New FBR — yes please!

Last week, at the closing ceremony of All Pakistan Chamber President Conference, PM Imran Khan assured the business community that the government would create a new Federal Board of Revenue (FBR) if reforms could not be undertaken, since the country’s survival is dependent on adequate tax collection. For anyone following this space, this is old news.

Back in mid-November 2018, BR Research had reported that the PM is very unhappy with FBR’s performance, and 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.” (See ‘FBR sunset’ published November 16, 2018)

There is good reason why the organisation needs to be disbanded, and new tax authority is created ground up. At the end of FY18, more than 90 percent of total direct tax collection by the FBR was in indirect mode of WHT or advance tax collection, whereas direct tax collection itself was only 40 percent of total tax collection. This makes one wonder why the tax body has a staff of nearly 20,000 people.

In FBR’s own words, ‘tax collection on-demand’ carries great importance “as it reflects departmental efforts in revenue collection”. In FY18, despite all the focus on tax reforms, collection on-demand was merely 6 percent of total direct tax collection; ten years ago that number stood at 10 percent. In terms of the number of returns, it had received 1,552,287 returns for Tax Year 2018 as compared to 1,792,630 returns filed in Tax Year 2017.

BR Research’s analyses of the recently released tax directory for FY17 also bring home the point that FBR is beyond repair. (See ‘FBR FY17 directory: ‘zero’ sum game’ & ‘FBR’s tax directory: the story of association of persons’ published March 4 & 5, 2019). In street parlance, can India fix an old MIG to win a dogfight with Pakistani jets. Nay! She probably can’t win regardless, but old MIG doesn’t stand a chance. The same applies to organisations; weak organisations need to be replaced. Period!

Perhaps the best display of FBR’s poor performance can be evidenced by the performance of provincial revenue authorities set up to collect GST on services.

Sindh was the first one to kick-start the process. In FY11, when GST on services for Sindh was collected by FBR at the standard rate of 17 percent, the FBR collected and transferred an amount of Rs18.28 billion to Sindh. In FY12, when the Sindh Revenue Board was assigned the functions of administration, levy and collection of that tax at a reduced rate of 16 percent, it collected a little more than Rs25 billion.

Or take the case of KPRA in Khyber Pakhtunkhwa. Between 2001 and 2013 (12 years), FBR collected a total of Rs22.8 billion for KP under GST on services. But since 2014 when the province started collecting the tax on its own, it has collected north of Rs40 billion. Likewise, is the case of Punjab, and also Balochistan that deserves a special mention given the small scale of services economy in the provinces.

In FY15 when FBR was still collecting GST on services for Balochistan, the provincial GST on services collection was Rs0.87 billion. In FY16 – the first year of self-collection by the province when it didn’t even have a proper office for Balochistan Revenue Authority – collection under the head more-than-doubled to Rs2.04 billion. This by the way does not include the GST on services from berths on Gwadar Port. The port hasn’t been given an exemption by Balochistan province, but the provincial government is still unable to collect it since the federal government had given the Chinese exemption from all taxes relating to Gwadar – even for the taxes that didn’t fall in federal government domain.

Both the poor performance of FBR, and the respectable performance of the four new provincial tax bodies (for GST on services) show that the sun should now set on FBR. And if the PTI must try reforming the ailing tax body then don’t wing it and go for a complete overhaul instead. (See also BR Research ‘Reforming FBR: don’t wing it’ published November 16, 2018)