The United States Agency for International Development (USAID) in its paper, Information Technology for Tax Administration [February 2013], provided valuable insights into the challenges faced by modern tax administrations constrained by limited resources. The Paper, still relevant for countries like Pakistan, suggesting a departure from the conventional exhaustive “policing” of tax compliance, urges a shift toward three key objectives: facilitating voluntary compliance, selectively monitoring compliance, and strategically enforcing compliance.
Showing resource-intensive nature of scrutinizing every taxpayer the Paper underscores the importance of encouraging voluntary adherence to tax obligations. It promotes the use of targeted monitoring mechanisms for efficiency and strategic enforcement actions. The focus is on developing a resource-efficient strategy that recognizes the complexities of taxpayer obligations and aligns with contemporary tax administration principles.
Tax administrations adopt proactive measures to enhance compliance, including simplifying procedures, offering information, educational support to taxpayers, while diverting monitoring and enforcement resources to high-risk areas for revenue. This approach prioritizes engagement and assistance over rigid enforcement focusing efforts where they are most impactful in safeguarding revenue streams and simultaneously guiding taxpayers in complying with their obligations.
Conventional reliance on legal remedies to enforce taxpayer compliance, often characterized as a “classic enforcement mentality”, assumes that a robust investigation and enforcement capability would ensure compliance through deterrence. In the contemporary context, tax administrations prioritize fostering voluntary compliance. Yet, when necessary, they deploy the full force of the legal system against non-compliant taxpayers, promoting consistency in application of law and fostering a perception of fairness among taxpayers.
Traditionally, information technology (IT) systems in tax administration primarily served essential functions such as processing returns, handling payments, and collecting pertinent information. The current IT systems maintain a “core tax” component that supports these fundamental tasks, allowing tax administrations to shift away from labour-intensive manual procedures. Instead, they can allocate resources to streamline processes, monitor compliance, and enhance enforcement efforts. This evolution reflects a broader integration of technology to optimize the efficiency and effectiveness of tax administration tasks.
The core tax system serves as the central record-keeping system in a tax administration, facilitating automation and seamless processing. It offers technological support, catering to various functions within the tax administration. This includes registrations, issuance of taxpayer identification numbers (TIN), validating and processing returns and payments through diverse channels, managing taxpayer accounts, automating the tracking of appeals, and furnishing taxpayer service staff with access to relevant information for enhanced level of service. The system is also equipped to identifying and addressing delinquent taxpayers. Overall, the core tax system is integral to the diverse functionalities for streamlining tax administration processes and increase efficiency.
Today, IT systems are linchpins in encouraging voluntary tax compliance through various interactive and electronic channels. These encompass electronic registration, filing, payment support, and information dissemination. Simultaneously, in the realms of compliance, monitoring and enforcement, contemporary IT systems feature a ‘compliance performance system’. This system supports tax administrations in their audit and collection functions by efficiently gathering and managing information. The strategic focus is on targeting areas where non-compliance poses the highest risks to revenue. In summary, advanced IT capabilities significantly contribute to fostering voluntary compliance and refining the monitoring and enforcement functions of tax administrations.
A fundamental tax IT system enables the streamlining of audit processes. Firstly, it aids in the audit plan by automatically assessing the risk each taxpayer poses to revenue and selecting high-risk taxpayers for audit. The system can automate the entire audit case workflow, including the allocation of cases to auditors based on their skills and availability, providing them with relevant return, available information, offering an integrated view of taxpayer accounts across taxes and periods. Swift initiation of investigations into potential taxpayer fraud is seamlessly integrated into business and system processes. The system archives audit reports for easy access during objections, appeals, and strategic quality reviews.
In modern IT systems, audit information is captured in a compliance database for future audits of the same or different taxpayers, allowing for the discovery of pertinent information about one taxpayer while auditing another. Additionally, third-party validation is crucial, and the system may seek information from various external sources, such as bank account statements, business transactions, insurers, and employer data (including expense reports). This extensive functionality enhances the effectiveness of audit processes, ensuring comprehensive and accurate assessments while promoting efficiency and strategic planning for tax administrations.
Taxpayers should have the right to object to decisions made by the tax administration, both internally and through external channels like the courts. This dual recourse mechanism is essential for providing taxpayers with fair avenues to challenge decisions and encourage voluntary compliance. For ensuring transparency and adherence to legal frameworks across taxpayers, objection and appeal processes are kept distinct from compliance activities like audit and collection. As objections and appeals are specific to individual cases and initiated by taxpayers, automation opportunities are limited, with many countries opting for a more manual approach. Nevertheless, IT systems can play a supportive role in the objections and appeals process by granting access to taxpayer account information, monitoring the status of cases, and recording appeal outcomes. Furthermore, an e-tax system can facilitate electronic objection filing and offer online updates to taxpayers regarding the objection process.
Although Pakistan has improved its systems over the period of time, yet we are still struggling to broaden our tax base, enforce filing of income tax and sales tax returns, and ensure security of taxpayers’ data. In 2021, we witnessed a deadly cyberattack by hackers on Federal Board of Revenue’s (FBR) website which was shut down for 24 hours.
We need to integrate technology in our tax administration for broadening tax base and fortifying relationship between tax authorities and businesses. By employing digital tools, real-time monitoring of financial transactions becomes feasible, curbing under/over invoicing and mitigating the risks of trade-based money laundering. The use of technology, tracking and cross verifying transactions, can identify inconsistencies and irregularities in invoicing. Moreover, machine learning algorithms and data analytics can help in detecting patterns associated with under/over invoicing, providing tax authorities with effective and proactive tools to address potential issues. Moreover, technology acts as a catalyst for financial inclusion, particularly for smaller enterprises, by streamlining tax compliance processes through digital platforms. This facilitates the integration of businesses into the formal economy, reducing reliance on the informal sector and promoting equitable tax distribution.
The interconnected digital infrastructure enables seamless information exchange between businesses and tax authorities, enhancing the efficiency of tax monitoring and enforcement. This connectivity, coupled with increased transparency and accountability, aids in minimizing tax evasion, ultimately leading to an augmented tax-to-GDP ratio. In essence, the strategic incorporation of technology in tax administration modernizes processes and lays the groundwork for a fair, inclusive, and resilient fiscal environment.
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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media and cyber laws, ML/CFT, IT, intellectual property, arbitration and international taxation. He holds LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz.
He studied journalism, English literature and law. He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal). He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.
Twitter: DrIkramulHaq
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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer.
His notable publications are: Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.
His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .
Twitter: Adbul Rauf Shakoori
The recent publication, coauthored with Huzaima Bukhari, is
Pakistan Tackling FATF: Challenges & Solutions
available at: https://www.amazon.com/dp/B08RXH8W46
