Fixing the leaky tax system | Imtiaz Gul

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Criticism is growing over the government failure to stem terror financing. Apart from freezing or blocking a few thousand bank accounts with insignificant amounts of cash, the campaign to control financing of militant and terrorists outfits — a stated objective of the National Action Plan — has not truly taken off.

Often knee-jerk reactions to such issues leads to inconvenience even to innocent people just because the moves are not well-thought through.

In a country where the will to realistic and voluntary documentation is still missing and the Federal Board of Revenue continues to act as a highly extractive/ arm-twisting institution — largely to the benefit of its own officials, there is little hope that officials will clamp down and squeeze informal sources of funding of religious and militant outfits.

The same applies to officials who have failed to improve the oppressive taxation regime which often coerces most businessmen and regular taxpayers into settlements that get the state hardly one-third of revenue. The rest goes into the pockets of FBR officials.

The business community has been screaming about the need to simplify the taxation regime. At a recent interaction among leading businessmen at the Islamabad Chambers of Commerce and Industries almost all participants demanded the abolition of the exploitative rebate system. Why not have a zero-tax-zero rebate regime?

Most businessmen called most of the FBR officials as rent-seekers, who are mostly interested in enriching themselves through coercive measures. A major point of convergence related to the taxes on imports and the malaise of under-invoicing. Why do the importers under-invoice? Because of an illogical and irrational taxation regime.

The finance minister, many participants argued, is well aware of the flaws of the system, as well as the propensity of business and officials to dodge the system. One industrialist pointed out that the new powers accorded to the FBR officials for determining and evaluating taxes has encouraged more corruption within the institution. Hardly 25 per cent of additional funds go to the national kitty, while the rest is settled through under-hand deals, he said.

Arbitrary powers of FBR officials only discourage the majority from paying up what is due to them. That is why direct taxes have been on the decline.

Forget about nearly a million identified taxpayers already in the net. We as businessmen will take care of them, set the FBR new targets for increasing revenues.They pointed out that the high-handed FBR has lost its relevance to the modern challenges — evident from the fact that it has failed in enlisting new direct taxpayers. Why does the number remain under a million despite an expanding economy comprising over 200-million or so inhabitants.

An investment diplomacy framework is largely missing. The Board of Investment (BoI) continues to remain a typical bureaucratic entity with little to show. It directs potential investors to about two dozen other institutions for registration. This, they said, itself is a colossal task.

Where is the one-window for investment?

Honest taxpayers will not step forward until they feel comfortable that the FBR will not indulge in a witch-hunt. This, said the businessmen, is used to extract lucrative deals by the officials involved. As long as the FBR treats everybody as a thief and tax-evader, the direct tax base will most probably never expand.

Can the parliamentarians take the lead in proposing at least some reforms to the FBR? Many businessmen and industrialists may be tax-evaders but the critical question is whether the FBR succeeded in engaging them so they could honestly pay their dues? The answer is an emphatic ‘No’. Why not then introduce a uniform tax across the country, abolish the counter-productive policy of packages and rebates? Well-meaning parliamentarians must rise against the rent-seeking propensity of officials and the businesses’ penchant for official patronage. Without that neither the state revenue will increase nor will the leaking ever stop.

The writer heads the independent Centre for Research and Security Studies, Islamabad and is author of Pakistan: Pivot of Hizbut Tahrir’s Global Caliphate