Caretaker Finance Minister Dr. Shamshad Akhtar in her televised speech on Tuesday night did not mention or respond to an earlier letter by the Election Commission of Pakistan where it asked the outgoing federal government to skip restructuring the Federal Board of Revenue (FBR) and to keep it pending for the new to-be-elected government.
She stated that the competence of the caretaker government to develop the proposals for the Restructuring and Digitization of FBR was endorsed by the Cabinet and an implementation committee will be notified to carry out follow-up activities to prepare the required package of legislative and administrative changes.
She said the federal cabinet, on 30th January, approved the FBR restructuring and digitization plan in preparation and under deliberation since September 2023. The plan, a home-grown product, is the outcome of considerable consultations among the minister for finance, FBR chairman, and members along with independent highly qualified tax experts.
The plan does draw on substantive research and recommendations of the long-standing multilateral engagement and technical assistance studies that were sponsored by the FBR over the years.
The caretaker government recognizes the macroeconomic challenges, and it has prioritized critical reforms, particularly the urgency for domestic resource mobilization. Pakistan’s tax-to-GDP ratio has been declining, with FBR tax/GDP ratio barely 8.5 percent in 2022/23, while the country’s tax capacity has remained largely around 22 percent of GDP including the taxes under the purview of provinces that yield barely one percent of GDP revenues.
The number of taxpayers in Pakistan is barely 2.3 million. Corporate tax filers are 0.8 percent of commercial and industrial electricity users and GST-registered entities are barely 13 percent of the 1.4 million taxpayers.
The minister said FBR’s ability to tap tax sources under its jurisdiction has been constrained by complex and opaque tax administration, top-heavy management that lacks delegation and accountability, an excessively large pool of staff, and conflict of interest between policy and collection functions that are under one roof.
High levels of policy gaps exist because of high revenue sources assigned to provinces and large undocumented sectors have served as an impediment. In parallel, the compliance tax gap is large too because of lack of failure to bring in the tax net of what is feasible to achieve such as wholesalers and service providers, etc.
The overwhelming undocumented sector, absence of data and the lack of digital integration, tax evasion, and avoidance because of loopholes in legal and administrative systems, and integrity issues are some of the critical gaps in tax administration.
Shamshad explained that the plan for FBR’s restructuring and digitization approved by the Federal Cabinet has two components. One pertains to several initiatives and interventions expected to reduce the leakages because of the lack of adequate documentation that has complicated raising the number of filers, significant tax evasion, and avoidance. The traditional model of relying on tax officials to identify tax evasion and plug leakages has not delivered results but rather aggravated the problems of malpractices.
Blueprint for Digital Transformation
Going forward, the Tax Administration will be driven by advanced technology, utilizing Big Data, leveraging data analytics and Artificial Intelligence systems. The blueprint for the digital transformation of the Tax authority has been prepared.
The documentation has already been introduced making it mandatory for organizations, both public and private, to share data about assets, transactions, and income with the FBR through a digital platform. Digital Invoicing to capture Sales and purchase transactions across the entire supply chain, which is mostly undocumented right now. This will help document the economy, plug huge compliance gaps, and enhance payment of Sales Tax by wholesalers, dealers, distributors, SMEs, and manufacturers.
The automated system and the rules for operationalizing digital invoicing have been prepared, and the implementation is at an advanced stage. Leveraging the technological prowess of Nadra and bringing in Karandaaz and the support of the Bill and Melinda Gates Foundation to help digitize tax collection. Together, over the period, these reinforcements will foster IT integration across different organizations. Meanwhile, transformation and governance of PRAL and new software will help improvements in the automation, she added.
These multiple interventions would include Broadening of Tax Base (BTB) initiatives by facilitating data exchange with organizations holding the data of assets, transactions, and payments. Digitization of Withholding Tax Collection would address another area of huge compliance gap in the tax administration, as many withholding agents are engaged in different kinds of violations & malpractices, which are currently not being detected in the manual & outdated process.
The entire process will be digitized through a new system “Synchronized Withholding Administration and Payment System – SWAPS”, which will link the payer, Payee, bank, and FB through the SWAPS Portal.
A new and simplified scheme for untaxed sectors has also been devised based on a technology platform, to ensure that there is no human interaction of such small businesses with tax officials, which results in complaints & malpractices.
Rationalization of FBR Structure
Finance Minister highlighted that the second component focuses on the rationalization of the FBR structure, the key elements of which are:
- Separation of policy function from operations – former to be handled by the Federal Policy Board with a new Board composition and mandate, while separating the operations mostly the collection function.
- Establishment of separate Customs and Inland Revenue organizations headed by DGs from respective service cadres, given that these organizations handle different taxes. This is in line with the international best practices – almost 73 percent of countries have separate Customs organizations, since their functions and businesses are different and changing, with the need for customs to harness global integration, boost exports, and fight smuggling and money laundering.
- Strengthening the governance of the FBR structure by institutionalizing a new oversight mechanism (separate for Customs and Inland Revenue). Oversight boards will be responsible for holding these outfits to higher standards of performance assessment and service delivery while ensuring policy and compliance functions as set by the Federal Policy Board. The Finance Minister would head these Oversight Boards and would include Federal secretaries of Finance, Commerce, and Revenue, Chairman NADRA as well as tax domain experts. Such members would be selected based on predetermined fit and proper criteria with no conflict of interest.
- The Federal Policy Board would be headed by the Finance Minister and would include academic professionals as members to be nominated by the Finance Minister, on predetermined fit and proper criteria, with no conflict of interest and approved by the Federal Government. The policy board’s mandate would be to focus on Policy & Strategy, while the operational performance would be in the domain of Oversight Boards.
- The Revenue Secretary would act as the secretary to the Federal Policy Board, reporting to the Finance Minister, and would facilitate the issuance of common and harmonized policies as well as coordinate and collaborate matters between the Customs and IRS, where needed. Secretary Revenue by his presence in both the Oversight Boards shall offer the needed guidance.
- A Tax Policy Office will be established in the Revenue Division with a mandate to conduct solid research and offer empirical analysis on taxation structure issues and based on it recommend tax policy changes and assess the projections of possible revenue from different sectors which currently may not be estimated properly. Focus would be on developing the tax policies to expand the base, and control rampant avoidance & evasion.
With this new structure and measures of broadening the tax base and integration of data enhancement and technology, and transformation of PRAL into a cutting-edge technology company with the support of NADRA, expectations are that the tax administration would be able to lift the tax/GDP ratio to 18 percent in 5 years (by 2029).
The competence of the caretaker government to develop the proposals for the Restructuring and Digitization of FBR was endorsed by the Cabinet and an implementation committee will be notified to carry out follow-up activities to prepare the required package of legislative and administrative changes.
The whole package of legal amendments, rules & regulations, and required administrative interventions for FBR restructuring and digitization will be operationalized by the new Government. There will be no retrenchment of Staff and they will retain their civil service status. FBR will carry out this restructuring within its existing resources and budget, the minister concluded.