NationalVOLUME 16 ISSUE # 03

Taxation and revenue mobilization an unmet challenge

Revenue mobilization is the Achilles heel of our economy. Despite tremendous tax potential, revenue collection always falls short of the target. All efforts made over the years by successive governments have failed to yield the desired results. Whether legislative or administrative forms, all have failed to work. Where lies the problem?

As identified by experts, the main issue is of approach. There are numerous rules and regulations and no dearth of processes and procedures. But the missing element in all the measures taken so far is the main stakeholder – the taxpayer. They figure nowhere. No effort has been made to win their trust or to convince them that paying taxes is in their own interest. A country with lower tax morale cannot achieve success with revenue mobilization efforts. No system can deliver unless there is a “willingness to pay” by the citizens of the country.

In our country, life is difficult for the honest taxpayer while the cheats get off scot-free. It is impossible to pay taxes honestly in the present circumstances in the country. There is so much distortion in the business landscape owing to smuggling, massive tax evasion, higher tariffs and corruption, which makes it very hard for a willing taxpayer to sustain the present tax burden fairly, thus forcing them to become part of the rot.

People working in the organized sector are willing to pay their legitimate obligation, provided there is a level playing field and the tax compliance does not make their business unsustainable. But the system is distorted which punishes the honest and rewards the tax evader. There is a general lack of trust in the ecosystem of our business sector, as it is not being engaged by the state to resolve the issues and create an environment conducive to tax payment. The state cannot succeed unless it creates a level playing field for its businesses, makes payment of taxes a sustainable option, ensures the benefits of taxation for all its citizens and wins their willingness to do so.

Modern tax administrations everywhere are friendly to its citizens and businesses. Given the range and nature of laws to be administered, the tax administration has to attend to a large number of clients and needs adequate powers and autonomy to perform in an efficient and effective manner. But it must operate in a fair and impartial manner, and be subject to a range of checks and balances to ensure transparency in its operations.

To this end, a transparent accountability mechanism is needed for the overall management of the tax system. There is a need to establish a strong governance and oversight mechanism for the Federal Board of Revenue (FBR). It should work without direct interference by the federal government under a strong and functional board which should keep a vigilant eye on its performance and functions as a fiscal policy adviser for the federal government.

A good taxation policy is the key to a successful economic policy. In all developed societies, there is an interactive participation of the stakeholders in policy formulations. The process could not be implemented in Pakistan in the past. So, potential revenue has been wasted owing to the absence of requisite policymaking that is essential to ensure sustainable growth in the revenue.

All over the world, the tax system and administration is technology-driven. Automation is the name of the game. Technology provides avenues and innovations to support tax revenue mobilization. It presents an opportunity to formalize informal businesses, expand the tax base, and increase the tax capacity. Simplifying processes and reducing the cost of formalization can help firms make the transition to the formal sector. The largest impact on compliance can result from the real-time exchange and analysis of taxpayer/trader data among the Federal Board of Revenue (FBR), provincial tax authorities, withholding agents, other national and international databases. Big data and computing power help tax authorities to better detect tax evasion by tracking and registering all ongoing transactions.

There should also be an audit and fraud investigation programme based on clear risk assessment criteria. The transition to a technology-based audit will result in fewer, well-targeted taxpayer audits. It will enable tax officers to devote their quality time to medium and high-risk cases, build confidence of the compliant taxpayers and improve the Federal Board of Revenue (FBR) image.

Smuggling drives a big hole in tax collection. It has played a central part in fuelling the informal economy and limiting growth. The government should rationalize the import duties and contain smuggling through a single law enforcement agency, rather than mandating it to multiple agencies as being done presently. The customs checking and monitoring of the western borders should also be upgraded in addition to visible vigilance and action in the markets selling smuggled goods. The FBR should also digitise its customs entry-exit system by investing in equipment and software for the non-intrusive inspection of import, export and transit cargo. It will accelerate customs clearance, reduce the frequency of inspections and seamlessly detect fraudulent declarations.