Is FBR’s incompetence hurting economy? (by failing genuine Taxpayers)

The following article has been published in Daily Nation, dated 27th April 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-04-27/page-9)

(Onlinehttp://nation.com.pk/business/27-Apr-2015/fbr-s-incompetence-hurting-economy)

FBR’s incompetence hurting economy

Prof Dp

By: Omer Zaheer Meer

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. Whether this is really the case shall be examined in this write-up. About couple of weeks ago, 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 this perspective.

Currently there are approximately 800,000 active income taxpayers out of a population of roughly 200 million in Pakistan. This is a meager 0.4% of the total population. On the other hand every Pakistani is paying indirect taxes on whatever they consume. The lack of trust of the taxpayer 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 of the rulers. However the areas where FBR can and should play a very effective role are not in the best of states either and that is simply unfortunate.

Considering the tiny tax base it was only natural for FBR to attempt to broaden it. However the way they went about it is unprofessional to say the least while messing up a good endeavor big time. Recently 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 allowing use of CNIC as National Tax Numbers (NTN) and Sales Tax Registration Numbers (STRN) have been falling on deaf ears for almost a decade now. Of late, there has been news that CNIC may finally be allowed as NTN. If done, this will be a step in the right direction.

To underline the vast difference in the workings of FBR and similar bodies in developed countries, Let me share a personal experience with the readers to illustrate the significant gulf in 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 a genuine tax payer in Pakistan who is ridiculed and abused for even genuine works. 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.

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

IMF-driven Policies: Destroying Economy

The following article has been published in Daily Nation, dated 16th March 2015

(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-03-16/page-9 )

(Online: http://nation.com.pk/business/16-Mar-2015/imf-driven-policies-destroying-economy )

IMF-driven Policies: Destroying Economy & inciting Revolts

 Prof Dp

 By: Omer Zaheer Meer

Pakistan is going through an economic slump; some would even argue a meltdown. With rampant lawlessness, terrorism, rising inflation and severe electricity and gas load management especially for industry, the economy is in dire need of a revival. Many of these problems were inherited by the incumbent administration from the previous PPP government with the economy on the verge of collapse. It was against this backdrop that the PMLN government decided to go to the International Monetary Fund (IMF) for a $ 6.7 billion loan.

The IMF offered a package based on austerity, asking to cut subsidies in a very short duration, seeking reduced public spending and privatization of national institutions like PIA in addition to devaluation of Pak Rupee.

These measures led to unbearable levels of inflation, making an already tough situation worse. Even the prime constituency of the incumbent Government, the business community has been protesting but at the end of the day they will still be able to simply pass on the effects to the consumer. It’s the masses that would ultimately be hit the hardest. With the industry already in tatters due to the energy crisis, law and order situation and ever increasing input costs, they are shifting base overseas resulting in a flight of local capital. The gigantic increases in the power tariffs until recently were serving to worsen an already dire situation for the local industry. On the other hand national institutions, instead of being revamped and properly managed are being planned to be sold off in non-favorable conditions when they could end up being sold for peanuts.

POL products are treated as a cash-cow for revenue generation, ignoring the super-inflationary effects of increases in their prices. It is indeed ironic that while the prices in international market fell, the benefit was only partially passed on to the consumers in Pakistan and that too owing to the political pressure from the opposition of Pakistan Tehreek-e-Insaf.

While the IMF program may serve to stabilize the national exchequer in the longer term, the economic opportunity costs, resulting unemployment and the high risk of an economic meltdown makes it a non-prudent choice. Instead it is pretty obvious that Pakistan’s economy requires an impetus, a stimulus to revive the economic activity and not the program agreed with the IMF.

While we can give some space to government’s economic team citing the tough challenges they inherited and are facing, what is unfortunate though is that even the steps possible within the ambit of Finance Ministry are not taken. There seems to be a lack of understanding and political will to actually carryout the reforms necessary to resuscitate the failing economy.

Financial management and transparency is one such area. I’ve written before that the manner in which the circular debt of app PKR 500 billion was paid to private power generators and similarly the funds released for Petrol import earlier this year were astounding to say the least. There were no audits, no checks and no proper incentives negotiated for the masses. Whether right or wrong, some sections of the intelligentsia believe these crises to be manufactured, aimed at getting around the checks and balances in order to oblige party financiers and key supporters.

For example, despite claims of around 40 % unused capacity of private power companies, un-tapped owing to the outstanding circular debt, the promised increase in the electricity generation was never delivered despite payment of the same. Pakistan had to approach IMF for $ 6.7 billion to be released over several years, while 75% of that amount was distributed to private power companies without any verification as if it was an immaterial amount. What’s more, the genie of the circular debt in the power sector is back to haunt the nation again.

We must ask the finance ministry why no proper audits were performed? Why could we not negotiate with the power companies the terms for payments in four or six installments with the next installment payable only on achieving an additional power generation as agreed? Furthermore, there has been no effective national energy conservation drive or campaign to cut the line losses to the minimal possible. Similar mismanagements resulted in the infamous petrol crises too.

Furthermore, the painful but obvious fact remains that the necessary reforms required to revamp the tax system and structures are not been followed either. Instead of extending the tax base by bringing in Agriculture and other exempt areas in the tax net the existing base is being taxed more along-with higher indirect taxes imposed on the common citizen, both of which are disastrous in the long run. Had we actually taken the tough but necessary decision to broaden our tax base and executed proper financial management especially in the power circular debt payment we would not need to go to the IMF. The lack of these reforms has led to exorbitant borrowing with the internal borrowings alone reaching the mark of a trillion.

Alarmingly, there are noises about a very powerful industrialist from Punjab with stake in the power sector besides others, dictating the economic policies of the current government. On the backdrop of this, a list of public sector power companies was also announced for privatization. Guess where are they based? Yes, all of them are based in Punjab. The Prime Minister needs to take corrective measures. As a minimum the finance ministry should be directed to undertake independent forensic audits into all future payments as well as those made till now including circular debt payments to the power companies in addition to the implementation of other measures to ensure transparency. Corruption scandals of the likes of the last PPP Government should not be tolerable anymore. This, along with tough decisions to extend the tax base with a focus on direct instead of indirect taxation and proper financial management can still lead to a turn-around.

The biggest question is will the present Government review its IMF driven economic policies and carryout the necessary reforms while providing relief to the ordinary citizen or will it continue to focus exclusively on temporarily filling up the coffers of the national exchequer without any bearing to the economic condition of a common man and risk a revolt? It should remember empty stomachs breed anarchy.

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