Corruption and taxation
Revenue is the chief preoccupation of the state. Nay, more; it is the state,” Edmund Burke, the British statesman and philosopher, once said. This dictum of Burke holds for all times as it is not possible to run the state machinery without tax money. In fact, the power of the state is reflected mainly through its tax-levying power. If the state is weak, its capacity to levy and raise taxes will also be weak. Rampancy of tax evasion in a sense points towards low quality of governance and erosion of state’s legitimacy. Thus governance and tax evasion are related to each other but in inverse order i.e. if the governance is poor, tax evasion will be high and vice versa.
Unfortunately, Pakistan’s revenues are the lowest in the world in terms of tax-to-GDP ratio. Despite all rhetoric of tax reform in the last decade or so, no tangible progress is visible in major areas like broad-basing, increase in tax-to-GDP ratio and control of corruption in tax machinery. Hardly one percent of the population pays tax. This number (in percentage terms) is much smaller compared to countries of similar level of per capita income and development. Enforcement of tax laws is weak due to lack of political will at the top and capacity constraints of the tax machinery. In this context, we need a clear stock taking of the situation as to what is fundamentally wrong despite all reforms. And what should be the basic tax reform agenda that we need to pursue for improving the situation?
First of all, it is the political will that matters. Taxation is not a cakewalk as nobody wants to part away with his money, so resistance to new tax measures is always there. Without strong political will, broadening of the tax base and increasing tax-to-GDP ratio is almost impossible. But at the same time quality of tax machinery also matters as it is primarily the tax bureaucracy which translates the government will into action. If the quality is low or corruption in tax administration is rife, even the noblest of the objectives will not be achieved. Thus, the basic tax reform agenda should essentially focus on improving the quality of the tax bureaucracy and control of corruption in tax administration.
Achievement of all other tax objectives hinges on these two factors. Improving the quality of tax bureaucracy does not mean stereotyped training programmes and incremental changes in the salary structure. Basically, a drastic change in the weights of variables like seniority, competence, and integrity is required to improve the performance and productivity. This will require fundamental changes in human resource management, service structure, promotion and posting criteria, and integrity management.
The second area that needs our focus is control of corruption in the tax administration and minimising rent-seeking opportunities for the tax auditors and collectors. In order for this to be done, reforms in several key areas are needed. First of all, the compensation structure needs to be improved. Living wages should be paid at the least to tax officials. An increase by three to four times in the salaries of the tax officials may not reduce the corruption levels drastically, but the so-called justification for corruption will no longer be there. Low-level officials who involve in facilitating payments (also called speed money) do so, on the excuse of low salaries though illegal gains may be shared with the senior tax officials.
Mahesh C Prohit, in his paper on “Corruption in tax administration” writes: “In case of foreign trade taxes and other routine activities, low-level officials are also likely to be involved, sharing their illegal gains with those higher up in the chain of authority. It is these routine cases of lower-level corrupt tax practices that ultimately erode public confidence in governmental institutions. For this reason, these practices are often seen as more corrosive than abuse of power at higher levels.”
It needs to be emphasised here that corruption in tax administration does not always involve taxpayer as one of the necessary party to the corrupt act. For example, if a senior tax administrator sells a post instead of appointing the junior tax officials on the criterion of competence and integrity, the tax payer is not directly involved but corrupt act has been committed. The reforms in tax administration generally miss this point. Corruption in tax administration should not be construed in the paradigm of “tax collector-tax payer contact” only. So the point is that corruption in tax administration has got multiple dimensions and corruption cannot be rooted out unless the tax organisation reforms itself from within. Against this backdrop, procedures of selection, promotion, placement, integrity management, and performance evaluation need to be critically examined and improved to address the problem of corruption in tax administration.
Tackling corruption in tax administration means change of culture of the organization, which is certainly a Herculean task when corruption is deep-rooted. We need to put a maximum premium on integrity in such a culture otherwise efforts to root out corruption from the tax administration will be frustrated by those having vested interests to perpetuating the corrupt system. One of the IMF papers on this issue has rightly pointed out that: “organizations where corruption is endemic, honest employees may be led into corruption by the behavior of others. Corrupt employees also exert pressure when they will not accept that someone in the group should behave properly while others are engaging in corrupt practices. If senior revenue administration officials are known to engage in corrupt practices, lower-level employees have another justification to engage in similar practices. In some countries like Peru and Uganda, corruption in the tax administration was so endemic that the government closed it down and started a new one.”
Moreover, strong accountability mechanisms need to be put in place as the tax officials are rational human beings like other people. They take into account the perceived risk of detection and punishment while deciding to engage in corruption. If the risk is low due to weak accountability, they are more prone to indulge in corrupt practices. If penalty is not harsh compared with the dividends of corruption, or we have a culture of tolerance for tax frauds, or system is such that the delinquent tax employees are absolved from corruption charges sooner or later, then other employees will also be motivated to indulge in corrupt acts.
Moreover laws, regulations, and procedures need to be made more clear, simple and transparent. Tax structure need to be redesigned in a way that it is corruption-resistant. For example, tax may be fixed for small businesses operating in the informal sector, and for example those paying higher tax (say, 30 percent) compared to previous year may not be put to detailed audit scrutiny, or withholding tax regime may be further expanded. On customs side it is possible through further rationalisation of the tariff, simplifying the customs procedures, reducing steps in clearance of goods, and increasing access of the importers and their agents to assessment and valuation data.
The point is that any tax-reform agenda will fail unless fundamental reforms within the tax organisation are introduced to improve the quality of the tax bureaucracy and weed out corruption from the tax administration. Improving the quality of tax machinery and corruption control should be the item number one on any tax-reform agenda for a meaningful change towards improvement of the taxation system. It is the tax system which makes an effective state but it is the quality of bureaucracy that makes the taxation system effective. Thus, a comprehensive anti-corruption strategy that addresses both the motives and the opportunities for corruption is direly needed.