We need to revisit the whole taxation system

Interview: Dr Muhammad Irshad, former Chairman FBR


Dr Muhammad Irshad superannuated as Chairman FBR/Secretary Revenue Division on the last day of June this year after an illustrious professional career spanning over three decades of diverse experience. Joining Civil Services of Pakistan in 1985 in the Income Tax Group, since renamed as Inland Revenue Service, at his retirement he was in the highest grade in BS 22. Prior to entering the elite service, he had already served as a captain in Pakistan Army.

In IRS, he held numerous key positions, including Member IR Operations, Chief Commissioner, Regional Tax Office at Sargodha, Lahore and Karachi, and as commissioner Large Taxpayers Unit (LTU), Karachi. His assignments have ranged from heading some of the most vital field formations to spearheading the administration of IR Operations at the FBR Headquarters.

Dr Muhammad Irshad has multiple educational degrees in various disciplines, such as medical (MBBS), law (LLB), business and finance (MBA Finance) and public administration (post graduate diploma).

The following are excerpts of an interview with Dr Irshad post his retirement.

Profit: What to you are your accomplishments as the head of FBR?

Dr Muhammad Irshad: For a government employee, the foremost achievement would be completing one’s term with respect after completing assigned duties with honesty, dedication. You may ask around at FBR about my performance and achievements; they should be the best judges on my role as head of the department. With whatever role was given to me during my job, I am satisfied that I fulfilled it. I have set a precedent as member operation at FBR. In judging the role of chairman, unfortunately, recoveries and revenue targets have been the parameters at FBR, which I think should not be the case. Revenue targets each year are not based on statistics but on assumptions. Instead of merely going after the revenue targets, I focused on team-building and harnessing and development of human resource etc.

Q: What were major challenges for you at the FBR?

DI: The major challenge was to rectify or improve the tax machinery, as I believe the tax machinery actually determines the writ of a government. I faced a lack of resources, inspecting tools [to dissect] fake businesses, accommodation for the young team, accessibility to various locations etc. Whatever improvements I could bring in the tax machinery with the given resources would not go up unless more resources are provided to my successors.

Q: What’s your present workforce and how many of them are tax inspectors, do you think you were under-staffed? How many people does the FBR need?

DI: There is a lack of support staff at the FBR as no recruitment has been made during the past 10 to 12 years. Many experienced and qualified people have retired during this period. However, the number of officers has increased since the tax reform was introduced in 2001. There were only 15 officers when I joined the academy. Presently there are 60 to 70 officers but without enough support staff and facilities. An assistant commissioner can do nothing without proper machinery. The policy of decreasing lower staff and increasing number of officers was, I think, a self-defeating policy.

Another issue I must highlight here is related to Universal Self-Assessment Scheme (USAS) introduced in the Income Tax Ordinance 2001. This scheme authorised the taxpayer to assess his own tax liability. This scheme has no doubt made the tax laws modern and facilitated the taxpayer but the number of taxpayers and ratio of tax collection have gone down. People were happy to see revenue increasing but it caused a reduction in compliance level and tax to GDP ratio.

The tax department has already lost its teeth because of the USAS. It needs patronage and authority to bring the authoritative and affluent class into the tax net. The scheme, which was misused by the taxpayers, ultimately de-motivated tax officers. When I took charge, the institution was completely demoralised for the last 10 years. There was apathy among services and the officers with resource constraints were largely unhappy.

With limited resources, I tried my best to improve the system with the same workforce. Only 0.7 percent of the total tax collection is spent on tax machinery, which is unfortunate indeed. Even in Afghanistan, India and other developing countries, this percentage is higher. How can you expect extraordinary performance while spending only a pittance? At least one percent of the collection should be spent on the department. This would still be puny in comparison to other countries where over five percent of total tax collection is spent on tax collecting institutions.

Q: How are the groupings, political intervention, corruption and irregularities were impacting FBR’s performance?

DI: I agree; there are black sheep in FBR but an overwhelming majority is honest, dedicated and talented. Especially the younger lot recruited through FPSC during the past 10 years is very good in FBR. Since the perception of being corrupt has already demoralised the institution, I would request that nobody is called corrupt without evidence. At the same time, I would call for stricter internal accountability system in the FBR.

I must say the cancellation of transfers by my successor even before taking charge of the department was not right. I had ordered the transfers and postings before leaving office as I had forced some employees to continue against some officers’ desires.

Q: What tax reforms you have to your credit

DI: I have been a member of Tax Reform Commission when it was formed. The commission comprises highly competent members. I loved working with them. As head of FBR, the first step regarding tax reforms was to divide the corporate and non-corporate sector. I opened a Large Taxpayers Unit (LTU) in Karachi and two corporate Regional Tax Offices (RTOs), one apiece in Lahore and Karachi. In the rest of the country, we established corporate zones. I also assigned duties to officers as per their expertise in corporate or non-corporate sectors.

There are multiple examples in which we tried to discourage the tax evasion in the corporate sector. I noticed that in companies with bottom lines in the red, directors’ led a plush lifestyle, and tooled around in expensive vehicles, so we focused on them.

In the non-corporate sector, I tried to monitor businesses through RTOs. For instance, I wished to set up offices and assign the commissioners duties in Defence, Anarkali, Jatti Umra and others areas and outskirts of Lahore to not only monitor the businesses but also facilitate the taxpayers.

Apart from these, I had only recently introduced the concept of District Taxation Officers (DTO) to expand the tax net to every part of the country. Through this initiative, the intent was to bring more people into the tax net. The DTO offices established under the newly introduced reforms will be autonomous and mini-RTO office having financial and administrative powers to recruit staff. District Tax Officer will be in-charge of the district and will have representation at Tehsil level so that they could report about the overall performance of tax collection.

DTO will have a separate office and will have the powers of rectification, which will simplify the verification system and will be the appellate authority in deciding taxpayer related problems. The state will provide expenditure for DTO offices and instead of Additional Commissioners, they will directly report to Commissioner Office. As per the news system for the resolution of tax-related problems, the commissioner will have to visit the DTO office in the first week of every month with Chief Commissioner paying quarterly visits to these offices.

This system will provide correct data and record for the formulation of national reforms policy. I have introduced it in Attock, Wah Cant and Charsadda during my last days at the FBR. The model system would be copied in rest of districts of the country. The DTO will be given a residence, staff, administrative and financial authority and shall be provided security under this system. I hope my successors will continue it in future.

People don’t pay taxes voluntarily as taxpayers are not sure the taxed money would be spent on their welfare and services.

Q: What advice will you give to your successor?

DI: I would suggest to him to focus more on human resources instead of pushing files.

Q: As FBR misses revenue collection target again, what were the reasons behind this shortfall? Why has FBR accepted another challenging target of collecting Rs 4trillion in 2017-18?

DI: Honestly speaking, FBR should not be blamed for missing target as policy measures taken by the government actually affect the target. For instance, there was a differential of around Rs130 billion in the collection from the petroleum sector. As chairman FBR, I did not know how to compensate for it. Secondly, the government reduced the tax on fertiliser from 17 to 5 percent, affecting revenue loss of another Rs30 billion. The extension of zero-rating regimes also affected losses to the tune of Rs32 billion. Besides, the government introduced export bailout package worth Rs180 billion. Then taxes on pesticides were waived. These are quantifiable facts. Interestingly these policy initiatives were taken after fixing the revenue target!

The revenue growth must be 16 to 17 percent in 2016-17 if the policy measures are excluded. It was the same team which made record revenue generation in 2015-16. I would not comment on how the target of Rs4 trillion has been fixed for 2017-18. The FBR team may give better results provided they are given due respect.

Q: Despite tall claims of an increase in the numbers of filers, it is still at 1.158 million. What went wrong?

DI: I have already mentioned the reason: the FBR is not present everywhere. The concept of DTOs is aimed at expanding tax collection as well as encouraging filing tax returns. This will be very unjustified if the new system introduced through the tax reform commission is not expanded throughout the country.

Q: Is the government not overtaxing the at least 50 percent amongst common citizens who are non-filers? Millions of cell phone and internet users are not filers despite paying taxes in advance?

DI: This is an issue but FBR should focus on the major tax evaders. The DTOs are needed to watch people on high networks and taxing the rich will have a trickle-down effect. I suggest that wealth reconciliation certificate and tax record of a government officer should also be mandatory for promotions.

Why are parliamentarians not being asked wealth reconciliation certificates before contesting an election? They are only asked to submit tax returns. If someone is spending Rs5 million on election campaign as allowed by the ECP, it means he/she has surplus cash. I also agree that making filing mandatory for cell phone and internet users would be the right course.

Q: What did you do to deal with the issue of double or multiple taxes, especially on exporters and traders? Removal of federal-provincial multiple indirect taxations was also an issue which has remained unresolved?

DI: I admit that the issue is still unresolved. This is completely wrong to slap notices on a trader from four different quarters. I tried to address this issue but due to the reluctance on the part of provinces, it could not be sorted out. Provinces after getting right to collect some taxes following the 18th Amendment have established their own tax authorities. This case is needed to be tackled at Council of Common Interests. The FBR can do nothing in this regard until and unless the law is changed. The issue needs to be resolved immediately as it is causing an increase in the cost of doing business and also shattering the confidence of taxpayers in tax department.

Q: What measures have taken so far been taken to discourage under invoicing and tax evasion?

DI: Pakistan is facing losses in terms of tax and duties due to Free Trade Agreements (FTAs) signed with various countries. I think the environment in which these agreements were signed was not right. The Ministry of Commerce should revise the terms and condition of FTAs as Pakistan is the loser while other nations are prospering at our expense. We need to take steps for border management besides minimising human element and computerising the system at ports. The FBR only considers the exit and entry points and has initiated a foreign-funded project of Integrated Transit Trade Management System (ITTMS) for the construction of facilities at Wagha, Torkham, Chaman and border crossing points to deal with the taxation issue effectively. However, if goods are coming from FTA countries with zero or relaxed duties, FBR cannot do anything.

Q: Keeping the major subsidies intact in the present budget was a political decision. Is removing subsidy on power a good idea?

DI: Though it does not fall under my purview, I think subsidies are being used in Pakistan. Only targeted subsidies are given in the world but the case in Pakistan is different. If the government is targeting millions of poor people through the BISP why the same network is not being used to target the subsidies? I will only support targeted subsidy for a limited time.

Q: Did you have full autonomy as FBR chief or was there political intervention?

DI: Honestly speaking, the credit of non-intervention in FBR goes to this government. The Finance Minister only wanted us to keep him informed about major decisions. He never interfered in my affairs. I have been one of the powerful administrators in FBR.

Q: What is your take on some Western states and even Dubai where they have scrapped all kinds of income tax, which resulted in massive investment, job creation etc? Why can’t we do it in Pakistan where tax evasion is rampant and big fish don’t pay taxes anyway. What will be its implications?

DI: The idea is good but in an ideal world. This idea is good for the country where data is recorded even if someone buys soap or other small items from a grocery shop. He finds every record at the end of the year. On the contrary, we need huge investment to create such environment. Besides, the whole society needs to change to implement such a system.

Q: How many FBR inspectors have you fired or suspended for not doing their job effectively or over misuse of power?

DI: I have avoided the traditional way of punishing the wrongdoers. I was used to talking to them separately. I have taken stern action against few people in the organisation but on merit.

Q: We heavily depend on indirect taxes, and loss close to Rs1 trillion in tax evasion, what do we need to change that equation?

DI: I agree that indirect tax is a regressive tax, having negative implications on the society. Indirect taxes like sales tax, excise duty, customs duty, etc., are levied on all products/services without any differentiation, without considering the consumer group’s income/fiscal status which consumes the product/service. So the poor or rich are equally impacted by this.

But since our economy is largely undocumented, no solution to avoid indirect taxes is in sight. Our society usually resists documentation of economy as we have experienced in the case of the tax on property.

Q: Those earning above Rs400,000 are taxed, but there are two million merchants who earn much higher than this but pay little or no tax. This has been the same for many years. Why have you not been able to tax retail and wholesale sectors?

DI: As I have said earlier, we need to revisit the whole taxation system. The first thing we need to do is to shelve the USAS completely. It has badly affected compliance level. We need to introduce forensic audit, create deterrence and set an example by taking the major tax evaders to the task. These are steps needed to be taken at the government level. Being a government employee, one can only implement rules set by the government. Let the rulers not be influenced by their political compulsions.

Q: If asked to serve FBR again, what is that one thing you would do differently this time?

DI: I have never been interested in a position after I have left it once. However, I can serve on any other suitable post if I am offered one. I avoid self-praise, you may ask officials at the FBR how my initiatives were helpful in improving the performance of the organisation. Throughout my career as assistant commissioner, commissioner, chief commissioner, member operation and chairman FBR I have never been late to office. I never left office early.

I count the concept of DTOs, territorial approach, increase in tax machinery, action against wrongdoers etc. as best initiatives taken by me at FBR.

Q: There is a strong perception among the public at large that taxes collected are not spent on them, this is cited as a valid reason by many to either not pay taxes or avoid paying to the extent these are due?

DI: The taxpayer has every right to ask about money. The general perception that taxes are not paid in terms of services to the people is true. The government is yet to make a transparent system where the taxpayer can check where their money has been spent. The real issue is definitely on expenditure and not on collection side.

I will exhort the people to pay taxes and then boldly question the rulers on where their money was being spent.

Q: How the Panama Gate impacted the FBR? Did it make things even worse for the tax collectors?

DI: Not at all. Whatever record was demanded by the Joint Investigation Team (JIT), FBR obliged. The FBR is controlling body but the tax record is available with commissioners; even chief commissioner is not the custodian of record. The FBR only forwards what record is shared with it by the commissioners and their staff. I think only a stupid officer can take the risk of tampering with the record. He or she should not take such risk for a government which changes after every few years.