Mr. Patrick Kevin Doherty, an International Tax Consultant with Government of Punjab, a former President of Institute of Revenue Rating and Valuation Council and Deputy Director of Finance, Harrogate Borough Council gave a talk on Tax Reforms in Punjab: Challenges and Opportunities on April 15, 2010 at CPPG.
Patrick Doherty opened his talk with the question “Why should there be tax reforms in the Punjab?”, remarking that he perceived a great opportunity as the people of Pakistan, as a nation, were under-taxed. Pakistan with a tax to GDP ratio of 8.9% stood in the bottom pile with a high capacity to increase taxes. He argued that the only reason to have tax was to provide services to the citizens and thus the tax ethos should be based on the kind of services needed by citizens. But the reality was that the demand for services increased further as more services were provided. While Government of Punjab realized the importance of promoting the level of social services, it was under severe financial constraints to realize this goal as its income versus expenditure gap had been widening for the past three to four years owing to constrained revenue collection through taxation. Financing (taxes) had not kept pace with aspirations of service delivery (expenditures) and this trend showed an increasing gap, which stood at Rs. 98.41billion (B) in 2008-09. The equation at the national level was not much different as Pakistan had a 5.1% deficit with Public Sector expenditures at 14% of GDP whereas tax to GDP ratio stood at 8.9%. He argued that no country could go on like this, as the only option left was to print money, which led to massive inflation. IMF in their recent analysis had suggested that tax to GDP ratio must increase to 15% over three years to bridge the gap and wanted to see this ratio at 11.3% by next year.
With two years of experience working with the Revenue, and Excise & Taxation (E&T) Departments, Doherty articulated the reasons behind this widening gap as political instability, inconsistent policies and a lack of planning, capacity issues and an archaic administrative structure. Exploring policy planning, he stated that he had been surprised that no new tax had been levied in the last seven years, while the government had introduced new tax exemptions in E&T further overloading the alarming debt burden. Thus in actuality, taxes in real terms had gone down.
Property Tax had last been revalued in 2001 when the old rental value system had given way to a table oriented system (which actually represented a downgraded form of a rental value system). Thus the tax base had not changed in 9 years while the tax rate had yet to change since 1958 leading to declining revenue in real terms. Usually tax rates were set for 5 years while the base value increased at least according to inflation year after year. Punjab had collected Rs. 2.8B in property tax last year but if inflation rate (Consumer Price Index) was applied to the tax base value, the Punjab government’s losses amounted to Rs. 3.3B since 2001 surpassing the collection for a whole one year. Doherty thus argued for at least keeping the income
“… income versus expenditure gap had been widening for the past three to four years owing to constrained revenue collection through taxation.”
in line with inflation. He then identified the problem of Differential Rating disagreeing that rented and owner occupied property be treated differently costing the exchequer over Rs. 2B a year. Instead, the income from rental should be part of income tax while property tax should be based on property ownership and not income. But the biggest problem was horizontal to vertical equity. He stated that Punjab with a population of 88M only had 1.2 million (M) taxable properties, which according to international standards (1 property for 8-9 people) should have around 10-11M properties. Even if a big majority could not be taxed because of poverty, still a conservative estimate would entail 3-5M taxable properties, at least 3 times the current number. Thus property tax could be increased three folds given the 1958 legislation was changed to remove exemptions for rural areas (properties in new growth areas around Lahore were still considered rural and thus not taxed), widows and 5 marla houses. He further said that there had been no analysis on how much those exemptions actually cost. Additionally there was not even an actual figure of the number of properties, as some districts did not record the exempt properties. So 2.6M properties in the E&T database of which 1.2M were taxed and 1.4M were exempt, was not even a correct figure.
” … no new tax had been levied in the last seven years, while the government had introduced new tax exemptions in E&T further overloading the alarming debtburden.”
Briefly mentioning other taxes, he said that the Motor Vehicle Tax had increased in real value since 2000 but this was due to an increase in the number of vehicles, which compensated for decreased real value per unit. Additionally, in his analysis of mutation fee comprising of three processes, he had found nine gaps leaving it open to issues of mishandling.
Adding insult to injury, he expressed dismay that there was no R&D or policy development in the departments leaving senior management in a difficult position to lead. He argued that departments with a strength of 13,000 required full time staff for statistics, analysis and research to support proper policy planning and management.
Doherty was emphatic in arguing that massive capacity issues existed in many departments but especially in departments related to revenue collection in the Punjab. The E&T Department not only lacked in physical capacity but also provided no appropriate trainings catering to personal and professional development, or basic job related skills to the existing staff. In the two massive departments, he saw no computers except on the manager’s desk. Arguing that Punjab had one of the brightest, cleverest and best qualified manpower in terms of academic qualificatithat he had come across, but this had to be bridged with pragmatic and practical management. The other issue was a complete lack of training & development for subordinate levels, which was extremely important to increase the effectiveness and efficiency of the department. From one of his queries, he had found that the general departmental staff had not received any training in the last 10 years. Continuous and rigorous human capacity building in government departments was thus the need of time along with the provision of good office environment.
Describing the archaic administrative systems, Doherty argued that a system, which had three levels, those who joined the lowest level stayed there while those at the top moved around the system, was devoid of the necessary ambition and motivation. Additionally there could be no accountability in this system because senior managers (secretary) stayed in one job for 11 months on average while the junior staff took 15 years to move up two grades. While arguing that the change in organizational structure needed to be a long-term strategy, he inquired, who would take responsibility for a five year reform program as it at least required stability at the senior manager level? Further exploring, he critiqued the Dispersed Management Structure of the Board of Revenue (BoR), which had a head office while most of the staff worked in the districts. The district staff thus reported to two bosses, one in district administration and the other in the Centre, seldom knowing what their priorities were. Giving an personal example, he said that during a meeting, the person in charge was called and sent away on a 10 minute notice which was definitely not good management, good use of resources or people friendly.
In term of administrative planning and efficiency, he articulated the lack of departmental budgeting and unre-alistic target setting as hindering departmental accountability. In the E&T department, all taxes were administered centrally while property tax was with the districts. But for either the BoR or E&T Department, there was no collated budget describing the departmental cost because the Secretary, the Director General and the districts all prepared their own budgets. Additionally unrealistic budget setting to match GDP figures was instead a de-motivating factor, especially because news reports incessantly criticized the department. He stated that while the target set for property tax was Rs. 6B, only Rs. 2.8B (over the years collection had been 1.9 – 2.3B) was collected which was the highest collection since 2001. This year again, the target was set at 6.6B. Tackling departmental efficiency and human resources, he argued that Collection Level (collection measured against current year debit – arrears) stood at 75% in Punjab while it ranged from 89.9% – 99.8% for authorities in the UK. Asking the question, what would happen when the person managing files spanning a 100 years in a dusty room for the last 40 years retired?, he argued that computerization was important but a bigger need was Human Resources trained to manage management information systems and compensated according to their own and departmental performance. He suggested a Graphical Information System (GIS), which acted as a central store for the information fed through core systems such as the property tax system.
Lastly Doherty concentrated on the reform process stating that there was no such thing as discretionary reforms. He argued that the fiscal imbalance menace needed to be tackled by increasing revenues through Tax to GDP ratio of 11% by the next two years. This entailed restructuring tax policies, better effectiveness and efficiency of the syssystem and most importantly changing the culture of evasion encouraged by the working practices of the department. Training, development, appropriate salaries and incentives, and proper targets were necessary to do the job along with inculcating the missing concept of customer service. He stated that designing a new financial management tax system was never the issue but instead the incorporation of local customs, culture and laws into its design to make it workable based on ground realities. While the British had introduced a good property tax system in many parts of the world including Pakistan, the same system had long been rdesigned and reformed in the UK. He argued for a moderate paced reform process agreeing with the World Bank report suggesting that a new property tax system would take 5 years and $34million to implement. He stated that the Federal Board of Revenue (FBR) reforms, which had been going on since 1996 through a multistaged process were a good model to follow. Under these reforms, the department had received computers and information technology literacy training multiple times over the last two years, which was remarkable as compared to any other department.
“… tax base had not changed in 9 years while the tax rate had yet to change since 1958 leading to declining revenue in real terms.”
He further argued that administrative management was a problem everywhere in a federal structure because power was always pulled towards the center with the argument that provincial or local bodies did not have the needed experience or resources. Thus local government was always the weakest tier unless the law, outlook and culture changed as tried under the 2001 devolution plan. Though accepting that challenges existed, Doherty saw an incredible opportunity for reforms arguing that the people in departments were willing to talk and to get involved in the reform process.
“… a system, which had three levels, those who joined the lowest level stayed there while those at the top moved around the system, was devoid of the necessary ambition and motivation. “
Answering a question as to why so many reform projects ran out of steam, Doherty argued that most tax reforms were half cooked rather than involving proper preparation, plumbing and the right team. Though an inte tional consultant himself, he was a big believer of internal reforms but argued that sometimes it was necessary to invite an outsider for a wakeup call. One of his suggested intervention was to setup a Change Management Unit directly accountable to the Chief Minister and not to the ever changing Secretary. It should be initiated with an external advisor to get the right people, to train and give people appropriate skills, and after 6-12 months handed over to a senior person to be driven internally. His disagreed with setting up a normal Project Unit under the department arguing that frequent changes in leadership will leave it non-functional and additionally running a project in addition to daily responsibilities was not feasible.
Answering a question regarding fairness of the tax structure, he argued that rather than having differentials (widows, 5-marla houses etc.), it was important to have a working relief regime ensuring that those who could not afford did not pay tax. Currently no law or process existed where by relief could be given to people who could not pay and no law allowed a write off of tax debt. He argued that the number of taxpayers needed to be increased to lessen the average tax burden. Punjab should be one rating area and there should not be an urban rural divide but instead the valuation of properties should take care of the difference in values. Additionally rather than a pay period of two months, a longer period would make it easier for people to pay property tax.
When asked if there was willingness of the staff for change management?, his answer was a categorical yes. But the difficulty was the size of the departments and the question of where to start from. The system did not encourage change as it lacked stability, ownership, accountability or responsibility. In two years, he had seen two Secretary’s and five Director Generals change. He argued that blame should be placed on the bureaucracy and not the bureaucrats as the bureaucracy needed to be resolved before resolving the bureaucrat. For Doherty, the big question was ”Where is the politician brave enough to say that we need a change and then carry it through?”
“Training, development, appropriate salaries and incentives, and proper targets were necessary to do the job along with inculcating the missing concept of customer service. “