TAX REFORMS REQUIRED AGAINST MISUSE OF TAXPAYER'S MONEY

TAX REFORMS REQUIRED AGAINST MISUSE OF TAXPAYER'S MONEY <!--[if gte mso 10]> TAX REFORMS REQUIRED AGAINST MISUSE OF TAXPAYER'S MONEY By M. Iqbal Patel, F. C.A., Karachi The Federal Board of Revenue (FBR) claims that it is in the midst of an ongoing Tax Administration Reforms Programme (TARP) which is sponsored by the World Bank (WB) and DFID. The main focus of TARP has been on promoting voluntary tax compliance through an enhanced level of tax payer's facilitation. The revenue administration is presently far better equipped and motivated to take the reforms initiative forward. Whereas Advisor to the Prime Minister on Finance Shaukat Tarin complained that the government is not satisfied 'with tax reforms of the FBR as it failed to raise the tax-to-GDP ratio at he desirable level. The WB mission has recently completed review of the TARP at the FBR. It appears that it is not, satisfied with the implementation of the TARP and it feared that FBR would not meet the conditions to complete the TARP during 2009, it has, therefore, urged the FBR for speedy the implementation of reforms. The FBR working is subject to review and getting approval of its, functions from the WB as recently it approved audit plan for 2009-10 devised by Member Taxpayer audit. The WB has also asked the FBR to implement immediately the enforcement plan 2009-10 to check sales tax and income tax non-filers and late filers of the returns 2009-10 and take other necessary actions for systematic cross checking and development of simplified information system. It is surprising, that on one hand the Government said that the reforms failed to deliver the desired results and on the other hand the FBR is closely working under the directives of the WB. The Government's dissatisfaction is reflective in the amendments introduced from time to time in the Income Tax Ordinance 2001, which has been sponsored by IMF, through Federal Budgets every year whereby several provisions of the Income Tax Ordinance 1979 (Repealed) have been restored in the Ordinance. Obviously the WB consultants are not aware of our local environment hence their expertise of their laws does not suit to our requirements. The FBR should have hired the services of local experts which would have suggested better reforms at a lower cost. In the circumstance present position of FBR to consult and obtain approvals from time to time of each its action from WB and to pay high consultancy fee to them is questionable. The dissatisfaction on existing tax policy expressed by Mr. Tarin is meaning less as he has conceded the fact that the tax-to-GDP ratio is not an acceptable level of tax efforts because there are significant sources of income that are mostly outside the ambit of taxation such as agriculture sector. Further there is no effective way of taxing capital gains on property and the Government has been postponing taxing capital markets gains since over last two decades, but he' did not brought them into tax-net in the Act. It is shocking fact that the government thus has kept tax base so much narrow that out of population of our country of around 200 min, total number of tax payers were 2.5 min of which 1.8 min were from salaried class i.e. less than 2%, as Senate was informed recently by the Minister of State for Finance. The salaried class constitutes 72% among the taxpayers who make meaningful contribution.. The Federal Budget 2009-10 did not move in the direction of taking any most difficult decisions required to reform tax policy and system on the basis of best international practice to bring into tax net the sources of income which enjoys exemptions so as to improve the tax-to-GDP ratio at desired level. Under the situation the reforms to be introduced even by foreign consultants would not serve the national objective unless a broad based tax system is devised in a manner in which each and every Pakistani should share the burden instead of burdening some people. Moreover, some move made to get a breakthrough in revenue mobilization, a series of policy reversals neutralized many gains, such as recent decision of Economic Coordination Committee of the Cabinet approved deferment of 6% withholding tax on advance payment to all rental power projects till such time as monthly payment of rent starts after commissioning of .the project. Similarly Mr. Tarin, after his meeting with the Members of the Bourses, has indicated that withholding tax on share transactions will be withdrawn. If the tax policy is a tool of politicians to amend it at their whims, the tax reforms will be unable to achieve the desired objectives, whoever may be the author of the reforms. Interestingly all these developments took place just after few weeks of passing the Act by the Parliamentarians. The inconsistency and distortions in tax policy, creating privilege class allowing them concessions for political gains defeat the objective to bring the tax-to-GDP ratio to acceptable level. The Ordinance provides for exemptions and concessions to various sectors and privilege class of persons which have cost the Government Rs.199.646 billion during 2008-09 against Rs.86.657 bln in 2007-08, reflecting an increase of 38.1 %. Mr. Tarin, should have concentrate to reduce the cost of these exemptions rather he rushed to the Washington with a begging bowl to raise $4 bin more aid from IMF well before the present $ 7.6 bln financial aid approved by IMF is released by it. His total reliance on aid to run the economic affairs of the country jeopardize the future of the country as there no sign of any effort is made by the Government for revival of economy through industrialization and generation revenue therefrom which would generate fund for repayment of these loans on maturity. Further more the government under Stand-by Arrangement with IMF has committed that subsidies will be fully eliminated by end June 2009. Though the government failed to meet this condition but additionally recently announced the Trade Policy provided for subsidies to be paid to many sectors such as inland freight cost will be compensated to exporters of cement, light engineering, leather garments, others, surgical instruments, sports goods and cutlery sector would be granted 25% support on brand development, R&D cost will be reimbursed @ 6% of export to food exporters, 50% of cost of Certification will be paid for Halal products etc. Besides the aforesaid incentives, the Trade Policy provides for establishment of number of Funds worth over Rs.6 bin dedicated to support the economic activities in various sectors. Whether the government has done its home work in the present economic scenario to carry on the proposed financial burden envisaged in the Trade Policy is a matter of concern. The establishment of Authorities/Board under the Trade Policy to regulate these Funds are politically motivated thereby jobs will be created for blue-eyed politicians at lucrative packages. These factors are relevant as these have vital implication for viable economy. Presently tax reforms are confined to devise mechanism for collection of taxes whereas the issue of spending of the money so collected from the' tax payers neither is looked into by the FBR nor other departments are held accountable for its misuse. How the tax payers money is misused mercilessly by the functionaries of the government departments is brought on record in some cases by the AG in their audit reports-2005-06,, reviewed by the Public Accounts Committee of the National Assembly are reported in the press as mentioned below:--- * Defense Services made unauthorized expenditures and embezzlements on construction of Troops Family Welfare Centre at Rs.23.239 bin; * Ministry of Petroleum and Natural Resources and the Ministry of Religious Affairs, Zakat and Ushr of Rs.343.12 m1n and Rs.68.82 min respectively; * National Logistic Cell (NLC) management invested a sum of Rs.201,470 m1n in the stock exchange by purchasing shares of different companies in violation of policy and directives issued by the Prime Minister being Chairman of NLC. Later the same was sold at Rs.196,082 min thus suffered a loss of Rs.5,388 min on this account; *Finance Ministry and Finance Division of presidency and prime minister secretariat exposed a total Rs.19.385 bin and Rs.726.41 mln irregularities and embezzlement in respective department; . * Audit report for the year 1989-90 revealed massive misappropriation and irregularities as PIAC paid $10.05 mln to the airbus industries in contravention of the airline's laid down policy; * The government lost Rs.585 m1n because of its decision to import urea through Gwadar; * National Assembly was informed by the State Minister for Economic Affairs Hina Rabbani Khar that Pakistan Work department spent an amount of Rs.141.919 min on account of monthly bills of telephones, fax machines, green telephones, and . internet/DSL connection of the President's camp office, Rawalpindi for the period from September 2002 to 2008; * Use of sub-standard steel in the Ghazi Brotha Hydropower Project that caused a loss of Rs 80 bln to the national exchequer; * The Minister in charge of Cabinet Division, Babar Awan said in the NA that Cabinet Division and its Central Pool of Cars purchased 59 vehicles including 28 bullet proof during 2004-09 at Rs.1.91bin; Billion of rupees, thus have gone into drain, but nobody is held responsible for such huge loss of tax-payers money. The government should also introduce the reforms on expenditures incurred by the functionaries of various departments/divisions of the ministries. The FBR may be entrusted the responsibility to regulate/monitor the spending of tax payer's money; and quarterly report may be presented in the Parliament with a view to adopt measures/actions against the accused for misused money.