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Maladministration within the Federal Direct Tax

Establishment in Pakistan.
- a diagnostic evaluation.

M Munir Qureshi
Advisor to the Federal Tax Ombudsman,

1. Maladministration in the FBR and its’ field formations has had a

close nexus with the type of tax law in force (tax statute) and
the tax system in place in a particular time frame. In Pakistan
we have had three direct tax statutes since 1947- the Income
Tax Act 1922 (Act XI of 1947); the Income Tax Ordinance 1979
and the Income Tax Ordinance 2001. I have been associated
with all three during my service career.

2. The Income Tax Act 1922 had universal assessment of all

Returns filed as its’ outstanding feature. Limited self
assessment was introduced in the later years but there was
never any concept of across the board self assessment or even
self assessment for a very large segment of the taxpayer
population. There was no requirement for mandatory
maintenance of records and accounts in the case of Individual
taxpayers. Also, there was no system of tax withholding such as
in place since the 1990’s. Only ‘Advance Tax’ paid was required
to be ‘adjusted’ at the time of ‘assessment.’ Furthermore, a
great deal of ‘authority’ was invested in the person of the
‘Income Tax Officer’- the first tier in the direct taxes

departmental hierarchy. The assessing officer though powerful

was very poorly paid. Tax rates were very high- especially the
highest marginal rate of tax, and the ‘zero bracket’ amount
[exemption limit] was low.

3. The ‘tax system’ outlined above, based on the Income Tax act
of 1922, adapted as it is, in 1947, had very close interaction
between an all powerful assessing authority overseeing a
relatively ‘harsh’ tax regime – in terms of liability created,
especially in the higher tax brackets- and the tax paying public.
Coupled with the fact that there was no rigorous system of
accountability in place, this became an ideal environment for
the arbitrary exercise of discretionary power by the assessing
officer and a rapacious clerical bureaucracy linked with the
office of the ITO and much of the maladministration in these
years was relatable to this environment. Record keeping was
on almost exactly the same lines as in pre-partition British India
ie entirely ‘paper driven’ with no access to any technological
innovation – other than the now archaic manual typewriter.
Corruption was rampant but the taxpayers did not complain a
great deal as they were generally ‘comfortable’ with the
corrupt environment in which they ‘saved’ a great deal of
income from taxation by paying what was generally perceived
to be, a limited amount by way of a bribe. Taxpayers did their
utmost to keep the ITO and his ‘staff’ – especially the Circle
Inspector, the record clerk and the ‘assessment’ clerk happy as
they knew they had a great deal of authority and a strict
assessment invariably entailed a heavy tax liability because of
the harsh tax rates in force – as high as a confiscatory 98% for
the highest tax bracket in the early 1970’s. Many ‘Individual’
taxpayers were placed in the ‘no accounts’ category and did

not produce any accounts before the assessing officer who

exercised his discretion while making assessment ‘leniently’ or
‘harshly’ depending upon the ‘arrangement’ with the taxpayer.

4. A system of universal assessment of all tax returns is bound

also to lead to a great deal of litigation as obviously every
assessment cannot possibly be a “compromise” assessment.
The first appellate tier in the appellate fora set up for redressal
of taxpayer grievance is the departmental forum of APPELLATE
COMMISSIONER OF INCOME TAX. The appellate commissioner
is a departmental officer and though exercising appellate
authority is placed in the administrative control of the FBR
(Member, Judicial). This mix up of executive and appellate
authority has been the cause of much misgiving among
taxpayers as there is a perception – not without justification-
that this first appellate tier was subject to a great deal of
maladministration as appellate commissioners were loathe to
rule against revenue even in deserving cases and as their
periodic performance evaluation was to be made by
departmental officers (the executive) the reluctance of the
appellate commissioner of income tax to give ‘relief’ where due
though not justified by any means is to a certain extent
understandable. However more worrisome is the perception
that in some cases where ‘appeals’ have been preferred against
the orders of the assessing officer before the appellate
commissioner ‘undue relief’ is given as a quid pro quo for illegal
gratification. Obviously both the failure to give relief where due
and the relief given consequent to receipt of illegal payment
amounts to maladministration.

5. Maladministration in this ‘first phase’ associated with the

Income Tax Act 1922 was thus manifested mainly with an

explicit or implicit ‘threat’ to exercise discretionary power

connected with assessment of income and the adjudication of
appeals filed against such assessment of income, arbitrarily.

6. The Income Tax Act 1922 was superseded by the Income Tax
Act 1979. Tax rates had started coming down and self
assessment of income was now in place for a much ‘enlarged’
taxpayer population but was still far from being ‘universal’ in
scope especially with regard to corporate taxpayers who were
not only denied the benefits of self assessment of income but
continued to suffer from a discriminatory and harsh, three
tiered tax rate regime. The ‘no account’ category of taxpayer
was still there. This phase however saw the beginnings of
workplace automation and the Personal Computer and the dot
matrix printer enabled information to be stored on computer in
digital format for the first time in tax offices. Also, mini main
frame computers were put to use, again for the first time, for
data entry related mainly to the storage and processing of tax
collection challans.

7. One of the most significant changes brought about in this

second phase that saw a new tax law in place (the Income Tax
Ordinance 1979) was the introduction of tax withholding in
many areas yielding ‘income’ to recipients. One ‘fall out’ of this
new system of tax withholding was the emergence of ‘refunds’
in a relatively large number of income tax assessments as the
quantum of tax withheld exceeded the total income assessed.
This introduced a new area of ‘maladministration’ in the
Income Tax Deptt. Officers and staff ‘processing’ the refund
applications often faced allegations of wrong doing in so far as
in many cases refund applications were not disposed of in time
and in others were alleged to have been disposed of with

alacrity only because extra legal ‘payment’ was involved. In

order to cope with this flood of complaints and allegations an
innovation in tax law legislation was introduced, the so called,
presumptive tax regime. Payments of tax to construction
contractors and commercial importers, to begin with, were
deemed to be ‘final discharge of tax liability’ requiring no
further assessment of income of this category of recipient. This
practically eliminated ‘refunds’ of income for taxpayers placed
in the PTR. Gradually the scope of the presumptive tax regime
was extended and the quantum of refunds has come down but
obviously in a fairly extended system of tax withholding in
which such withholding constitutes some 50% of over all tax
collections there are bound to be areas in which tax withheld is
“adjusted” against tax demand raised at the time of assessment
as PTR cannot possibly cover all areas yielding income and
refunds will arise in some of these cases where withheld tax is

8. Litigation though somewhat reduced than in the earlier phase

nevertheless continued at a fairly high level and was again the
cause of much misgiving both for taxpayers as well as tax

9. This second phase that follows the promulgation of the Income

Tax Ordinance of 1979 introduced another feature that has
been the cause of a great deal of maladministration. This is the
use of political power to settle scores with the ‘opposition.’
Both the major political parties when in ‘power’ lost little time
in using their political clout to ensure that those in the
‘opposition’ had to face up to a rigorous tax regime that
saddled them with huge liability. In the long run this was a
futile exercise as the manner in which the tax demand was

contrived was so outlandish that it was knocked down as soon

as the political power changed hands. In the bargain the tax
functionaries under whose signatures the actions were taken
often became scapegoats, accused of maladministration.

10. Apart from the feature of political excess it had become

clear that the existing law was not able to satisfactorily deal
with the changed requirements of the information age and
maladministration had become increasingly associated with
obsolete systems that made it possible for errant individuals to
‘exploit’ the system for their private benefit.

11. Business Process Re-engineering was now required to

revamp the outmoded work procedures and authority was
required to be dispersed and delegated on the basis of
functional specialization to prevent its’ undue concentration in
a few hands and in keeping with the modern, business
management approach. Furthermore, to cope with the
enhanced workload, induction of modern I.T. based data
management technology had become imperative.

12. The Third Phase which began with the introduction of yet
another tax law, the Income Tax Ordinance of 2001 now sought
to re-cast the entire tax system. Starting with universal self
assessment for the first time for all categories of taxpayers – ie
including corporate taxpayers, authority was now delegated on
functional lines “from the top down.” Whereas under the first
two tax laws the income tax officer was all powerful, now, it
was the Commissioner who was so empowered. However in
order to achieve the given objectives he was expected to
“delegate” authority down the line but this delegation was to
be on purely functional lines. Thus an officer empowered to
conduct Audit would not be issuing refunds. He would not be
in-charge of assessment records. And so on.

13. Universal Self Assessment has minimized departmental

taxpayer interaction. Only a limited number of cases of
taxpayers are picked up for Audit and the selection is required
to be on parametric criteria. Coupled with changes in the
manner in which authority has been dispersed rather than
concentrated in a few hands, it is now much easier to get a grip
on maladministration. Both the inefficient and the corrupt are
now much more prominent than under the old dispensation.
And this is true both on the assessment side (fewer cases
picked up for audit) as well as on the appellate side (reduced
institution of appeals, less litigation).

14. A much improved taxpayer environment has also

followed in the wake of marked reduction in tax rates especially
for the corporate sector where the three tier tax rate structure
for private, public and banking companies has finally been done
away with completely and a single rate prescribed for all
corporate entities (35%). Similarly in the case of Individual
taxpayers the highest marginal rate of tax is pitched at an all
time low (25%).

15. As for political interference and settling scores with

political opponents, thankfully, this is no longer the problem
that it once was. This is one area in which there has been a
clear improvement.

16. This is not to say ofcourse that maladministration has

been eliminated because of a more salutary environment for
taxpayers. In particular the maladministration that is linked to

an adversarial relationship vis a vis the tax paying public

persists. However here too some improvement is certainly in
evidence. Corruption is there but the avenues for corruption
are much less.

17. A good deal of maladministration continues to be in the

area of settlement of refund claims. Delay occurs mainly
because of workforce apathy; claims are taken up only when a
complaint is filed or someone in authority ‘puts in a word’ – or
when a bribe speeds things up.

18. Additionally, delays in settlement of refund claims occur

even when a claim is taken up for processing and it involves
verifications of payments from withholding agents. In most
cases departmental officials are content to send one letter to a
withholding agent and then to forget about the matter. There s
just no system in place to ensure that there is effective follow
up action in case – as is usually the case- the withholding agent
does not respond to the query addressed to him. The deptt has
been facing this problem with refunds for a long time now and
one would expect that an effective system of payment
verification would be in place by now but unfortunately that is
not so nothwithstanding repeated exhortation from the FTO’s
office as well for remedial action in this area.

19. As regards the really large refund claims an important

reason for delay in their settlement is that disbursement would
affect the “budgetary position” of collections adversely. The
deptt says that “budgetary targets” are no longer a criteria
when evaluating performance of field officers but the actual
position on the ground suggests otherwise.

20. In all advanced tax jurisdictions all refunds are received


automatically through the post once they have been claimed

properly. Tax payers willingly deposit ‘extra tax’ over and above
what is due from them as an insurance against any possible
shortfall in payment in the certain knowledge that the extra
payment made will be refunded automatically – within a short
time span.

21. The system of income tax withholding introduced in the

1990’s has, as stated supra, a lot to do with the emergence of
income tax refunds. This system was put in place when the
Income Tax Ordinance 1979 was in place. Today a new tax law
is in place (the Ordinance of 2001) but the tax withholding
system continues, the old system having been ‘saved’ in the
new Income Tax statute. However there is a change in that
reliance on withholding taxation is being reduced gradually.
However this is not to say that there is an intention to do away
with tax withholding completely as this has shown its’
usefulness and some form of income tax withholding is present
in most tax jurisdictions. But the dependence on withholding as
a source of revenue mobilization will undoubtedly have to be
reduced and that would be a step in the right direction. If we
retain tax withholding in certain specified areas only then this
would definitely have a salutary effect on the emergence of
refunds as well.

22. Of great concern also is the maladministration that results

from deficient technical expertise. “Harsh assessments” are
often a symptom of deficient technical expertise. Baseless
additions to declared income cannot stand the test of appeal
and only create hardship for the taxpayer as he endeavors to
get relief from the regular appellate fora or alternate dispute
resolution systems. The generation of bogus tax demand might

serve to create an illusory perception of workplace efficiency

but in actual fact such action only alienates taxpayers and
reduces voluntary tax compliance. The burgeoning size of the
informal sector – variously estimated at anywhere between
50% to 100% of regular GDP- and the abysmal tax to GDP ratio
is proof positive that voluntary tax compliance has not really
improved over time and the increase in GDP is not being
translated into increased revenue. Unless this be remedied
urgently, the improvement in revenue mobilization that is the
hallmark of an effective system of taxation will continue to
remain an elusive ideal.

23. Apart from moral concerns therefore, maladministration

causes revenue leakage and loss both through corruption and
inefficiency. Maladministration also impacts directly on tax
compliance and in the long run improved tax compliance is the
only way that tax revenues can be increased significantly.

24. Successful tax jurisdictions throughout the world have

dealt with the problem of maladministration because of
corruption by addressing the root causes of corruption.
Corruption has often been linked to poor compensation, lax
accountability and complex and confusing tax laws. The
common sense approach would therefore be to deal with these
areas directly. As explained above, the latest tax law in force in
Pakistan does seek to simplify and rationalize the tax system.
An effort has also been made to improve the compensation
package for FBR officers and support staff – to the great
irritation and annoyance of other service groups. Accountability
however remains an area of weakness. The outlandish lifestyles
of corrupt officials have failed to invite the kind of swift and

severe punitive action that has been very effective in many tax

jurisdictions. We need to monitor lifestyle of tax officials much

more closely. There is also a pressing need to nab corrupt
officials in the act – red handed. This has been achieved in
many tax jurisdictions by the use of “sting” operations and we
could emulate them in Pakistan too.

25. While on the subject of corruption we have to keep in

mind that corrupt officials often jockey for key positions in the
tax establishment and they are able to do so because of their
linkages within the system. These key positions are those
where there is maximum scope for the arbitrary exercise of
discretionary power. Successfully vying for such positions
means that in many cases this is a ‘group’ rather an individual
effort. This is the basis for a pernicious system of ‘patronage’
that plagues the Pakistan tax system. Dealing with such a ‘wolf
pack’ system of corruption is much more complex than getting
hold of the corrupt individual making a ‘solo’ effort.

26. As regards enhancing technical, workplace efficiency by

detecting tax evasion and bringing the same to tax, a better
training regimen would appear to be the obvious solution. Less
obvious is a change in the system of recruitment of tax officials.
Many countries – Malaysia for example- have stopped
recruiting tax personnel through a general, public service exam.
Such a system selects “generalists” and many so selected have
neither the academic background nor the aptitude for tax work.
Training ‘generalists’ and transforming them into ‘specialists’
has been found to be time consuming, difficult and expensive.
A more practical approach therefore would be to recruit
persons with a sound background in accounting, economics,
business management, law and commercial practices. Training

them as tax specialists would be much easier and much more


27. The need for technical proficiency in tax functionaries of a
high order is heightened by the fact that in Pakistan 75% of
income tax revenue emanates from the corporate sector and
100- 125 large corporate entities in the corporate sector make
this contribution. Each one of these entities understates due
tax liability and each is advised by a battery of extremely
proficient tax counsel. Needless to say, an assessing officer with
less than adequate proficiency will never be able to make any
headway in peeling away the layers of very complex
arrangements made to reduce tax liability.

28. Even in areas other than corporate, technical expertise is

necessary because tax evasion in Pakistan is endemic and
therefore deeply entrenched and many of these non corporate
entities are no less powerful in terms of the financial resources
that they deploy than their corporate counterparts. Many have
established close links with the informal sector, dealing openly
in smuggled and counterfeit goods such as business entities in
the wholesale and retail trade area. The scale of tax evasion
that they practice is evident from the fact that their share in
GDP is close to 20% while their share in tax revenue is less than

29. The technical efficiency of tax functionaries is enhanced

manifold by the use of modern, I.T. based, automated systems
that can revolutionize record keeping, data storage, retrieval
and collation. These are ‘force multipliers’ put to use routinely
by many of the most successful tax jurisdictions in the world. In
Pakistan efforts are certainly being made to modernize and
automate the workplace and several systems are already in

place but a great deal more needs to be done especially with


regard to ‘integration’ of diverse systems.

30. A spin off of work place automation is that it creates an
enabling environment for efficient, error free discharge of
duties. Maladministration is bound to be greatly reduced
when it becomes very difficult to exercise discretionary power

31. Institutions like that of the Federal Tax Ombudsman can

play a vital role in revamping tax administration by focusing
closely on maladministration within the federal tax
establishment. Since its’ inception in 2000 the FTO has
highlighted hundreds of cases of maladministration. However
the response from the FBR has been lukewarm at best. In fact
there is a strong tendency to simply deny any wrong doing by
tax officials who routinely delay dealing with pending cases of
different types. The FBR mindset will have to change if FBR is to
evolve into a dynamic organization able to make a quantum
jump in revenue generation capability.

32. Improvements have been made in the tax system in

Pakistan but we need to aggressively continue to keep on
making improvements so that key criteria show that things are
indeed better:

a) An improved tax to gdp ratio.

b) An improved gini index placement for Pakistan to show

that the progressive tax rates in place are actually
reducing inequalities in income distribution.

c) An enlargement of the tax base. Less than 2% Income Tax

Return filers when the population is 170 million is a
national disgrace. It shows that tax compliance is

extremely poor.
d) A drastic reduction in the size of the informal sector. A
huge informal sector – such as that in Pakistan – means
that huge revenues are being lost and the rule of law of
law is being undermined.

33. Reduced maladministration in the tax establishment

would mean that more tax officials are working efficiently and
honestly and when that becomes a reality most of our
problems with revenue mobilization will stand resolved.