The government has notified integration of tax administration, and created functional streams of inland taxes. This is an interesting step with far reaching consequences and needs a serious analysis. The Central Board of Revenue (CBR) was governed under CBR Act 1924 that has recently been replaced by the FBR (Federal Board of Revenue) Act.

The history of taxes goes back to the days of East India Company which introduced imperial customs. The repealing of such an old structure must have been preceded with serious research work, candid discussion and evaluation of pilot projects of the new set-up. There was no reference to such a spadework in the papers read out at the international conference on taxes, organised by the FBR.

The purpose of genuine reforms is to develop a role model. Do the reforms being conceived by the government meet this criterion? The question needs to be answered with supporting data that we have attempted to discuss in this article.

One does find in Pakistan’s letter of intent to the IMF dated November 20, 2008 that the government will introduce integration of administration of domestic taxes. Interestingly, the letter presumed that this measure would be endorsed in a conference that was to be held on December, 16-18. However, this measure was proposed by World Bank consultant, Mr Salvani and was evaluated by IMF consultant Dr Ihtesham Ahmad. The model proposed by Mr Salvani, which has been implemented by the government, is presented below.

That is how a very important and crucial decision was not only made in the said conference but implemented as well.

One of the concerns voiced constantly by the government’s fiscal wizards as well as donor agencies is the low tax-to-GDP ratio. Mr Salvani cited the example of Egypt and asked if Egypt can raise GDP-tax ratio by four per cent, why can’t Pakistan?. Another IMF speaker, Dr Ihtesham Ahmad found faults with VAT in Pakistan and suggested to fix it.

Mr. Micheal Keen, another IMF expert from Georgia University referred to aberrations inducted in VAT in Pakistan such as resorting to zero rating withholding tax and exemptions. It was quite interesting to note that to fix the VAT, Mr Salvani’s advice was to expand the scope of withholding tax in GST which is also an aberration in VAT regime.

Since the FBR collects taxes from public, it is essential to examine any changes made in its structure as well as in the tax regime. For this purpose, a brief resume of the organisation profile of other countries has been described below.

The first question is to see whether is there any country where the administration of taxes has been integrated and functional streams drawn as has been done by Pakistan. No such model as has been adopted by it, exist in any other serious economy. The only functional models that exist with a sizable economy and worth referring are Australia and New Zealand.

In both of these countries, there are independent boards for domestic tax and international taxes. Again, there are streams of Enforcements, Compliance, Technology, and Legal. They have not provided any slot for inland taxes, as it is contrary to functional model. The enforcement stream as has been made by the FBR is dependent on indirect streams. In this set-up, the enforcement stream loses its relevance. The field enforcements will look towards the one who is responsible for their administration.

It is also relevant to see how successful economies are following models in our region:

In India there are two separate boards, Central Board of Excise and Customs and Central Board of Direct Taxes. In Malaysia, Inland Revenue Board collects only direct taxes whereas Malaysian custom collects GST/VAT.. In Bangladesh, the National Board of Revenue, has separate streams for income tax, value added tax and Customs. The first major merger of direct and indirect taxes was introduced in the UK, where HMRC was constituted to administer income tax, VAT, Excises, and Customs.

Apart from putting administration under HRMC, it has constituted different committees that look after the distinct operational streams of VAT, income tax, and excises. There are, RC Audit Committee; HMRC Departmental Board; HMRC Executive Committee; HMRC Executive and Advisers Committee; HMRC Operating Committee; HMRC People’s Committee; and Joint Departmental Board. The HMRC reorganisation has enhanced efficiency as tax gap analysis narrowed down to single digit from more than 30 per cent losses.

The other example is that of Egypt. Egypt increased the share of its revenue to GDP by four per cent. It would have been logical to consider the Egypt taxation model as it is considered a success story. This model is contrary to the one Pakistan has introduced. Interestingly, Egypt has not fiddled with its organisation structure.

The countries which have merged federal and domestic taxes, have their own autonomous organisations, as is the case with India, Australia, and New Zealand. In other countries, such as Bangladesh, and Malaysia, the VAT is with customs and there are separate organisations administering income tax and customs. This discussion has not taken into account many Latin American and African countries for the simple reason that they follow whatever the donors tell them.

There is no denying the fact that every organisation needs reforms and more so in a country like Pakistan. But the point is one must follow the example of those countries that are very successful in adopting the merger system. The countries that have more than 100 years of experience are in a better perspective to decide the kind of organisation is needed to put in place.

The IMF guru, Richard M. Bird in his study, “Value-Added Taxes in Developing and Transitional Countries: Lessons and Questions” has suggested the NOSFA principle – No One Size Fits All – although it may be that several ‘sizes’ (patterns) of VAT may prove suitable for different groups of countries in similar circumstances.

Apart from the integration of administration of taxes, care should be taken that the stream of direct and indirect tax, federal excises and GST should continue till integrated information is developed. If GST has to be on VAT pattern-- considered as tax of century—it should be replicated in accordance with best practices.

There is a need to keep the accountability of revenue organisation in mind while embarking upon reforms. Even in the US, the IRS is the most dreaded organisation despite that relief readily available in courts. If Pakistan creates IRS, it may turn out to be a monster as was NAB or FIA.

Everyone knows that it is not easy and cheap to seek relief from courts even for a genuine case. There is too much political acrimony and divide between cross sections of society and let not the FBR be made to serve as a tool to squeeze the opponents. The economy is largely undocumented, illiteracy a norm, and acts of omission and commission will be in the hands of FBR to whip whoever it wishes. This could not be the intent of any reforms.