Domestic revenues

Domestic Resource Mobilisation (DRM) is the cornerstone of taming debt growth, providing governments with adequate funds for development and delivering public services.

Weak administrative capacity, low tax morale and compliance, and a limited tax base are key challenges in many developing countries – and Pakistan is no different. The country has been undergoing tax reforms since 1990 to overcome systemic failures. However, the economy struggles to raise its overall tax-to-GDP ratio to worthwhile levels to manage burgeoning fiscal deficits.

Success at raising domestic revenues remains weak at best, despite support of international partners through tax administrative reform projects and technical assistance provided to Pakistan. In fact, the FBR tax-to-GDP ratio of 11.2 percent in 2018 has slid to a single digit.

This is a serious cause for introspection. Pakistan’s tinkering with tax rates and import duties, attempts at broadening the tax base by providing amnesty schemes, and traditional administrative ways to get compliance are insufficient to bring a worthwhile change. In addition, the retail sector largely remains out of the tax net while property taxes, agricultural income tax, capital gains tax and inheritance tax remain out of the purview of mainstream taxation. We must reconsider an over emphasis on revamping policy and move towards a serious administrative rewiring.

Doing more of the same is unlikely to achieve major success. Budget 2022 continues to lay emphasis on policy with a focus on indirect taxation. A tacit acceptance that a major departure from the past is difficult to undertake. Administrative strategy is restricted to point of sales at the retail level with a hope that much delayed track and trace is implemented to capture under-reporting. It is unlikely that however well intentioned, budget measures cannot fundamentally alter the systemic issues.

The way forward requires a clear break from the ongoing practices in tax administration to improve DRM. It may be worthwhile to take cue from countries like South Africa, which took surgical steps to change the culture and mindset of the tax organisation, leading to more voluntary compliance. Similarly, East Asian countries also embarked on successful tax reforms to improve their DRM through efficient and effective tax structures and administration. Let us outline a transformative agenda for rethinking administrative processes at the national level in Pakistan.

A radical overhaul of the legacy system by modernization – based on new technologies, analytical tools, and data integration – should be our end goal. A National Tax Authority focused on digitalised processes, risk management compliance framework, streamlined procedures, and end-to-end automation with minimal contact with taxpayers has to be shaped. Finding the right combination of three measures – enforcement, facilitation, and trust – is critical to achieve revenue goals.

The approach to detect and deter inaccurate reporting needs to be focussed on a risk-based audit methodology based on taxpayer size, tax types and industry sectors. Risk profiling of taxpayers by data mining using information exchanged automatically or on request (domestic and international) to identify tax evasion and avoidance is imperative.

It is also essential to strengthen the upper and middle management in the FBR by selecting people of managerial and leadership competence with adequate skills and experience. Professionalising the FBR through remuneration reform, performance-based human resource management and training is essential. Such a setup can provide an overarching, whole-of-tax approach for taxpayers by coordinating the administrative reform process for at least three years.

International taxation remains an under-exploited area of revenue in Pakistan. Globalisation, digitalisation and increased mobility of tax bases have increased pressures on tax systems and led to introduction of international standards on Base Erosion and Profit Shifting (BEPS) and automatic exchange of financial information. Taxes paid by companies remain a key source of government revenues, especially in developing countries; however, governments can lose a high percentage of revenues due to BEPS by multinational enterprises (MNEs). Transfer pricing audits of MNEs has the potential of helping get $3-5 billion yearly in revenues for Pakistan.

Information and transactions transcend all boundaries. A different type of capacity building is needed to be able to use the vast information to ensure tax compliance and prevent tax avoidance and tax evasion. Specialisation today means trained teams dealing with international money movements, high net worth clients, small and medium enterprises, digital economy and e-commerce. The mindset should be two-fold: ensuring full compliance yet facilitating ease of doing business. This specialised framework will be a major departure from the all-integrated framework in which the administration currently works. It will help sectoral tax specialists focus on facilitative practices in their areas.

The future generation must be taught the value of paying taxes as a national service. Awareness campaigns should be conducted through educating school children and university students in tax literacy, television and entertainment media, firms as well as tax advisors and the informal sector. This is essential to build a national tax culture, more than just doing philanthropy. A specialized team should be built to focus on raising awareness – it’s not always about deterrence; at times moral persuasion can change minds.

Global experience has taught us that successful tax reforms involve political support and administrative follow-up. Building our local capacity at the individual and organisation levels is a must. It is also necessary to build in-house research and evidence-based policy analysis for both advocacy of reform and to convince taxpayers to do their bit as all incomes get taxed, progressivity of payment is ensured, and all taxpayers are treated fairly.

Pakistan’s tax administration can potentially play a pivotal role in re-defining the way financing needs are met – moving from a borrowing mindset to one relying on DRM.

The writer is former advisor, Ministry of Finance, Government of Pakistan.

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