Inefficiencies failing the Tax Apparatus in Pakistan

The following write-up was published in the Oct-Dec 2017 Quarterly Edition of “Policy Insights”, the largest accountancy body ACCA’s regional publication covering MENASA

Link: ACCA’s Policy Insights’ Published Link

Link: Main Page

Inefficiencies failing the Tax Apparatus in Pakistan

(by failing the genuine Taxpayers)

Federal Board of Revenue (FBR) is a semi-autonomous federal institution that is responsible for auditing, enforcing and collecting revenue for the government of Pakistan. It’s one of the most critical components of the revenue collection apparatus in Pakistan. As such it is supposed to be the pinnacle of professionalism, discipline and support to tax payers.

During the last budgetary season, Chairman FBR invited this writer, while representing ACCA (UK) and LTBA at a historic pre-budget seminar that was organized with the collaboration of ICAP, ICMAP, ACCA, LTBA, PTBA, LCCI and several other Tax Bars, to send him proposals about the issues in and reforms for FBR. Below is a brief overview from that perspective.

Currently there are approximately 1,210,000 active income tax return filers as per the FBR directory issued in August 2017, out of a population of roughly 218 million in Pakistan. This is a meager 0.55% of the total population. A huge proportion of these filers, file NIL returns is another topic. On the other hand every Pakistani is paying indirect taxes on whatever they consume. The evident lack of trust of the taxpayers on the system and the resulting regressive taxation policies are a big hindrance in the attainment of an optimal taxation system. We’ve often discussed the problems with the taxation policies in Pakistan and proposed practical solutions. Frankly speaking there is only so much FBR can do in this regard since the policies are often driven by the IMF, World Bank and/or the political interests in the country. However the areas where FBR can and should play a very effective role are not in the best of states either.

Considering the tiny tax base it was only natural for FBR to attempt to broaden it. However the way they went about it, has been unprofessional to say the least while messing up a good endeavor big time. Notices claiming no existing tax registration based on “economic activities”, usually citing vehicle purchases were sent out to masses. Sounds positive? Hang on, what if it’s shared with you that many of those receiving these notices were not only tax payers already registered but paying millions in Income Taxes annually? This exemplifies a total lack of coordination within the systems and functions of FBR, which is unfortunately becoming a norm of late. Missing out on the records already held by FBR simply reinforces the misconceptions amongst the tax payers that FBR is out to bother already registered tax payers instead of acting as a facilitator and initiating genuine drives to catch tax evaders.

What’s tragic is that while on one hand such steps are undertaken citing the need to broaden the tax base but on the other hand proposals with huge potential to broaden the tax base such as bringing agricultural income and other exempt sections within the tax net as well as converting the CNIC into National Tax Numbers (NTN) and Sales Tax Registration Numbers (STRN) for broadening the tax base have been falling on deaf ears for almost a decade now.

To underline the vast difference in the workings of FBR and similar bodies in developed countries, a personal experience is hereby shared with the readers to illustrate the significant gulf between the international standards and the ones practiced in our beloved country. While working in UK, I needed to change my tax code. For ease of understanding you can say it was like claiming a tax refund and I was not even a British national. It took me one phone call to UK’s HMRC (Her Majesty’s Revenue and Customs) during my office lunch hour to get it done by the end of the lunch. Yes, just in less than an hour. Now compare it to the experience of genuine tax-payers in Pakistan who are ridiculed and abused for even minor genuine tax affairs. Presumptive and advance taxes are collected but when it is time to issue refunds in line with the law, actual due refunds are held for months and even years despite completion of all legalities and verification. What is worst is that in most cases the FBR officials verbally accept the cases as genuine but claim that due to the pressure to meet revenue collection targets they are unable to follow the law and deliver the tax payer their due right.

The problem manifests from the nepotism and non-professional attitudes of some officers who treat tax-payers with utmost contempt instead of the dignity they deserve. Un-realistic targets setup by higher-ups then further aggravates the matters with coercive, non coordinated and even illegal measures used by certain sections within FBR. The widespread corruption within the department further worsens the matters.

It’d be reasonable to point out that although PRAL (Pakistan Revenue Automation (Pvt) Ltd) does mess up things at times, many of its’ positive endeavors were blocked for fears of eradicating corruption using different pretexts by certain sections of FBR. For example, PRAL once finalized a completely automated system of issuing refunds to tax payers with even an online payment instrument. Naturally there was a huge hue and cry. The project was dumped and the corrupt manual practices continue to date.

Now as if all this was not enough, even the laws governing the whole taxation system are made mockery of within FBR by several officers undermining the good work and efforts undertaken by their more professional colleagues. Just ask any genuine tax payer or tax practitioner about the treatment meted out to them by most FBR officials and you’d be shocked. Due to limited space, this topic will have to be continued in future write-ups.

As for now, perhaps the policy makers and senior FBR officials should consider this dire situation seriously to rectify all the serious problems within FBR. If they fail to do so, the next time they complain about low proportion of tax payers in Pakistan as compared to UK or other developed countries, they should realize that they only have themselves to blame. 

About author:

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading tax expert, experienced fellow Chartered Certified Accountant CFA Charterholder, and anti-money laundering specialist with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

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ACCA Pakistan “Working Group on Taxation”

IMG-20160516-WA0046.jpg

Assalam O Alikum (Peace be on you),

The above is a picture from one of the events launching ACCA’s last pre-budget proposals. We’re planning for a revamp of the ACCA taxation committee and opening up to have some more competent professionals join us with their valuable contributions for the profession, country and their Alma-mater.

Below is the snapshot of a recent email from ACCA to members across Pakistan. Please feel free to share this in your circle and get in touch if you’re the right person.

Dear ACCA Members
ACCA Pakistan MNP has decided to setup a working group under the Taxation Subcommittee. The objective of this working group will be to interact with the Federal Board of Revenue initially and expand its remit to the Provincial Revenue Authorities under the leadership of Omer Zaheer Meer, FCCA, Head of Taxation Sub Committee, ACCA Pakistan and offer the following:

  • Provide regular feedback and suggestions on circulars/policy matters pertaining to taxation
  • Prepare budget proposals (initially federal and later on expand them to the provincial proposals too) and forward them to Federal and Provincial Ministries of Finance.
  • The budget proposals should be prepared in such a way that they present a holistic as well as sectoral suggestions for Pakistan’s Annual Budget
  • Discuss, deliberate and critically evaluate issues pertaining to taxation and present the critical evaluation to Federal and Provincial
  • Profile the ACCA Pakistan Members Network Panel and the subcommittee to the taxation regulators in Pakistan

This working group will consist of 3-5 members working in the taxation sector in strategic positions with considerable experience of the sector. Members with a diverse view point on taxation of different business sectors are encouraged to share their CVs and a personal statement describing their claim to merit for these position with us.

Those members who are keen to join this working group should send us their CV and personal statement by replying to this email. We will look forward to your responses by 24 February 2017.
Haroon A Jan
Regional Head of Member Affairs – MENASA
ACCA Pakistan
61-C  Main Gulberg  Lahore Pakistan

Kind Regards,

Omer Zaheer Meer,

Managing Partner,

Millennium Law & Corporate Company

Announcement of Exceptional Public Value Award by ACCA

Dear Readers,

Peace be on you!

It’s with extreme pleasure that I announce that the prestigious Exceptional Public Value Award is to be awarded to myself by Ms. Helen Brand, OBE, CEO ACCA (the largest accountancy body globally). I’ll share the details with you after receiving the award, Insha Allah.

I’m honored by this privilege and grateful to ACCA for the recognition of my:

“contributions in the field of Budget and Taxation including but not limited to

  • the drafting of Anti-Graft Legislation focused on Undisclosed Foreign Income & Assets which was later adopted by the Treasury,
  • work done on the Regional Research Study on Indirect Taxation across South Asia and UAE,
  • MOU’s with Tax Bars,
  • Collaborations with Chambers of Commerce and Tax Bars,
  • Pre & Post Budget proposals and seminars,
  • continued member education events particularly on Taxation and
  • opportunities created through R&I sessions with key employers.”

Last but not the least, I’m thankful to you all for your support and prayers particularly my parents, siblings, mentors, colleagues and friends.

acca-exceptional-public-value-award

Regards,

Omer Zaheer Meer

Formal Launch of My Youtube Channel

Dear Readers and Friends,

Assalam O Alikum! (Peace be on you),

The constant suggestion by many of you to launch a formal Youtube channel covering my key public and/or professional engagements with a dimension of educating and enlightening has been turned into a reality.

It is with pleasure that I announce on this auspicious day of Friday that my team has successfully launched the same. The channel can be accessed at:

There are already some very interesting videos covering some of the key current issues and opportunities such as Immovable Property Taxation Issues, CPEC, Budget Proposals, Finance Act, e.t.c.

We aim to constantly update our channel with valuable knowledge sharing videos. Your feedback and appreciation would be the fuel to keep us going in this effort. I hope you find this useful and wish you all the best in your lives and careers.

Take Care,

Omer

Inaugural session of Think Ahead with ACCA on CPEC – ACCA MNP Elections 2016-18

Salam,

Below is a picture from and video of the historic inaugural session of Think Ahead with ACCA (a TED Talk inspired program) on CPEC with me, resulting in ACCA becoming the pioneer accountancy body to launch such a program.

Mr. Hammad Azim (Head of Marketing, ACCA Pak) hosted the program. It was a phenomenal success generating over 27,000 views in just 2-3 days with extremely positive feed-backs. The technical content was highly appreciated and worked towards capacity building. The focus of this initiative was on expanding the footprint of and creating opportunities for ACCA fraternity.

CPEC

It is my vision and aim to build upon such historic successes for the betterment and professional development of ACCA fraternity.

This can only be possible with your vote and kind support in the ongoing MNP elections. For me, MNP is a platform to increase my positive contributions for ACCA fraternity, the profession and thereby our beloved Pakistan.

Please visit:           My Professional Profile, Achievements for ACCA & Manifesto  to consider me worthy of your valuable vote & kind support.

Thanks in anticipation.

Kind Regards,

Omer Zaheer Meer (ACCA MNP Candidate Sr. No: 23)

omerzaheermeer@hotmail.co.uk

 

PIA: Striving for past Glory – Blue Chip Oct 2015 Edition

The following is the original draft of the article published in the renowned “Blue Chip” journal as an exclusive Op-Ed on Aviation in its October 2015 Edition

Online Version Link (Blue Chip)

PIA: Striving for past Glory

Prof Dp

By: Omer Zaheer Meer

Preamble:

It was the one of the top airlines of the world. It was also the first airline throughout Asia to operate a Boeing 737 as well as the first Asian airline to induct a jet plane in an era still stranger to them. Development, expansion and growth were not only the key goals of management but the vision driving forward a young airline of a new country on a global stage.

Yes, we’re talking about our very own Pakistan International Airline (PIA). Founded a year before Pakistan’s birth in 1946 on the direct orders of Quaid-e-Azam Muhammad Ali Jinnah to a leading industrialist M.A. Ispahani. Quaid’s strategic vision and foresight had him realize that with the formation of the two wings of Pakistan, separated by 1100 miles with enemy territory in between, a swift and efficient mode of air-transport was critical for the upcoming nation. The airline formed was named Orient Airways Ltd and was merged in the national flag-carrier PIA after its’ creation in 1955. Orient Airways has not only established a fleet of thirteen (13) aircrafts for air-transportation but also built a crucial setup of overhaul and maintenance facilities, trained pilots, engineers and technicians,. All this proved to be a great asset for PIA during its infancy phase. However the glory PIA achieved from such humble beginnings were hard to envision at that time.

Past Glory:

Under the likes of Air Commodore Nur Khan and Air Vice Marshal, Asghar Khan PIA not only grew regionally but implanting its’ signatures on a global level. Opening up of new routes, taking bold yet successful initiatives and delivering a top-class customer experience turned PIA into a truly great service to fly with. It was a success story of a newly born nation achieving many firsts, creating historic records (some of which are still unbroken to this date) and helping other countries build their national carriers. Some proud achievements from those golden years are as below:

  • In 1962 PIA set the record for the fastest flight between London and Karachi by completing the flight in just 6 hours, 43 minutes, 51 seconds, it is a record which still remains unbeaten to this day even after 53 years.
  • On 29th April, 1964 PIA became the first airline from a non-communist country to fly into the People’s Republic of China. PIA’s Boeing 720B flew from Karachi to Shanghai via Canton.
  • In 1960’s PIA continued to expand its fleet further with the addition of Boeings, Fokker and other top airplanes.
  • During both the 1965 and 1971 Indo-Pak wars, PIA played a major role in providing logistical support to the Armed Forces by operating special flights airlifting soldiers and ammunition. With these contributions, the prediction of Quaid e Azam came true in that the Pakistan Air-force (and defense) needed the support of a civil airline in special circumstances, and this was evident during these wars.
  • Such was the charisma and lead of a confident national carrier at this time that PIA hired the renowned French designer, Pierre Cardin to design new air-hostesses’ uniform which was another first and trend-setter in the aviation industry, immediately imprinting PIA’s brand as one of the aviation leaders on world stage.
  • PIA became a household name in Pakistan in the sixties.
  • During 1970’s PIA reached a level where it started providing technical as well as administrative assistance and/or leased aircrafts to foreign airlines including Somali Airlines, Philippine Airlines, Air Malta and Yemenia.
  • Through one of its’ subsidiary, PIA also started providing hotel management services in United Arab Emirates towards the end of the 1970’s.
  • During the 1980’s PIA continued its’ journey towards excellence and helped establish Emirates’ Airline by leasing two of its airplanes, Airbus A300 and Boeing 737 (737-300), as well as by providing technical and administrative assistance to the carrier.

It was during the 1990’s when private airlines were allowed to operate within Pakistan that PIA faced domestic competitive pressures. However with bold and creative measures including “air safaris”, adding new destinations, starting non-stop flights to key destinations, not only did PIA successfully faced off the competition but continued to register profits after a slump. However despite some achievements like being the first Asian airline to touchdown in Oslo, Norway, the second half of the 1990’s saw PIA nose-diving.

Intriguing Queries:

This all should lead us to questions worth pondering such as:

  • Where does PIA stand now?
  • What exactly did go wrong?
  • How did a national carrier that did so brilliantly despite strong odds fell so low when the going got easy compared to the challenges of its’ early days?
  • What’s being done to revive the ailing flag-carrier that once stood for national pride and identity?
  • What, if anything can be done to reverse its’ fortunes and itself to its’ past glory?

The Present:

At present, PIA is owned by the Government of Pakistan which holds 87% while private shareholders already own 13% of the national flag-carrier. The Pakistan Muslim League–Nawaz government that took over in May, 2013, created an Aviation Division to look after the affairs of PIA, the Civil Aviation Association and the Airport Security Force, all under the defence ministry until then.

As for PIA’s own corporate management, it entails a Chairman, Managing Director (MD) and a Board of Directors. The Board includes nine independent members amongst its ranks to ensure independence and has several sub-committees including an Audit Committee, Brand and Advertising Committee, Finance Committee, and Human Resource Committee. The MD leads the executive management of staff who run the airline. As you must already be aware, PIA’s headquarters are located at Karachi Airport with smaller offices located in several cities across Pakistan.

Despite all odds, PIA is still the largest airline of the country with a fleet comprising of 35 aircrafts some of which are not serviceable. The fleet includes thirteen (13) Airbus 320s and five (5) ATRs leased over the past year. Moreover, four (4) additional A320s and two (2) Boeing 777s are expected to join later this year.

Despite improvements over the past year, the service standards deterioration over the years with a reputation of late flights, unfriendly airhostess and rude support staff topped up with undesirable food has built a negative impression of PIA over the past decade

Root Cause(s) of the downfall:

The political hiring and nepotism during the 90’s brought the airline down from the high standards it had placed itself on. The interference reached a level where currently, despite some positive steps recently, PIA has the highest employees to aircraft ratio in the world of 690 compared to a global average of approximately 150 employees per aircraft. This should lay bare the extent of the problem. Moreover most of these hirings in the past had nothing to do with merit and as such caused unnecessary burden on the ailing airline. This all was happening against the backdrop of increasing competition along-with end of PIA’s monopoly over local market due to the Government’s open skies policy and allowing of private airliners.

The Impact:

In addition to the financial pressures, these unnecessary hirings against merit resulted in a serious slump in the service standards. Food became stale, cabin crew unpleasant and support staff unhelpful. To make matters worse a culture of being late was accepted as a norm which is perhaps the worst that can be done in air travel which often is time-constrained anyway.

Unionism went on rise within PIA with powerful unions of pilots as well as other workers. Incidents of smuggling rose as a result of the pressures from these unions placing favored crew on international flights, hiring based on fake degrees rose, the lack of competencies and slackness resulted in maintenance standards falling resulting in fines and bans on PIA flights intro certain developed countries, employees started side businesses as contractors and/or suppliers with cover providing sub-standard items to the national carrier. Nepotism and strong union culture along with a focus on corruption resulted in the practices going unpunished.

The result was a not so surprising down-fall in business and a tarnished reputation resulting in massive losses that seemed to continue accumulating with an upward trend for years on the trot.

Remedial actions undertaken for revival:

While it is very easy and a national trend to criticize public institutions, it takes vision and courage to see deep and state the truth perhaps even against the widely held false beliefs. That is precisely what we’ll be doing in this section of this write-up.

Over the past one and a half year, the PIA management has taken various steps to address the problems plaguing it with the aims of upgrading service standards and boosting employee morale.

The most critical issue of unnecessary non-competent staff and corruption has been addressed. Earlier this year, in an unprecedented move, three hundred and eight (308) fake degree holder employees were terminated from service after a move of credential verification of around sixteen thousands (16,000) employees was initiated in line with the apex courts’ decision.

Similarly to address quality issues and corruption allegations all aircrafts’ parts procurements is now been made from original equipment manufacturers, closing the doors for middle men and agents.

Also a focus has been made on competent employees with a through process initiated to hire top-qualified and experienced professionals who can think out of box to assist in the revival attempts for the national carrier.

Moreover as mentioned above modern fuel-efficient planes have been leased into the airline fleet while more are in process to join the airline addressing the critical employees to aircraft ratio as well as the high fuel costs. The four (4) additional A320s and two (2) Boeing 777s are expected to join later this year have the potential further strengthen PIA while generating additional revenues. These result in serious reductions in fuel and engineering costs.

Under previous administrations some aircrafts were planned to be leased under “wet lease” which is short-term and includes the complete crew, maintenance and insurance from the lessor too. This was astonishing considering that PIA is already heavily over-staffed regarding crew, maintenance and flight support services. However the current administration has leased and plans to lease future aircrafts under longer-term “dry leases” which addresses this serious issue of additional constraints negating one of the prime purposes of expanding the fleet.

The top management is leading by example with unprecedented moves like Chairman PIA Mr. Nasser N.S. Jaffer travelling in ordinary flights taking the last seats and personally visiting airports to first hand observe the delivery standards and seek passenger inputs.

The punctuality issue and improvements in in-flight service is also been addressed and not only witnessed first-hand by this writer but shared by many frequent flyers. The flight schedule integrity (operating the flights on scheduled time) has improved to high nineties (though finance minister recently appreciated the 88% on time flights of PIA) while seat factor (seat occupancy) is now in high seventies as per official claims of PIA, which are indeed marked improvements. Similarly the critical Haj operation is underway and PIA claims punctuality of 96% so far which is largely in line with its past gold standards.

The Change Agent:

An apt saying often quoted is that it is the man behind the machine who matters. Similarly the men at the helm of affairs in large institutions like PIA can make or break them. We do not need to borrow examples of this from other countries or even institutions as the PIA’s own history with the glory attained under the likes of PAF big names Noor Khan and Asghar Khan as well as the shambles under the reign of some not so competent heads is a testimony to the same.

In was in this context that Mr. Shujaat Azeem was appointed as a Special Advisor to PM (SAPM) on Aviation. Due to some legal technicalities there were issues on his initial appointment which were sorted out in an amicable manner. Not many people outside the aviation industry know about the uniquely technically sound, experienced, gifted, business minded, astute and visionary person that Mr. Azeem is.

His career spans decades and is multi-dimensional. Not only has he been a fighter pilot for twelve (12) years and later became a commercial pilot serving as the chief pilot of ex-Lebanese PM Mr. Rafique Hariri’s fleet, the size of an airline, he also has vast experience of aviation related businesses. He successfully ran airline handling business in Canada while a successful business focusing on terminal services, cargo/ramp/ATC operations handling other than ticketing with clients such as Saudi Airline, Etihad Air, Gulf Air, Qatar Air was run in Pakistan. In line with the best corporate practices and ethical standards, he resigned from all family business when appointed to serve the national carrier.

He has brought with him the vast experience of not only the flight but the technical aspects, topped up with an astute corporate understanding. This has enabled him to have a tact-fully put in action a plan based on his solid understanding and vision to turnaround PIA. In order to execute his vision, meritorious placements at the top level in PIA have resulted in many positive things happening in the national flag carrier.

The appointment of Mr. Nasser N.S. Jaffer as Chairman PIA on Mr. Azeem’s recommendation was one such step and critical. Not only is Mr. Jaffer a successful businessman with a proven track record but has already won over many friends and fans with his hands-on approach focusing on revamping the dwindling standards of PIA.

So when an institution as much in slump as PIA has to be revived, top guns must be got on board. Although we often criticize incumbent Governments and in many cases rightly so, perhaps we should also be honest enough to give credit where it’s due. The placement of Mr. Azeem seems to be one such instance of good execution of discretionary authority which is bearing bruits for the barren lands of PIA.

To privatize or to not:

In September, 2013 the incumbent government decided in principle to partially privatize the national carrier, selling approximately 26 per cent of its shares, and to privatize its management. While the proponents point towards the past dismal performance, the opponents of the proposals also have a strong case to plead.

  • Firstly the track record of privatization has been dismal in Pakistan with a lack of regulation and investor interest.
  • The privatization of recent past has resulted in surplus institutions posting losses, Government been forced to pump funds to ensure provision of vital services, outstanding sums of investments on controversial pretexts and a deteriorating level of services.
  • In a particular case, a disaster of sorts, a public owned enterprise of an Arab country has been given the control of a public owned institution in Pakistan, citing that public owned institutions cannot be run efficiently. The irony is unmistakable.
  • Furthermore, no investor will come forward for or offer a good price for an airline in the state that PIA had been.
  • With an injection of capital and a ban on unions, PIA did become profitable in early 2000’s. There is no reason why this cannot be achieved again.
  • Things have started to improve with initiatives moving in the right direction as outlined above.

The solution to PIA’s woes lies in resolving the issues facing it with initiatives such restructuring, inducting new aircrafts, needs based hiring of competent professionals, improving service standards and punctuality along-with a brand makeover rather than privatizing particularly in light with the past experiences resulting in even worse situations for some national institutions that had been privatized.

PIA has proven that it can be successful and the initiatives by the current management including particularly the leasing of fuel-efficient modern aircrafts and improving service standards have the potential to revive it. The impact of the initiatives has translated in financial results as PIA’s operational loss of under Rs1 billion in the six-month period to 30th June 2015 is actually more than half of the loss it incurred the same period of the last year. Keeping in view of this, the current PIA team should be given a chance and time to prove their abilities in taking it to newer heights

Proposals to regain past glory:

The problems with PIA have been more due to past political interference and manageable. Some crucial issues and the proposals to resolve them are presented below:

Key Issues:

  • Aging fleet with average age of seventeen (17) years
  • Political interference
  • Perception of low service standards and non-punctuality
  • Exorbitant employees to aircraft ratio
  • High debt servicing costs

Proposed Solutions:

  • Dry leasing of additional modern, fuel-efficient aircrafts which will not only increase revenues but also cut down costs
  • Improving service standards particularly the hospitality and punctuality aspects
  • Continuing the process of weeding out the incompetent employees
  • Boosting morale of the other genuine and competent workers by merit based promotions and future hirings of competent professionals with a global outlook
  • Focusing on additional regional routes and capturing larger share of international routes
  • Shift most if not all of PIA’s debts to ideally a cash rich government institution in return for transfer/co-ownership of its’ renowned hotels including Roosevelt Hotel which alone is estimated to be worth around $ 1 billion
  • An alternate could be to create a separate entity with the above mentioned assets and liabilities transferred to it, giving PIA a thinner, focused look and resolving the issue of costly debt servicing
  • Amending the rules of PIAC prohibiting political interference

These core reforms proposed above, if properly implemented with a focus to rely on and develop indigenous capabilities, can resolve the current enigma facing the PIA. With the above actually implemented, there is no reason, why PIA cannot stand on its own feet and becoming a leading airline not just in the region but the whole world, attaining its’ past glory once again. Let us hope that our representatives in parliament give this all a serious thought while considering the future of PIA.

NB: More detailed procedures and sub-proposals regarding the above can be shared with key officials and those interested.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Budget, Taxation and Reforms – Blue Chip July 2015, 11th Anniversary Edition

The following article has been published in the renowned “Blue Chip” journal as an exclusive Op-Ed on Economy in its 11th Anniversary Edition published in July 2015.

Online Version Link: Blue Chip Article on Economy

Budget, Taxation and Reforms

Prof Dp

By: Omer Zaheer Meer

There were many positive indicators announced by the honorable finance minister, Mr. Ishaq Dar in his latest budget speech. The first one was the growth rate of 4.24% in 2014-15. Despite missing the target growth rate of 5.1% in last fiscal year, it is still a healthy sign when compared to the mere 3% from 2008 to 2013. The significant drop in inflation from 12% to 4.6% was also phenomenal. Fiscal deficit is expected to be brought down to the level of 5% of GDP from the previous level of 5.5%. However, all these were largely due to the significant reduction in global oil prices and the resulting deflation effects rather than the structural reforms and/or economic policies of the policy makers.

Furthermore, the foreign remittances to Pakistan showed an extravagant increase of 16.14%, which is the highest in the region and should be exceptional by any standards. However it would warrant further examination into the origins of the funds as the controversial law sanctioning no tax or questions about origins on foreign remittances has long made the foreign remittances route a heaven for money laundering and legitimizing black money. While legitimate foreign remittances are a great support for developing economies like Pakistan’s, the use of the above mentioned law for legalizing the black money actually costs more to the economy in terms of the lost revenue and the impact of black businesses on related industries.

In view of the above, it was rational to expect the shortcomings to be addressed in the budget including structural reforms in the taxation system pursuing a progressive regime, introduction of economic reforms and improvements in controversial laws hampering the economy. Whether that was the case is examined below along-with some recommendations

As for the reforms in the taxation system, the proportion of indirect and direct taxes has not changed substantially. This alone though is not sufficient as indirect taxes lead to a regressive system where not only are the rich and poor paying equal amount but unequal proportion of their incomes as taxes but it also causes inflation. This results in higher production costs, which leads to declining exports due to the loss of cost competitiveness and missed opportunities.

The government, in its defence points out to the existing trust deficit between the taxpayer and the taxmen which has created a tax avoidance culture in Pakistan. However there is a reason that all developed economies rely more on direct taxes to negate the disadvantages of indirect taxes which far outweigh the benefits to the national exchequer. The approach of using indirect taxes to fill-up government’s coffers has serious negative ramifications.

To make this clear, take the example of fuel. Upto 30% had been routinely charged as an indirect tax on every liter compared to only 13% in the USA. There are several types of indirect taxes levied within Pakistan including customs duty, sales tax, federal excise duty, petroleum levy, gas infrastructure cess, natural gas surcharge, e.t.c. All this focus on indirect taxation leads to inflationary pressures in the economy as increased prices translates into increased cost of production, services and living. The resulting impacts are hyper-inflationary in nature as there is a multiplicative rather than an additive element in the inflation passed-on at every level.

Furthermore the pay-rises are not proportionate to inflation. Only a 7.5% increase has been proposed in the federal budget. This forces people towards unfair means or rely on expensive credit in order to make their ends meet. Similarly finance requirements of businesses also increase. The resulting hyper-inflationary environment and decreased purchasing power leads to higher interest rates which negatively impacts the businesses as many otherwise viable projects become non-feasible. The declining business output results in lower employment opportunities which coupled with the limited money-supply puts recessionary pressures on the market. This ultimately results in the devaluation of the currency which in turn translates into increased foreign debt. As a result, financing costs of the foreign debts increases leading to a higher proportion of GDP being spent on debt financing. All this combined with hyper-inflation drags the already weak economy further back in Pakistan’s case.

It is therefore recommended that the policy makers should seriously consider pursuing a progressive tax regime where wealthy segments of the society are taxed more. Moreover large landowners and the various exempt sectors must be brought within the tax-net and the revenues raised should be utilized to subsidize the weaker segments of society and to support reforms. For example, it’s been suggested to the authorities before that the agriculture sector should be taxed at a reasonable rate, 5%-7% for landowners with holdings over 12.5 acres and the revenue raised should be used to subsidize the water and electricity for the agriculture sector. This would enhance the yield and therefore the GDP. To summarize, the proportion of direct taxes should be increased and reliance on indirect taxes should be minimized. While some exemptions have been withdrawn in the finance bill which is commendable, more needs to be done in this regard.

Also some structural reforms in the taxation system can go a long way to assist the authorities in meeting their revenue targets. One good step is the current budgetary proposal to allow computerized national identity card (CNIC) number to be used as the National Tax Number (NTN). However the proposal for using the CNIC number as Sales Tax Registration Number (STRN) for all citizens has been ignored. Together both these steps could not only make it extremely easy for any Pakistani to start a business having the requisite tax registrations and thereby promoting a culture of entrepreneurship but would also help broaden the tiny existing tax base as the number of filers and ultimately taxpayers are forecasted to increase with the increasing documented nature of the businesses.

Another key reform could have been to decrease the tax rates to make it more feasible to pay taxes with stringent penalties and cost of avoidance acting as a deterrent. The increase in the tax base would more than compensate for the loss from lower rates. Currently Pakistan has one of the lowest tax bases and tax-to-GDP ratios in the region. If implemented this proposal can turn this around and increase them both substantially.

In addition, to restore the faith of the taxpayers a multi-dimensional tax reforms agenda which has been constantly recommended by this writer must be implemented, where:

  • Taxpayers are encouraged and incentivized for paying taxes.
  • Taxpayers are facilitated by making the process easier and fairer, focusing on maximum automation in order to stem out corruption.
  • Instead of increasing the tax rates the tax net is constantly widened.
  • More focus is given to direct taxation.
  • Meaningful tax rebates and reliefs are introduced for the less able sections of the society.
  • A system of proportionate taxation is adopted with more affluent contributing more to the treasury.
  • Certain exempt sectors are brought into the tax-net (subsidies can be given for assisting any under-pressure areas/products).
  • Tax rebates and incentives are introduced to encourage foreign/local investments in key sectors with tax-breaks for transfer of technology, e.t.c. as may be required in a particular sector.
  • Tax money is actually spent on public welfare and infrastructure projects, which will improve the spending capacity and the business environment in Pakistan.
  • The massive corruption in public contracts/projects, now routinely in the range of 40-50% of tender values, is eradicated for better and efficient use of public money through revamping the pay and accountability structures.

Similarly the controversial law allowing foreign remittances to be brought to Pakistan without having to declare the source of origin or pay any taxes has more disadvantages than the benefits it brings. Let’s elaborate this further. As mentioned before, Pakistan saw an increase of 16.14% in foreign remittances from $12.89 billion to $ 14.97 billion in the last fiscal year. What’s interesting is that the remittances in the entire region have seen a much humble growth. Also, the work profile and the resultant pay scales of ex-pats Pakistanis have not been changed drastically. Furthermore, the inflation and cost of living has actually declined for the relatives of ex-pat Pakistanis as per the figures revealed by the finance ministry. Considering all this and the various studies conducted in the past, it can be safely said that a huge chunk of the foreign exchange remittances are actually the black money laundered and then brought back to legitimize the funds and that too tax-free. Now infamous model Ayan Ali is a case in point. We don’t know for sure how many Ayans are currently doing what she was caught for. It is therefore high time that the finance ministry officials give this a serious thought and atleast consider introducing checks about origins of finances to control and curtail the illegal economy hampering Pakistan’s economic development rather than actually assist it for some short-term gains at the cost of longer-term losses.

Pakistan has been blessed with all kinds of terrains and weathers, fertile lands, valuable natural resources, a high proportion of population been young and hardworking with cheap labor availability. A fairer system of taxation coupled with some key reforms culminating into a fairer economic policy can provide the necessary environment to harness the economic potential of Pakistan.

The key reforms outlined above, if properly implemented with a focus to rely on and develop indigenous capabilities, can resolve the current enigma facing the treasury. With the above actually implemented, there is no reason, why Pakistan cannot stand on its own feet and become an economic hub not only for the region but the whole world. Let us hope that our representatives give this all a serious thought while passing the amendments to the federal budget.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk