What the FBR tax directory does not reveal
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The Federal Board of Revenue (FBR) has made a decent effort to improve economic transparency in the country by releasing the tax directory for fiscal year 2018. Going by the data available in the document, it is encouraging to see that the number of registered enterprises filing their tax returns has grown by 20 percent. The directory, however, does not provide deeper evaluation of information it contains. This article provides suggestions to make the otherwise well intentioned exercise more useful for citizens and future fiscal policy designs.
First, while the number of filers has increased, more people are seemingly submitting their forms with nil tax liability. This may have several reasons. Among other things, existing evidence attributes this to the confidence of those practicing avoidance and evasion. Similarly, complexity of tax filing and audit methods and lack of risk-based assessments may also account for this trend. Nevertheless, these and other possible reasons are not found in the tax directory analysis which is available on the FBR website.
Second, while the focus of this quantitative information is on the actual taxes paid, the directory is silent on who received tax exemptions and concessions and how much? In a country where elite capture is often cited as a key reason for lack of inclusive economic development, such information is of vital importance. This can also tell us about the tax gap. Research indicates that if preferential treatment from the tax code is removed, an extra six to eight percent of GDP can be realized.
In a survey conducted by the Sustainable Development Policy Institute in Islamabad, respondents were asked if they gave gifts or made payments to tax officials. Twenty-nine percent of them admitted that they did, saying it lessened the time devoted to tax related matters. Answering another question regarding why some firms did not register with the FBR, nearly 30 percent informed they were afraid of excessive intrusion in their business matters
Dr. Vaqar Ahmed
Third, the directory does not mention FBR’s tax collection costs by region and various markets. Such data can reveal if the increase in nominal taxes is really the tax agency’s own doing or the outcome of the withholding agent’s efforts. Several independent economists have argued that most taxes are being collected in the withholding mode which does not require the FBR to do much. In the past, there were instances of regions where the administrative costs of FBR were higher than the tax collected.
Fourth, the information regarding the annual changes in compliance costs faced by genuine taxpayers is missing. A sincere effort is required to bring down the time and cost involved in tax filing, payments, and responding to audit queries. Pakistan continues to rank at a lower level in comparison to its peer economies as per most international comparative tax surveys. This aspect is also important from the viewpoint of keeping a check on rent seeking behavior. In one of the surveys conducted by the Sustainable Development Policy Institute (SDPI), for example, respondents were asked if they gave gifts or made payments to tax officials. Twenty-nine percent of them admitted that they did, saying it lessened the time devoted to tax related matters. Responding to another question regarding why some firms did not register with the FBR, nearly 30 percent informed they were afraid of excessive intrusion in their business matters. Another 27 percent said that compliance with taxes was costly, adding that they did not have such room for that in their cash flows.
Fifth, the tax agency could have provided more information in the directory regarding new sectors and economic activities which have been brought under the tax net. It is already known that several online businesses are either working in the informal space or being taxed in a manner which stifles their growth. The taxation regime faced by the IT, ICT, and other areas of the digital economy are a deterrent to investment in these sectors. This aspect is also important to understand what costs may be involved in hard-to-tax activities.
Sixth, the FBR has a track record of embracing new technologies and automation programs. It will be insightful to know how much increase in the number of tax filers and revenues can be attributed to the use of various automation platforms. The business community in a recent public-private dialogue hosted by the SDPI complained that despite the automation of most tax-related procedures, corruption remained rampant in tax offices.
Finally, a sustained increase in tax revenues is not possible without cultivating trust with those paying their dues to the state. In this regard, it is important that the FBR directory also provides data on tax disputes cleared and pending during a fiscal year. This will give people an idea if the grievance redressal mechanisms of tax bodies are well functioning.
- Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.
Twitter: @vaqarahmed
