Islamabad : Jan 30 , 2024 : Federal minister for Finance and Revenue , Dr Shamshad Akhtar on Tuesday said the federal cabinet on 30th January approved the Federal Board of Revenue (FBR) restructuring and digitization plan in preparation and under deliberation since September 2023. In her televised speech , Dr Shamshad Akhtar said the plan, a home-grown product, is the outcome of considerable consultations among the minister of 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 FBR over the years.
She said 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% in 2022/23, while country’s tax capacity has remained largely around 22% of GDP including the taxes under purview of provinces that yield barely one percent of GDP revenues. According to the minister , the number of taxpayers in Pakistan is barely 2.3 million. Corporate tax filers are 0.8% of commercial and industrial electricity users and GST registered entities are barely 13% of the 1.4 million taxpayers.
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, excessively large pool of staff and conflict of interest between policy and collection functions that are under one roof. High level of policy gaps exists because of high revenue sources assigned to provinces and large undocumented sector have serves as an impediment. In parallel, compliance tax gap is large too more because of lack of failure to bring in 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 system and integrity issues are some of the critical gaps in tax administration.
The plan for FBR’s restructuring and digitization approved by the federal cabinet has two components.
One pertains to a number of initiatives & interventions which is expected to reduce the leakages because of 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, rather aggravated the problems of malpractices. Going forward, the Tax Administration will be driven by advanced technology, utilizing Big Data, leveraging data analytics and Artificial Intelligence guided systems. The blueprint for the digital transformation of the Tax authority has been prepared, which has the following main components:
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.
She argued that digital invoicing to capture Sales and purchase transactions across the entire supply chain, which is mostly undocumented right now. This will help document economy and plug huge compliance gaps and enhance payment of Sales Tax by wholesalers, dealers, distributors, SME and manufacturers. The automated system & 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 support of Bill Melinda and 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. 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. She asseted
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. She added that 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.
The minister added that a new & 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.
She maintained that the second component focuses on rationalization of the FBR structure key elements of which are:
Separation of policy function from operations – former to be handled by 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 cadre, given that these organization handle different taxes. This is in line with the international best practices – almost 73% 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 FBR structure by institutionalizing a new oversight mechanism (separate for Customs and Inland Revenue). Oversight boards will be responsible for holding these outfits for higher standards of performance assessment and service delivery, while ensuring policy and compliance functions as set by Federal Policy Board. These Oversight Boards would be headed by the Finance Minister and would include Federal secretaries of Finance, Commerce and Revenue, Chairman Nadra as well 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 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 Federal Government. 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 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 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 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% in 5 years (by 2029).
The competence of the caretaker government to develop the proposals for Restructuring & 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 & 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.
