Note to Pakistan’s economic managers: reforming tax collection techniques

As the euphoria surrounding former cricket star Imran Khan’s election victory begins to fade in Pakistan, the country’s economic managers must deal with the hard tasks ahead. Immediately improving foreign currency reserves is simply a tactical necessity. The real challenges are strategic.

If Pakistan approaches the International Monetary Fund (IMF) for economic support – as is widely predicted by most analysts – then the IMF will remind Pakistan’s new Finance Minister of at least two priorities: increasing revenue and reducing expenses.

In order to achieve these two objectives there is a need to move away from the simple solution of imposing additional withholding taxes on an already excessively used taxation technique. To date, this method has only resulted in mixed success.

Presently, virtually any financial transaction in Pakistan’s organized sector, i.e. a documented transaction and not in cash, requires the collection of withholding tax. For example, registering a car or paying motor vehicle tax; registering a property; cash dividend payments made by listed corporations to individuals; and banking transactions such as preparing a bank draft all require collection / payment of a withholding tax. 

In theory, this tax payment is an advance tax and may be adjusted against future corporate or individual tax liabilities. In practice, few individual taxpayers make the effort to reduce their tax liability by the advance tax amount. For corporations, except maybe for top tier multinational and local institutions, increased bookkeeping coupled with a weak and often corrupt tax collection infrastructure reduce the incentive to claim advance tax. In other words, other than a few large corporations with sufficient resources to devote to copious bookkeeping, few businesses ever see the benefits of any ‘advance tax’ collected on their behalf.

Sure, it will be easy to continue and ‘widen’ Pakistan’s tax base by implementing additional presumptive tax on more transactions – or increasing percentages on existing advance tax payments - especially as these tax collections will likely be booked under the Direct Income Tax category and (falsely) boost the government’s claim of broadening the tax net.  Nevertheless, such taxes will only make Pakistan’s economy more inefficient by pushing up the cost of doing business, especially for Small and Medium Enterprises (SMEs), a backbone of the country’s economy.

Improving Pakistan’s tax collection infrastructure through reforming the operations of Federal Board of Revenue (FBR) is a prerequisite for success. It should be noted that reforming the FBR is a necessary though not sufficient condition for enhancing the country’s tax revenue.

One means of increasing FBR’s operational efficiencies is to reduce unnecessary human touch points. Corporate and individual tax payers should have as little interaction with humans as possible. Basic tax transactions must be simplified. More transactions should be shifted online. Online transactions reduce the possibility of corruption, improve speed and result in simplicity - an all round elegant solution.

To the naysayers who believe serious reform of the FBR is impossible only need look at the successes of NADRA and even the Election Commission. Both these government agencies have adopted new technologies and greatly simplified the lives of many Pakistanis as a result. Transactions which took weeks, months or even longer and were impossible without several unproductive visits to government departments are now routinely completed using a few clicks on a keyboard. Smart solutions are the way forward for the FBR.

Undoubtedly, increasing revenue and reducing expenses lie at the heart of any economic restructuring be it national, corporate or individual. Unfortunately, converting these two principles into effective policy decisions is a complicated process fraught with political minefields. Nonetheless, Imran Khan’s Justice Party (PTI) has a real opportunity to lay the foundation for genuine reform.

In my next post, I will discuss the necessity of approaching the ‘Filer’ and ‘Non-Filer’ distinction with greater finesse. ‘Non-Filers’ are not synonymous with tax evaders. Hence, throwing all ‘Non-Filers’ into a ‘penalize by paying more tax’ bucket is an unfair use of state powers. The policy must be improved to make it more equitable. Stay tuned.

__________________

Imran is a Singapore based Tour Guide with a special interest in arts and history. Imran has lived and worked in several countries during his past career as an international banker. He enjoys traveling, especially by train, as a way to feed his curiosity about the world and nurture his interest in photography. He is available on twitter (@grandmoofti); Instagram (@imranahmedsg) and can be contacted at imran.ahmed.sg@gmail.com