TAX REFORMS WITH WORLD BANK LOAN!

TAX REFORMS WITH WORLD BANK LOAN <!--[if gte mso 10]> TAX REFORMS WITH WORLD BANK LOAN! By Dr. Ikramul Haq, Advocate, Lahore The Central Board of Revenue (C.B.R.) has been successfully convinced by the World Bank that it needs substantial loan for its reform agenda. This reform agenda was earlier prepared by the IMF and World Bank and now they are lending us money to implement it by giving main chunk to their hand‑picked consultants. This modus operandi is not new; all the subjugated nations have to undergo this kind of exploitation at the hands of international donors. The responsibility for this kind of maltreatment and exploitation of a nation lies with its inept, incompetent and anti‑people leadership, rather than donors. In a meeting with IMF‑World Bank teem on May 21, 2004, the Government assured the donor agencies that it was focusing on tax reforms specially in the next budget and that the tax policy reforms included reduction in the multiplicity of taxes both at the Federal and Provincial levels, rationalization of various taxes and further reduction in corporate tax for banking and non‑banking companies. The donor agencies called upon the Government to accelerate the C.B.R. reforms in the next budget including a complete reorganization over a three year period (2004‑06) and the fundamental changes in human resource management. Immediately after these "assurances", the World Bank approved $6 million to refurbish Central Board of Revenue (C.B.R.) on "modern lines" under the restructuring plan. This release of $ 6 million loan is a part of WB's total grant of $58 million sanctioned for public sector capacity building project (PSCP). The 14 projects to be undertaken with WB assistance are capacity building and training of C.B.R. officials; Universal Self Assessment Scheme (USAS); STARR project (re‑engineering and automation of sales tax refund system); custom pilot project; change management workshops and communication; setting up of Dispute Resolution Complex, Karachi, interior development and refurbishment of Large Taxpayer Unit (LTU), Lahore; interior development and refurbishment of Medium Taxpayer Units (MTUs) at Karachi. Rawalpindi, Faisalabad, Peshawar and Quetta; taxpayer education and facilitation and appointment of experienced consultants for the interior designing and supervision of LTU, Lahore, Dispute Resolution Complex, Karachi and MTUs at all major cities. According to the break up; an amount of Rs.18.700 million would be spend on USAS scheme; Rs.46.500 million on capacity building and training of CBR employees; Rs.55 million on customs pilot project; Rs.20.10 million, STARR refund automation programmer Rs.5.660 million, change management workshops and communication; Rs.6.690 million, appointment of consultants; Rs.20 million, Dispute Resolution Complex, Karachi; Rs.33 million, interior development and refurbishment of LTU, Lahore; Rs.28 million, interior development and refurbishment of MTU, Karachi; Rs.24 million, interior development and refurbishment of MTU, Rawalpindi; Rs.24 million, interior development and refurbishment of MTU, Peshawar; Rs.16 million, interior development and refurbishment of MTU, Faisalabad and Rs.20 million would be spend on the interior development and refurbishment of MTU, Quetta. Our history of economic subjugation started in 1960s when the rulers started taking large intakes of foreign loans. With every loan comes a host of conditions. These conditions ostensibly aimed at reforms, in fact mean to make a nation subjugated in complete terms i.e. economically, politically and mentally. Our economic managers have now started telling the nation that they are severing all ties with IMF and other foreign donors, whereas the reality is that new loans for reforming (sic) tax, baking and justice systems‑‑ just to mention a few‑are being negotiated with unprecedented vigour on the dictates of foreign masters. The World Bank recently announced to give 'concessional, credit" of US $ 153 million to Pakistan to "support three separate poverty reduction projects" (sic). The Governor State Bank of Pakistan (SBP), Dr. Ishrat Hussain on May 22, 2004, while inaugurating the Karachi office of the International Finance Corporation (IFC), a subsidiary of the World Bank, revealed that the Government has approached donor countries for seeking US $1.50 billion for the completion of the on‑going infrastructure projects of the country. He said: "We informed our donor friends last month that the total cost required to finance the projects related to infrastructure would be around US $3 billion and out of this amount, Pakistan is ready to share the burden of US $1.5 billion, while the donors have to arrange the remaining amount." This exposes the claims of the Government that it is no, more relying on foreign loans and wants to march towards self‑reliance. The present phase of reformation of tax system by C.B.R. started when the IMF linked its first year Pakistan's Poverty Reduction and Growth Facility (PRGF) Programme with the Structural Performance Criteria (SPC) including complete\ restructuring of Central Board of Revenue (C.B.R.) by the end of February 2002, application of standard General Sales Tax (GST), penalty regime to retailers through March, 2002, implementation of universal self‑assessment scheme and establishment of large taxpayers' unit by July 2002. By the mid of 2004, many of these goals are still unrealised. The conditionalities imposed by IMF for extending us PRGF were: (1) No new exemption or special privileges regarding income tax, custom duties, or GST to be granted, no new regulatory import duties to be imposed (except for antidumping measures), and all time bound exemptions and regulatory import duties to lapse without extension, except for existing contracts and exemptions based on international commitments. Timing (Continuous). (2) Implement new organizational set up for C.B.R. headquarters per approved C.B.R. reform plan. Timing (February 28, 2002). (3) Apply standard GST penalty regime to retailers and eliminate GST exemptions for all fertilizer wholesale and retail trade. Timing (March 31, 2002). (4) Adopt timetable for the phasing out, wring the program period, of the GST subsidy en electricity and of GST exemptions for edible oil, vegetables ghee, and pharmaceuticals (except life saving drugs). Timings (March 31, 2002). (5) Implementation of universal Self‑Assessment Scheme effective for all income earned from July 1, 2002. Timing (July 1, 2002). (6) Start operations .of a Large Taxpayer Unit, integrating all domestic tax operations. Timing (July 1, 2002). (7) Implementation of income tax reform package effective for income earned form July 1, 2002 including elimination of at least two minor withholding taxes; elimination of at least 55 income tax rebates, concessions, and non‑standard exemptions from the CRITONESS schemes subject to withholding tax on interest income from Rs.300,000 to Rs.150,000. Timing (July 1, 2002). (8) Bring KESE to point of sale. Timing (July 31, 2002). (9) Issue circular allowing, banks to purchase from August 1, 2002 foreign exchange from moneychangers at freely negotiated rates. Timing (August 1, 2002). (10) Prepare list of intermediate indicators with baseline data for 2000/01, and preliminary annual targets for the period 2001/02 and 2003/04. Timing (December 31, 2001). (11) Quarterly published progress reports on implementation of Poverty Reduction Strategy, including "I‑PRSP expenditure." Timing (To start end‑December 2001. for 2001/02 first quarter data, and continued on the basis of the same quarterly Schedule throughout fiscal year 2001/02). (12) Publish rules and regulations including for record keeping under the universal self‑assessment scheme for income tax to become effective July 1, 2002. Timing (March 31, 2002). (13) Prepare proposals for revised income and sales tax appeals and dispute resolution process with a view to implementing them with the 2002/03 budget. Timing (March 31, 2002). (14) Bring United Bank Ltd. And PTCL to the point of sale through transparent and open public offer for sale. Timing (May 31, 2002). (15) Issuance of a streamlined foreign exchange manual to simplify and clarify rules regarding access to foreign exchange and current account transactions. (16) Establishment of a contributory pension scheme for new recruits in the civil service, and preparation of a third phase public pension reform package, prepared in collaboration with the World Bank and involving actuarially fair reform of early retirement and of commutation tables. Timing (July 1, 2002). Toeing the IMF conditionalities. Finance Minister Shaukat Aziz announced in Karachi on 29 December 2001, while addressing the tax collectors that massive tax reforms are on cards. He specified the following outline for intended tax reform (sic) agenda: Heavy investment in Information Technology (IT) to facilitate collectors. Interestingly, the Finance Minister talked about "facilitating" the tax collectors but did not bother to utter a single word about' facilitating the poor taxpayers who are the victims of highhandedness of tax collectors. He declared tax collectors as "front men for the country's development, defence and economic sovereignty". It shows how little he knew about these tax administrators [whom somebody rightly labeled as "administrators" as they pocket nearly Rs. 200 billion every year by conniving with tax evaders]. Massive surgery in tax system through human resource development and use of computers, which would increase the efficiency and image of the department. The worthy Minister ignored that all earlier moves for automation failed and millions of rupees were wasted. The CBR‑owned automation company PRAL, where market wages are offered, has become yet another symbol of corruption, incompetence and bureaucratic indifference. The worthy Minister was not aware of the fact that mere use of computer could not improve the image of the department. In fact many officers in Karachi have their own computers and self‑paid staff and they are using them successfully to extort big money from taxpayers in a more efficient manner. Good officers would get compensation on the achievements of targets. The amount of compensation would be performance driven and not seniority based and very, very attractive. The Minister had used cliches like "good officers"; "performance driven" and "very, very attractive compensation". It left no doubt in my mind that he was completely ignorant about the working of tax collectors and CBR. Like police stations, attractive posts are auctioned and "good officers" make huge money for them and their mentors in CBR. They buy collection challans belonging to other officers and get "rewards" for "super performance". The "compensation" they are already getting is perhaps much more attractive than the one promised by the Minister. The Minister then promised "a big change of culture" in the CBR in the next 12 months. A year back while commenting about the tax reform drive (sic) launched by the Finance Minister, I made the following remarks, which are relevant even today: The tall claims made by the Government about six months back that by 1st January 2001, it would introduce major tax reforms and even a new Income Tax Law proved to be yet another promise not kept. The deadline has now been extended to the budget time when the Finance Ordinance will be announced. This was not something that came as a surprise to many, including myself, as most of the claims by our Government are "Wo Wada Hi Kya Jo Wafa Ho Gaya" (promises are not made to be fulfilled). We would have been much happier if the hasty attempts to further destroy the existing enactments and tax structures were abandoned, but it spews that some vested interests are bent upon to do so in the, hope that they will get enormous money (for this poor nation it will be a loan of $ 100 million.) from the Word Bank for this vandalism. This is the most painful part of the whole exercise. On September 13, 2001, the military regime ultimately managed to promulgate a new Income Tax Law, prepared by an Australian expert. In the name of simplification of tax laws, the nation has been burdened with a number of more cumbersome tax terms and new enhanced obligations. This is the sordid story of tax reform in Pakistan so far. The new round of reform is about to start with foreign loan. More and more money will be given to hand picked consultants, who hardly know anything about a pragmatic tax policy and its administration. More and more workshops are going to be held to waste public money mercilessly. This nation is going to have more well‑equipped tax dacoits who are going to play havoc with their peace and tranquility. This entire process is being carried out under the umbrella of IMF, World Bank and other donors, who want to ensure that our economic subjugation leads to convert us into modern‑day slaves. The Problem of Pakistan is that its tax system is not equitable. The burden of taxes is already less on the rich and more on the poor. In the face of this reality, the Government is resorting to regressive taxation like presumptive taxes in income tax sod turnover taxes in the shape of multi‑point sales tax. Over the period of time 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 by the foreign donors. Our potential is much higher than these targets, which can never be achieved with the present tax laws and incompetent, inefficient and corrupt tax machinery: We should get ourselves free from the reform game of the IMF. The tax policies implemented by us on the dictates of IMF have failed to reduce the fiscal deficit, and on the contrary are destroying our industry and business. If we manage tot formulate a rational tax policy and implement it through consensus and not coercive measures, there is every possibility to get rid of IMF in a short span of times. However if we will keep on following their prescription, we will neither realise fixed targets, nor achieve the cherished goal of self‑reliance through resource mobilisation. Our tax revenue potential is not legs titan Rs.800‑1000 billion provided that the exiting tax base is made wirier and equitable, 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 loan from the World Bank for tax reforms. If we take money from them then 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.