FBR sunset

Yesterday’s piece ended with reports that PM Imran Khan is very unhappy with the FBR’s performance, where sources from PTI’s inner circle say that he has given them until March 2019 to put their house in order or the organisation will be disbanded, and a new entity set up in its place. Can PM Khan really do so, and what other areas of reforms that FBR needs?

The answer to the first question is ‘yes, he can’. Things are already moving fast on the tax front, which hints some level of seriousness. The Tax Reform Commission (TRC) has been reactivated, whereas Shabbar Zaidi has also been brought in the TRC. Meanwhile, probable names for FBR’s policy board have also started floating around; these include for former FBR chiefs, Abdullah Yousuf and Salman Siddique.

Second, the government seems to be bent on trying to get easier conditions from the IMF; hence the visits to China, Saudi Arabia, Malaysia and perhaps now the UAE. In that vein, the government perhaps wants to put a fiscal plan in order, and therefore quickly wants to set up the policy board, while they get into the thick of IMF negotiations.

Third, the transition from FBR to any other new entity is not going to be a walk in the park; but surely no exercise of Himalayan proportions as well. The biggest facilitating factor toward this end is that Pakistan Revenue Automation (Pvt.) Ltd is already well connected with both federal and provincial tax agencies and their data.

Recall that according to TRC 2016 report, FBR’s IT system is a big drag on the organisation, whereas in a modern tax administration system, there is no need for large machinery as has FBR, of 20,000 employees. Instead, a sophisticated IT based system is required that places large emphasis on self-assessment and strong independent audit.

Beside it is not as if the FBR’s huge staff are huge shoes to fill. Despite such mammoth machinery, most of FBR’s taxes are indirect taxes, whereas most of direct taxes are in indirect mode, where bulk of work is done by withholding tax agents that include employers, government department and ministries, banks, telecom companies, electricity and gas companies, airlines and provincial tax departments. Indirect mode of taxation makes it relatively easier to shift tax collection responsibility to another organisation.

In any case, a new organisation does not face legacy issues, and therefore may even be a better proposition than reforming FBR. Bear in mind that just a few years ago (in 2012) the World Bank’s assessment of its Tax Administration Reform Project (TARP) said the project could not achieve the desired outcome because of lack of reform ownership by FBR officials, frequent changes in FBR leadership and management, and division among its staff from various service groups. Ergo, don’t be surprised if the sun sets on FBR.

However, in the case the government choses to reform FBR instead, it would do well to keep in mind that separation of policy and administration is not the only kind of separation that is warranted at FBR. There are three more areas of separation required.

First, as the TRC recommends, a specialized but an independent unit should be created to conduct audit, and it should be “completely separated from rest of the FBR”. This separate audit division created to plan and execute audit work should be “semi-government autonomous body” comprising of accounting and audit professionals.

Second separation pertains to the separation of appeal system, where the TRC recommends setting up special tax benches at high courts with exclusive jurisdiction of tax laws. These two areas of separation are needed to ensure that the collection machinery does not get to arm twist using their direct or indirect powers in audit or appeal; or vice versa.

Third area of separation, and equally paramount, is the de-linking of FBR from cadre-based admission through the federal Public Service Commission system. Tax collection, audit and appeal are specialized areas and tax bodies should be autonomous enough to select candidates on the basis of relevant education and work experience.

Fixing taxation isn’t only about fixing macroeconomic imbalance or inequity or corruption; it is also about reducing poverty, inequality, ensuring a competitive landscape, encouraging entrepreneurship, innovation and of course growth, which is the biggest benchmark chased by politicians and business. If there is only one legacy that PTI wants to leave at the end of its five-year tenure; it should be a professional, apolitical, equitable, fair and easy tax system.

Acknowledgement: A continuation of ‘Reforming FBR: don’t wing it’ published yesterday, this piece is also based on a host of academic journals and policy reports as well as conversations with several tax experts including Dr Ikram ul-Haq and Masoud Naqvi (others preferred to remain anonymous). This acknowledgment is made to avoid the clutter of individual academic-like citations.