Dial ‘F’ for FBR

GIVEN the advanced state of collapse of so many public-sector enterprises, which one institution or agency should we be most worried about?

Railways, with a loss of ‘only’ Rs40bn? PIA, needing a bailout this year of ‘only’ Rs22bn? Steel Mills, requiring a monthly injection to stay afloat of ‘only’ Rs6bn? Sindh Bank — a potential Rs30bn disaster (‘only’) in the making?

Out of all the institutions being merrily run into the ground by the ‘awam dost’ coalition government, there is one that is not only much larger, has far greater consequences for its acts of omission and commission, but is being pillaged without fear of public scrutiny. Welcome to Federal Board of Revenue, a Rs1,550bn behemoth.

While things have been in a state of secular decline at the FBR for a long time, its one redeeming feature has been its fairly professional cadre. On the whole, a judgment about FBR as an institution has always been corrupt, yes, but competent. Now, however, prima facie it appears FBR has moved to a dangerous new category of ‘corrupt and incompetent’.

This is indicated by the tax-to-GDP ratio hitting rock bottom in 2011, declining to a record low of 8.6 per cent, or by the fiasco of reporting an inflated figure of tax collection on the night of June 30, when even provisional figures are not fully available (and then promoting those responsible while blaming the field formations). Clearly, there are good reasons to worry about the situation with regard to FBR.

Two worrying, and inter-related, developments best illustrate the true state of affairs in FBR, and the scale of the clean-up required. The first is the so-called ‘ISAF missing containers’ case, which the Supreme Court took suo motu notice of. Initially, the Supreme Court entrusted the inquiry into the matter, in which FBR itself estimates that a loss of around Rs50bn at least was caused to the exchequer, to the Federal Tax Ombudsman’s (FTO) office.

The FTO’s inquiry report is a damning indictment of corruption at senior levels in FBR. Excerpts from the report’s findings will best illustrate the issue at hand:

“One-Customs manual clearance system was found particularly prone to huge transit scams.

“The investigation of four mega scams of containers in the past few years indicates a clear pattern. The phenomena of pilferage is not new, neither are the glossing over efforts by senior officers to provide cover up through creating hindrances in

investigations, manipulation of record and data, diverting focus by ‘fact-finding committees’.”

(In one case, the collector who had failed to prevent wrong clearance of 52 containers was made part of the ‘fact finding committee’, according to the FTO report).

“The picture that emerges is of gross inefficiency, maladministration and corruption in an organisation that is geared to further principally individual and communal self-interest of a few individuals at the cost of Pakistan and her people.”

Against this backdrop, the second shocking development provides an insight into how deep and entrenched the vested interest in FBR really is. FBR insiders, after many attempts, have finally succeeded in killing a third-party developed automated customs clearance and risk-management system called Pakistan Customs Computerised System (PaCCs).

While international best practice, our own experience with maladministration and corruption in Customs, and the damning report by the FTO office, all point to the direction FBR should be taking — of strengthening its automated clearance capability in a transparent manner and instituting a stronger risk management system — FBR has chosen to do the complete opposite:

de-automate customs.

My involvement with the PaCCs issue in 2009 and early 2010 gave me a shocking insight into the scale of deception and fraud that FBR insiders at the highest level were prepared to employ to protect ongoing large-scale corruption in their institution.

When the PaCCs issue was first taken up, we were informed in a ‘secret’ briefing that the reason FBR high-ups wanted to shut the automated clearance system was that the security establishment had objected to it as it was somehow deemed to be ‘against the national interest’. Smelling a rat, their bluff was called and appropriate checks made. It was discovered that FBR’s representation made by no one else than the chairman and member was false!

To my amazement, the same ‘secret’ file was presented to the new finance minister a few months later. (Talk about brazenness and persistence). I briefed the minister on the background and the result of our earlier checks. He made a few calls and was told exactly what we had been informed earlier — no objection had been raised by the security establishment to PaCCs.

And yet, months later, PaCCs has finally been abandoned. The task for developing an automated clearance system and associated risk management has been transferred to Pakistan Revenue Automation Limited (PRAL), the very agency which: a) has been indicted in the FTO report for facilitating corruption in Customs; and, b) is ‘owned’ and managed by FBR itself.

So, now FBR is expected to police itself — which goes against the basic principles of governance.

To strengthen FBR as an institution, the following measures will need to be taken:

1) Implementation of the report of the Task Force on Tax Administration (the Shahid Husain Committee Report of 2001).

2) Implementation of the findings of the World Bank mission on tax administration reform, which was headed by Carlos Silvani, an expert of international repute;

3) Independent third-party audit of PRAL and its systems, and implementation of PPRA rules on FBR in its relationship with PRAL.

4) Disclosure and audit of personal, business and family assets of chairman and members FBR;

5) More stringent monitoring of measures to improve tax compliance and enforcement. For the past few years, FBR has set itself a collection target of Rs50bn via better administration, but this is not monitored.

Revamping the tax system in Pakistan is the single biggest challenge facing the economy — and should be the single biggest target of any reform effort.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.