Digitalization of Tax System Without Digitalizing Economy – Car Without Engine

The technological revolution has transformed how we think and organize activities globally. The Information and Communication Technology (ICT) sector[1] has influenced almost all disciplines worldwide, making its user-friendly services and accessibility widely adopted. ICT-based companies have created ‘digital identities’ for users through their profiling systems.[2] Government institutions now use these digital identities for official correspondence, considering them authentic sources for communication between states.

Digitalization involves adopting systems or processes using computers and the internet, replacing physical documents with e-files. While the concept is easy to discuss, its implementation and execution are significant challenges for developing and underdeveloped states. As the title suggests, this article aims to start off with exploring the existing practices of the Federal Board of Revenue (FBR) in the context of digitalization.

In 2009, FBR in a press statement[3] announced the implementation of an online/e-filing system for the tax year 2009 for individuals and associations of persons (AOPs). Now, almost 15 years later, the FBR should have gained more familiarity with online practices and the online filing of returns whereby system-generated assessments are passed under Section 120 of the Income Tax Ordinance, 2001. A recent press release from the Ministry of Finance[4] discussed a meeting between Karandaaz, FBR and the Ministry of Finance about digitalizing the tax system in Pakistan. Despite initiating digital practices in 2009, no significant progress has been made in developing these practices.

Digitalization of the tax system alone is not enough unless implementation, recovery and assessment procedures are digitalized as well with input from technology experts. The issue lies not in the IT system developed by the FBR but in the practices of FBR officials. The FBR is advancing its systems daily but is not ready to hire technical staff with the authority to oversee that subordinates are using the available IT resources appropriately. Returns are filed online, assessments are issued online, system-generated SMS and notices are sent online. So where does the problem lie?

The main problem exists in the procedures adopted by the FBR tax assessing officers, who often try to contact taxpayers ‘directly’. Moreover, these officials, especially those who cannot move away from paper-based systems, still use traditional methods to approach taxpayers. When the FBR initiated online practices, it should have replaced these officials with tech-savvy employees who could implement the system with training and new procedures. Experienced individuals accustomed to paper systems may find it challenging to adapt to new systems, whereas younger individuals may be more comfortable with tech-based practices and able to support and enhance the system through training.

Private banks, which no longer use paper-based filing systems, can serve as a model for implementing FBR procedures. Some government institutions have successfully developed themselves and are exceptions to this critique.[5] The basic infrastructure of the FBR is flawed, with record-keeping often handled by individual inspectors or ‘record sorters’, leading to documents frequently going missing from files. What is needed is an online data-based system, along with a Data Collection Centre (DCC) for the FBR, to monitor correspondence and case closures online (‘audit tech’) with cross-checks by independent tax consultants or law firms, without sharing the names and details of taxpayers or consultants with the assessing officers.

For the purposes of tax collection, the traditional system of notices should be replaced with a DCC monitoring system and an ‘audit tech’ system. The DCC, a physical unit supervised by the FBR Commissioner’s office and a technology expert, would interact with taxpayers, secure and archive all correspondence through video link, email or physical presence on camera, and involve the tax inspector, physically present at the DCC, in the process without the power to minimize or conclude proceedings. Recommendations would then be forwarded to third parties (such as private law firms or accountants, as discussed above) for opinion. Recovery is not the only issue with the FBR; it’s assessment system also lacks the capability to identify technical or legal issues while assessing tax returns.

Even if the FBR’s digitalization of the tax system succeeds, achieving the goals of enhancing the tax-base and recovery will still be impossible without digitizing documents and records across different institutions and bodies. The Securities and Exchange Commission of Pakistan (SECP), another regulatory body of the government, serves a practical example of an online registration process which verifies mobile phone numbers and CNICs through back-end database sharing arrangements between government institutions[6] and denies registration if a mobile phone number is not registered in the name of the applicant. Such basic level of digitalization needs to be expanded nationwide across all sectors. Focusing on one institution alone will be futile.

It’s not just the FBR that needs digitalization; Pakistan as a state requires a comprehensive digitalization policy. The Digital Pakistan Policy published by the Ministry of IT & Telecom[7] did provide a roadmap to a documented economy, e-governance system and implementation of digitalization, aiming to improve the citizens’ quality of life and economic wellbeing by ensuring accessible, affordable, reliable, universal and high-quality ICT services, though it did not specifically address the digitalization of FBR or the tax system. The Policy vision reads as follows:

The Government of Pakistan (GOP) strives to improve its citizens’ quality of life and economic well-being by ensuring availability of accessible, affordable, reliable, universal and high-quality ICT services. GOP strongly believes in mass adoption of emerging digital technologies and innovative applications to enable cross-sector socio-economic development and transformation of economic activities, governance models, social interaction, and achievement of sustainable development goals.

In this context, the Ministry of Finance should prioritize digitalizing the economy before digitalizing the tax system. A digital tax system cannot function effectively within a physical documentation framework currently prevalent in all sectors of Pakistan. It would be like having a car with all accessories but no engine.


References

[1] i.e. Networking, Computer Security, Computer Science, Computer Support Specialists, Data Communication, Information Management, Software, System Snalysis, Technology and Communication
[2] i.e. Google, Facebook, X(Twitter)
[3] through Hamid Raza Wattoo (Secretary PR)
website accessed: 13.05.2024
https://www.fbr.gov.pk/pr/fbr-launches-portal-for-e-filing-of-it-return/300/2009
[4] The Agreement signed on 15.03.2024 between Karandaaz Pakistan and FBR
website accessed 13.05.2024
https://www.fbr.gov.pk/fbr-signs-agreement-with-karandaaz-pakistan-for-digitization-of-tax-system/174032
[5] NADRA, SECP, etc.
[6] SECP, PTA, NADRA, PTA, etc.
[7] Digital Pakistan Policy
website accessed 13.05.2024
https://moib.gov.pk/Downloads/Policy/DIGITAL_PAKISTAN_POLICY%2822-05-2018%29.pdf

The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any other organization with which he might be associated.

Noman Yousaf

Author: Noman Yousaf

The writer is an Islamabad based High Court Advocate, working at Corporate and Legal Attorneys LLP. He is also enrolled as an Advocate, High Court at Punjab Bar Council and AJK Bar Council and is a member of the Rawalpindi Islamabad Tax Bar Association (RITBA). His LLM thesis was titled ‘The Comparative Legal Study of Online Working Entities Regarding Tax Administration in Pakistan’ and explored the operations of tech companies globally and their tax strategies to avoid tax from jurisdictions, including Pakistan, on the basis of tax principal ‘non-resident’.

Leave a Reply

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.