Much has been made of the achievability (or not) of the 5.5 trillion rupee revenue target for the current year against 4.1 trillion rupees as per the revised estimates of last year noted in the budget documents (data that is being challenged). The attainment of this target is almost entirely riding on the capacity of Chairman of the Federal Board of Revenue, Shabbar Zaidi, to deliver.
Shabbar Zaidi was appointed as Chairman of FBR on 6 May 2019 (erstwhile senior partner of the reputable A G Ferguson chartered accountancy company). However this is not the first time Zaidi has engaged with the government. He held the following positions in previous administrations though his services were and continue to be pro bono: (i) Sindh finance minister during the caretaker setup in 2013; (ii) Member, Central Audit Committee of Board of State Bank of Pakistan; (iii) Senior Member of the Task Force for Reform of Tax Administration; and (iv) Advisor, Corporate Rehabilitation Committee of Securities and Exchange Commission of Pakistan.
Zaidi, in his avatar as senior partner of Ferguson, dealt mainly with big corporate clients not known for evasion or failing to file their returns though loopholes would almost certainly have been explored. Be that as it may, Zaidi’s supporters maintain that he is uniquely placed to plug all loopholes given his long career in Ferguson while his critics challenge his appointment on grounds of conflict of interest. So where does the truth lie?
Less than a week after he accepted the position of Chairman Zaidi took four major far reaching decisions. First, he focused on dealing with long standing allegations made by taxpayers and thereby directed all chief commissioners inland revenue through a notification that there can be “no bank account attachment unless the taxpayer’s chief executive officer or principal officer or owner is informed at least 24 hours prior to attachment and the chairman FBR’s approval is obtained.” His first measure therefore must provide a comfort level to many of his former accountant colleagues and clients as FBR staff would no longer be able to threaten/blackmail them with summary annexation of their assets. Zaidi also barred field formations from conducting raids on the premises of an existing taxpayer without prior approval of FBR Member inland operations and himself as chairman. Seen from a different perspective this measure may tie the hands of ‘honest’ FBR officials who would no longer be able to freeze accounts promptly; and, at the same time, by making approval of the Chairman mandatory before punitive action can be taken is reminiscent of the much abused National Accountability Bureau law which makes its Chairman’s approval mandatory prior to initiating investigation leaving him wide open to charges of partisanship.
Second, Zaidi began a major country-wide FBR staff reshuffle: in the first phase 3100 Inland Revenue officials up to grade 16 were transferred and in the second phase 478 customs group officials were transferred. As per reports 10,000 FBR staff members are earmarked for transfer. It is too early to assess the outcome of this policy though his critics maintain that such large scale transfers may not achieve his objective as those transferred would merely share details of the ‘opportunities’ existing in their previous postings. To further limit the discretionary powers of FBR staff Zaidi revealed that the Board was planning to implement new E-virtual set up that would further reduce the role of FBR staff.
Third, while talking to the media Zaidi clarified that “my intention and aim is to document the undocumented economy. Documentation of the undocumented economy will automatically increase the tax base.” In his focus on enhancing documentation Zaidi announced two schemes notably: (i) registration of all (small, medium) retailers, wholesalers or association of persons would henceforth be mandatory and all purchases/sales would require the use of buyer’s CNIC; and (ii) a simplified small shopkeepers scheme would carry a fixed tax, though the CNIC condition would remain, with FBR stating that it has allowed that no adverse action will be taken against those who do not use CNIC till 30 September 2019. Negotiations between the traders and FBR are continuing with the former threatening country wide strike action if the CNIC condition remains.
Zaidi in a recent press conference clarified that as per the Income Tax Ordinance, filing tax returns is compulsory for those who own a house larger than five hundred square yards or a vehicle over 1000 cc and according to Clause 181 AA it is mandatory for commercial and industrial gas and electricity consumers to become part of the Active Taxpayers List (ATL). Zaidi also claimed that the number of tax filers increased to 2.1 million by end of last month for fiscal year 2018 – 523,000 more than filed in 2017. It is unclear how much additional tax if any has been collected by these additional tax filers. The date for filing returns for 2018 may end up being just one month away from the last date of filing returns for 2019 in the event that there is no additional extension reflecting serious management issues.
Fourth, and what has been under debate (with policy measures taken in the April 2018 budget presented and approved during the tenure of the PML-N administration) is the finalization of the rates of immoveable property, upping them from between 50 to 85 percent on average – a valuation that few, barring the real estate sector, consider is not long overdue.
Sadly, what Zaidi has not done so far is to change the tax structure itself which is inequitable as it relies heavily on indirect taxes (whose incidence is greater on the poor relative to the rich). Total indirect taxes are budgeted to generate an additional 40 percent this year in comparison to the revised estimates of last year (based on data available in the budget which independent economists argue is overstated) while direct taxes would generate an additional 25 percent. The rise in income tax rates for the salaried class has: (i) reduced their disposable income with a negative impact on consumption and consequently productivity as well as employment; and (ii) a major component of income tax collections remains withholding taxes in the sales tax mode which is an indirect tax.
In percentage terms the government has committed to the Fund that revenue collections in 2019-20 would rise from the following indirect taxes: (i) sales tax collection would increase by almost 42 percent; (ii) customs by 36 percent – a target which was unmet in the first month of the current year given the rupee depreciation dampened imports and therefore customs revenue; and (iii) federal excise collections would rise by 37 percent.
To conclude, Zaidi’s emphasis on documentation to the exclusion of initiating the challenging process of amending the existing inequitable, anomalous and unfair tax structure cannot be supported.
(This news/article originally appeared in Business Recorder on August 19th, 2019)