a new income tax law, prepared by an Australian expert, on the command of IMF as they refused to release the last tranche of PRGF. In the name of simplification of tax laws, the nation was burdened with a number of more cumbersome tax terms and new enhanced obligations. This was the sordid story of first tax reform agenda, the second round of which also proved equally disastrous.
At the end of Tax Administration Reform Project (TARP, sarcastically called TRAP) from 2001-2006, the nation had more well-equipped tax dacoits playing havoc with their peace and tranquility. This entire process, carried out under the umbrella of World Bank and IMF and other donors, was to ensure that our economic subjugation should ultimately make us modern-day slaves.
In Pakistan, unelected caretakers and their makers, who lack the right of representation, want to do it in a slip shot manner, without any public debate and democratic process, ignoring what devastating effects it can have for a large majority of the people.
The World Bank extended us US$125.9 million grant, including IDA credit of US$102.9 million, and a UK DFID grant of US$23 million for the TARP. The objective of the TARP was to improve the integrity and fairness of tax administration by improving organizational efficiency and effectiveness of the revenue administration. TARP was aimed at promoting compliance through strengthened audit and enforcement capacity and transparent as well as high quality tax services. The project was also to focus on improving trade facilitation through modern and internationally acceptable customs procedure’.
It was a national shame that for improving the integrity and fairness of tax administration we needed to borrow heavily from the World Bank and other donors. Although a part of revenue collection by the FBR could have been earmarked on annual basis for this purpose, but the government was bent upon borrowing funds. It is obvious that the actual aim behind this project was to make us subservient to the agenda of foreign donors.
In the name of tax reforms project, certain forces wanted to gain control over our revenues and tax machinery readily obliged them just for a few tours and chances to meet the old colonial masters. This was like the re-emergence of a New East India Company’s operations during the British raj in the Subcontinent. On the one hand, our Prime Minister, who also retained the portfolio of Ministry of Finance, was claiming to free this nation from the clutches of IMF, and on the other was negotiating fresh loans and grants even for such projects like tax reforms!
The grand failure of all tax reform programs and projects is now well-documented in The Role of Taxation in Pakistan’s Revival, edited by Jorge Martinez-Vazquez & Musharraf Rasool Cyan, and published by Oxford University Press.
All those interested in FBR restructuring and revamping of tax system in Pakistan, if not inclined to consider the work of local experts and PIDE, may study the details of ‘The Royal Commission on Taxation in Canada (the Carter Commission)’ as well as ‘Musgrave Commission in Columbia.’ These two are considered to have done the finest work up in applied public finance because of their comprehensive analysis, rational approach and recommendations that could not have been possible, if a short time frame had been prescribed. Relatively successful reforms in Indonesia, Jamaica, Malawi, etc., were carried out in three to four years’ time and these involved substantial preparation and transition arrangements including extensive consultations with all the parties affected by tax reform.
One wonders how in Pakistan, this task can be achieved in just one month as desired by SIFC and insisted upon by Dr. Shamshad? Are they living in a fool's paradise? What magic wand they possess to reform everything in one month? The tax reform programs and strategy involve continuity in key decision-makers and major educational campaigns concurrent with the introduction of tax reform proposals to familiarise taxpayers with the new requirements. This task needs at least 3 to 5 years’ time.
In Pakistan, unelected caretakers and their makers, who lack the right of representation, want to do it in a slip shot manner, without any public debate and democratic process, ignoring what devastating effects it can have for a large majority of the people. The problem of Pakistan is that not only its tax system is inequitable, there are dozens of tax agencies to make the life of citizens miserable. The burden of taxes is less on the rich and more on the poor and in return, they get nothing. In the face of this reality, the caretaker government is resorting to further fragmentation within FBR that means more burden on taxpayers’ pocket.
In the absence of a well-designed tax policy, the agenda of FBR restructuring will remain faulty as also opposed by the Standing Committee of Finance of Senate. The caretaker government and elected one, hopefully comes into power after general elections on February 8, 2024, should not make any legislative and administrative changes till the time a transparent tax policy is announced and consensus of all those who are affected by such changes is secured through a democratic process.
The caretakers and their makers have no mandate under the Constitution of Islamic Republic of Pakistan to carry out fundamental structural changes in FBR and changes in tax laws and they must leave this process for the civilian regime, hopefully to be established after February 8, 2024 elections.
The problem of Pakistan is that not only its tax system is inequitable, there are dozens of tax agencies to make the life of citizens miserable. The burden of taxes is less on the rich and more on the poor and in return, they get nothing.
Over the period, our tax system has become rotten, oppressive, unjust and target-oriented. There is a dire need to discuss the philosophical framework and principles that should be the main concern of our tax policy and not mere achieving of targets set out unreasonably on the dictates of foreign donors. Our potential is much higher than these targets, which can never be achieved with the present tax laws and incompetent, ill-equipped and inefficient tax machinery. We should get ourselves free from the reform game of the donors and their imposed by their nominees.
The tax policies implemented by us so far on the dictates of IMF and others lenders have failed to reduce the monstrous fiscal deficit, rather further widened it due to debt servicing alone now, and on the contrary have destroyed our industry and businesses. We need to indigenously formulate and manage a rational tax policy and implement it through consensus of all stakeholders and not coercive measures. There is every possibility to get rid of IMF in a short span of time. However, if we will following their prescriptions, we will neither realise fixed targets, nor achieve the cherished goal of self-reliance through resource mobilisation.
Our tax revenue potential is not less than Rs. 18 trillion at the national level - federal and provincial - provided the existing tax base is made wider and equitable with lower rates, tax machinery is completely overhauled and exemptions and concessions available to the privileged sections of society are withdrawn. To achieve these goals, we do not need any new loan from the World Bank, Asian Development Bank or other multilateral aid agencies for tax reforms. As we take money from them, we are bound to follow their conditions, as beggars cannot be choosers. Many local experts can do the reform work either voluntarily or at much less cost than what we intend to waste on foreign consultants at the commands of IMF and World Bank for yet another tax reform agenda—this time imposed through SIFC.