TARP has not translated into outcome of demonstrably higher tax revenues: World Bank

Though important to a well functioning tax administration, outputs of the 2005 Tax Administration Reforms Project (TARP) of the World Bank (WB) has not yet translated into the critically important outcome of demonstrably higher tax revenues, the World Bank website has noted.
While reviewing TARP, the WB noted that net revenue collection, as percentage of GDP, remains an area of concern. In effect, the Federal Board of Revenue (FBR) has yet to achieve the over-arching objective of raising Tax-to-Gross Domestic Product (GDP) ratio under TARP, which is scheduled for closure on December 31, 2011.
Experts told Business Recorder here on Tuesday that the over-arching objective of reforms under TARP was to raise the tax-to-GDP ratio, which deteriorated further to 8.6 percent during 2010-11 as compared to 9.0 percent in 2009-10. During the last seven years, the FBR has introduced a number of reforms under TARP. However, analysts maintain that these reforms are 'cosmetic' at best, and have been unable to increase the tax-to-GDP ratio despite introduction of self-assessment scheme and simplification of rules and procedures for registered persons.
The basic objectives of the reforms were to increase revenue collection and contribute to the achievement of fiscal targets; increase tax-to-GDP ratio; collect optimum tax revenues; broaden the tax base; strengthen audit and enforcement procedures; guarantee fairer and more equitable application of tax laws; increase transparency and integrity; improve effectiveness, responsiveness and efficiency; facilitate and promote voluntary compliance with tax laws and provide transparent and high quality tax services.
The Ministry of Finance noted with concern that the declining tax-to-GDP ratio is an alarming situation for the country and needs to be addressed if higher revenues are to be generated in the future. According to the 'Fiscal Policy Statement (2009-2010)', released by the Finance Ministry, the Federal Board of Revenue (FBR) collected Rs 1157 billion at the end of 2008-09. The tax-to-GDP ratio was calculated at 8.8 percent for 2008-09, lower by 1 percent point as compared to previous year.
Referring to the WB, sources said that the reforms of tax policy and administration are among the most crucial economic reforms for any developing country, and Pakistan is no exception. Pakistan's tax-to-GDP ratio is among the lowest in the world, severely jeopardising national goals of reducing poverty and improving vital public services such as health care and education.
The WB follow-up on tax administration reforms said that with the help of TARP, the government had achieved some notable changes in the tax administration. The form of interface between taxpayers and tax collectors has changed with the introduction of a new system of self-assessment for paying income tax, the development of a new set of user-friendly tax reforms, guides, a modern website and construction of 21 Tax Facilitation Centres. The organisation of tax administration has been consolidated through the establishment of 13 Regional Tax Offices (RTOs), three specially designed Large Taxpayer Units (LTUs), and six Model Customs Collectorates (MCCs). New IT systems have been developed to improve efficiency, including data warehouse, e-portal, payment and refund system and taxpayer account along with these systems. With the support of the project, the FBR has developed, for the first time, an integrity strategy, including a taxpayer charter and a code of conduct and ethics.
The new processes and systems have only recently been supported by institutional reforms to create a functionally integrated tax administration that are necessary to change behaviours in the way that taxpayers and the tax collectors interact. Starting in January 2009, the government took serious of administrative measures to reorganise the FBR along functional lines--a reform that had been part of the government's strategy since 2003. This meant merging the administration of sales, income and excise taxes and integrated common functions for collection, enforcement, audit and IT systems across all these taxes, the World Bank added.
It is important to mention that the FBR is in the process of completion of some crucial reforms in tax administration, including effective use of the information technology (IT) system, improved audit functions for sales tax and income tax and staff training under the TARP.
In its last report on reforms, the WB observed that the positive results in fiscal year 2010-11 included (i) registered and active taxpayers increased by 6.2 percent from 2.984 million to 3.167 million; (ii) electronic return filers increased by 6 percent for sales tax, with income tax filers registering a 27 percent increase in fiscal year 2009-10; and (iii) registered and active taxpayers for income tax and sales tax CE-enrolled, liable to e-filing increased by 29 percent and 13 percent, respectively, the WB review mission added.
The WB reportedly informed the tax authorities that the FBR's 'lower than expected overall performance' by end of fiscal year 2010-11 was associated with two major shortcomings previously discussed at length with FBR authorities during past supervision missions: (a) Under-utilisation of IT-related systems due to poor integration of the new systems into re-engineered business processes, weak management follow-up on implementation of systems, and opposition of FBR staff to adopt new business processes based on newly deployed systems at field formations; and (b) Continued weakness of the audit function, associated with 'lower than expected performance' by the audit program delivered by private accounting firms during the outsourcing program, lack of a centralised-based audit function in charge of planning, programming and monitoring of results, and poor training.
The modernised FBR organisational structure fully functional by end of project is facing critical challenges on account of the following factors: (i) possible adverse impact of the organisational changes, introduced in February 2011 on FBR's effectiveness and accountability goals originally pursued by the Government's endorsed organisational model along functional lines; (ii) lack of an appropriate co-ordination mechanism to oversee operations between headquarters and field formations, and (iii) an unstable tenure at mid-management levels undermining the efficiency and effectiveness of FBR to implement its reform action plan.
In its report in October 2011, the WB Implementation Review Mission had observed that despite sustaining positive trends on some intermediate outcomes, overall performance continued to fall short of expectations, thereby risking the achievement of key development objectives by the end of project life.
Moreover, the fully functional FBR organisation, envisioned by the end of the project, faces critical challenges on account of the possible adverse impacts of the reorganisation introduced at the beginning of 2011, lack of co-ordination between FBR headquarters and field formations, and unstable tenure at FBR's mid-management levels, the WB said.