Implementing tax reforms needs nerves of steel

LAHORE: The finance bill passed with unexpected ease. Its implementation will require not only strong nerves, but also the ability to identify and remove detractors from within the bureaucracy that has to implement those tax measures.

Right at the dawn of the new fiscal year, many trade and industry associations have announced protests, while a majority is waiting for the appropriate moment to join them. In fact, they will join if the government fails to tackle these initial protests. The finance bill has tried to close the doors of tax evasion for traders and industrialists, tax evaders, and short fillers.

It did give a small respite to traders that the CNIC was only needed in purchases of Rs50,000 or above. For the exporters, the government has stubbornly refused to grant them sales tax exemptions.

They will have to pay sales tax on their inputs and claim refunds after the exports are executed. For cheaters and hoarders, the government has withdrawn the powers of the Federal Board of Revenue (FBR) officials to raid residences to unearth illegal wealth stashed in houses.

The two concessions that the government granted would keep the non-documented and illegal wealth intact. The retailers were first directed to record the CNIC of all purchasers. This was indeed a tough condition and would have been difficult to comply with.

But the CNIC condition has been enhanced to Rs50,000. This leeway will be used by sellers to issue multiple receipts of less than Rs50,000 transactions for selling goods worth millions without the CNIC.

A Rs15,000 limit would have been better, as it would have covered a majority of small electronic gadgets and furniture purchased by a majority of households. This leeway will simply increase the paper work of the supplier, without identifying the purchases. The assurance not to raid residences will encourage those in possession of ill-gotten wealth to shift it to their residences, instead of bank lockers. It might increase robberies too, which rarely target secured bank lockers.

Withdrawal of zero-rating facility from exporters was in line with regional practices, where refunds were smoothly made after the execution of exports. It would not hurt exporters if the economic planners could reign in the bureaucracy.

The refund system is very lucrative for the bureaucrats. Exporters openly allege that they have to pay certain percentage of the refund amount to get them quickly.

Until now, we have been operating a flawed refund system. A firm or a person is registered in the sales tax regime after thorough scrutiny by the concerned sales tax official. The official is required to visit the premises from where that firm or individual operates. The FBR official has to personally interview the person who wants to register.

After being fully satisfied with the credentials of the person and his/her business, the registration is granted. The name of the firm/person is placed on the FBR website. The exporters are required to procure inputs from the sales tax firms/persons whose names are on the FBR portal. They are entitled to prompt refunds if the input for exports is made from these registered entities and the consumption of the input is proved through exports; the FBR, after deep collaboration with stakeholders has worked out the quantity of each input that is consumed in specific export products. This looks like a fair arrangement.

But up till now, this system has never worked smoothly. After execution of exports, when the exporters applied for refunds, the FBR officials told many of them that the sales tax they paid to the registered entity has not been deposited in the government treasury by the seller (registered sales tax person).

In numerous cases it was found that the registered entity has either closed the office registered with the FBR or there was no trace of the individual in whose name the registration was issued.

This was the fault of the FBR, and not the exporter. But the refunds were withheld till completion of investigation (which takes a long time). After that the FBR started scrutinising all refund claims and the “scrutiny” completed only after the exporter parted with a certain percentage of refund and paid that amount in cash.

The economic planners have assured that this time around, the refunds would be cleared as soon as the export proceeds were received. If this is assured, the exporters should not face much problem.

The exporters sometimes deliberately delay the export proceeds expecting to gain more value when the rupee declines. In such instances, their refunds would also be delayed. The government should conduct third party audit of input purchases. In case the sales tax amount is not deposited and the seller is untraceable, the FBR officer that registered the entity must be apprehended.