Balancing the government books has, for some time, been acknowledged as one of the top economic priorities for the country. The European Commission, the International Monetary Fund and also rating agencies look at our public finances on a regular basis to see whether the fiscal deficit is being reduced at the planned rate. Their comments and judgements on the state of health of public finances have a serious effect on how investors look at Malta’s future economic prospects.
While efforts have often been made to control both capital and recurrent public expenditure with some degree of success, the country’s tax collection systems have not been sufficiently restructured to ensure an effective revenue stream for the government. So the new Administration’s plan to merge the Inland Revenue Department with the VAT Department should be a step in the right direction.
In the Public Accounts Committee, the Commissioner of Inland Revenue said his department is owed a staggering €258 million in overdue income tax even if “taxpayers had assessed themselves to owe €361 million”.
Similarly, the VAT Director-General highlighted another substantial discrepancy in tax due by VAT debtors.
The VAT Department is officially owed “a backlog of €597 million since 1998 but experience had shown that these figures appear to be inflated. In fact, the department thought that only €316 million were actually collectable.”
These discrepancies and the language used by the heads of the tax departments to describe them reveal the pitiable state of tax collection processes in place. No wonder honest, law-abiding citizens who pay their tax bills when due feel cheated on hearing that so many other tax debtors seem to be able to delay or even avoid paying their dues for so long.
While merging the VAT and inland revenue departments is a step in the right direction, there is no guarantee that efficiency will suddenly and automatically improve simply by merging them into one entity.
What is needed is a full blown re-engineering exercise that looks at the present processes, identifies where the weaknesses lie and then come up with a new process that produces the desired results: a fair system whereby taxpayers are made to pay their dues on time.
The ultimate beneficiary of a re-engineered tax collection system will be the government, which will, undoubtedly, benefit from a regular stream of income that is based on actual amounts of tax due from taxpayers. This should, in turn, help honest taxpayers by eliminating tax leakages caused by late payments that, ultimately, have to be financed by even higher taxation on those who pay their dues on time.
A new tax collection process should also ensure better detection of tax evasion as VAT returns could be more easily compared with income tax records of business people. The audit trail of information flowing in the new merged tax collection department should help to highlight inconsistencies in the declarations of income and expenditure now being made to different departments.
While it is understandable that administrative crimes should, as far as possible, not be punishable by incarceration, it is only fair that moral hazard should be discouraged through proper systems that make tax evasion a risk not worth taking.
It is essential that full use is made of the tools needed to make this merger effective: a greater use of information technology, a reduction in cumbersome bureaucracy and a retraining programme for tax officials who will administer the new processes.