A fresh start for Federal Board of Revenue (FBR)4 min read

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REFORMING the Federal Board of Revenue (FBR), with the objectives of enhancing revenue collection and promoting equity and transparency has emerged as the single most important economic task for the Pakistan Tehreek-i-Insaf (PTI)-led government.

Expectations are high from the new government to bring structural changes in tax culture. Around a dozen major attempts have been made to reform the tax system, but the results have been dismal so far considering the extremely small tax base and present tax-to-GDP ratio of 9 per cent.

The Tax Administration Reform Project, which was supported by the World Bank and other donor agencies, and which ran from 2003 to 2011, was the last initiative to reform the tax system in Pakistan.

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The end-project ratings were “unsatisfactory” to “moderately unsatisfactory” on most of the indicators. The PML-N government had also constituted a tax reform commission (TRC) to suggest measures for bringing changes in the tax system, but most of the measures suggested in the TRC’s report were never implemented.

The newly-appointed Chairman FBR Dr Jehanzeb Khan told Dawn that his first priority will be to post suitable officers on key posts. The selection of the officers will be based purely on merit, while considering their integrity and competence. He agreed that he will take steps to eradicate corruption from in the tax machinery.

Dr Khan said that several studies have already been conducted on the subject of reforms. “We will ensure implementation of all those measures suggested in the TRC report”.

Notwithstanding this, serious efforts are still needed to double the tax-to-GDP ratio for achieving an optimal level of spending. Data show the share of tax revenue in total revenue has declined from 80pc to almost 70pc, while the share of non-tax has increased from 20pc to almost 30pc since the 1990s.

Also Read: To rid FBR of corruption, Jahanzeb Khan appointed chairman

Within the FBR taxes, the share of indirect taxes in total revenue is still high. The results of efforts to broaden the personal income tax base have also not materialised and reliance on indirect taxes has further increased. The efforts to reform the general sales tax and gradually shift to value-added tax have not succeeded.

Finance Minister Asad Umar told Dawn that the PTI government intends to build on the work of the TRC undertaken during the tenure of the previous government. He said that the recommendations of the TRC were also endorsed by a committee of the National Assembly, but never moved to the implementation stage.

He said the appointment of the FBR chairman is the beginning of the reforms. “We will start with tax reforms’ report recommendations.”

“We will do presentations and meetings on these recommendations to finalise it in the next couple of weeks”, Mr Umar stated, adding that these proposals will be approved in a cabinet meeting before implementation.

One of the main proposals on the agenda is separating the revenue collection administration from tax policy formulation. The powers of policy formation will be taken away from the FBR and handled separately by a policy board.

According to the TRC report, the policy board should be an independent body and its board of governance should comprise the chairman FBR, nominees of the parliament, economists, and other professionals who would develop an effective and dynamic strategy and monitor implementation of the tax policy.

The forum should periodically report to the ministry of finance and the standing committee of the parliament on implementation of the strategy. The previous government had partially implemented a proposal to allow the FBR to operate on territorial jurisdiction to broaden the tax base.

It was implemented in major cities; while originally it was to be extended to mofassil areas across the country from the current regional tax officers to enhance income tax collection on actual income.

The two biggest issues in the FBR are the skill sets of FBR personnel and the FBR information technology system. The current IT system has caused great difficulties to taxpayers. The TRC report recommends huge investments in IT.

The valuation of properties for tax purposes was due to be revised from July 2017, but was put on hold by the previous government to oblige vested interests.

The government also needs to make the tough decision of discontinuing prize bonds in the range of Rs25,000 to Rs40,000, and doing away with the Rs5,000 currency note. According to the TRC report, the high denomination bearer instruments fuel corruption and tax evasion.

Other proposed measures include satellite mapping of shops in major cities, electronic surveillance (especially of cigarettes manufacturers), reducing tax evasion on imports, increasing taxpayers’ compliance by enhancing the cost of evasion, encouraging business through banks to enhance documentation, and ensuring across the board accountability of FBR employees.

(This news/article originally appeared in DAWN on September 3rd, 2018)

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