Restructuring of FBR: Customs to be separated from revenue collection mechanism, says Dr Shamshad

Caretaker Finance Minister Dr Shamshad Akhtar has said that the government is taking restructuring measures in the Federal Board of Revenue (FBR) to ‘remove the apparent conflict of interest in tax collection’ as well to enhance the taxmen’s performance.

“We have developed an action plan for restructuring Pakistan’s tax administration,” Akhtar said while speaking virtually at The Future Summit organised by the Nutshell Group, which concluded here on Thursday.

“To us, the most absolute element there is strengthening the internal governance of the FBR.

“Today, I have a decision that I had placed before the leadership to separate the Customs from the revenue collection mechanism. They will be tracking the smuggling and other elements, while the revenue collection will remain a mandate of the FBR,” she said.

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Akhtar apprised that the initiative is a part of restructuring the FBR, and a notification to this effect would be issued by next week.

“There will be more notifications coming out on the restructuring of the FBR,” she added.

Speaking further about the FBR reforms, Akhtar said they would be moving towards innovative digital technologies that would help broaden the tax base and minimise the tax policy and compliance gap.

She said the measures would help in increasing tax collection and reduce the share of the shadow (undocumented) economy.

“Because we will be hunting all the non-filers more effectively and also the taxpayers who have been under-reporting their incomes or their businesses,” the finance minister said.

She informed that the government is working towards the separation of the tax policy and revenue division and moving it from administrative functions to be an independent division, which would be reporting directly to the Minister of Finance. “This will remove the apparent conflict of interest in tax collection.”

Tax policy has to be designed to be fair, equitable and productive, Akhtar said. “The revenue and fairness objectives need to be pursued by expanding the tax base, reducing tax exemptions and through a more efficient digital administration.”

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The government would be working closely with the National Database and Registration Authority (NADRA) to upgrade its data systems, she stated.

“We have established a technical committee to be chaired by the NADRA and the FBR chairpersons.”

“I will be working with them inside or outside the technical committee, given that I have to look at other areas of the tax administrative reforms too,” the interim finance minister said.

Revisiting devolution process with provinces

Akhtar said there is a need to enhance the efficiency and effectiveness of public expenditures, and there is also an urgent need to improve coordination within the federal government and with provinces and reorient expenditure priorities towards social welfare.

“I have to share with you that we have established a national finance commission that looks at devolution. In 2018, in a hasty manner, we devolved a lot of subjects, but also gave away a lot of the share of revenue to the provinces.

“It’s something everybody makes a mistake. All the other countries have also had issues in terms of the devolution process,” she said, adding, “It’s not an easy thing to do in a political setup. So, right now, we cannot introduce a new devolution mechanism. But what we have agreed with the provinces is that we will transfer the provincial components of expenditure back to the provinces.”

Akhtar said the federal government would take its responsibility and the provinces theirs’. “There will be some time lag in this process.”

“Provinces also run this very elaborate Benazir Income Support Program. They have their own public sector development program under which a lot of projects have been funded by the federation. So, this will be transferred to the domain of the provinces over the period in a phased manner,” she said. “Pakistan is well on the move to strengthen its reserves.”

Akhtar said the caretaker setup has taken a lot of proactive measures to stabilise the economy and build market confidence.

“At the core of the government stabilisation efforts is the $3 billion Stand-By Arrangement, which was approved in July 2023,” she said. “This led to the initial disbursement of $1.2 billion by the IMF. It also gave confidence to friendly countries about $3 billion in bilateral assistance. The State Bank reserves, which had dropped down to almost $4.4 billion, equivalent to 1.1 months of import, have now increased to almost $7.5 billion, 1.8 months of import cover as of 13 November 2023.”

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“I am hoping that with the news that I am going to give you, we will have more increments in our foreign exchange reserves,” she said. “Because we have just finished the review of the IMF second tranche and this has been agreed mutually, and after the IMF management and board have approved the package, we should be able to get another $700 billion.”

“And with that, we are hoping there will be unlocking of the multilateral quick disbursing assistance, which we have already negotiated, and they hopefully will go to the board soon.”

“The first comfort that I want to provide to our colleagues in Karachi as well as our international participants is that Pakistan is well on the move to strengthen its reserves. As you know, this will restore more business and investor confidence,” the interim finance minister stated.

Talking about the staff level agreement on the first review of the SBA, which Pakistan has managed to conclude, Akhtar hoped this will take the government forward with the efforts that it will be launching further deepening its “commitment to advance the planned fiscal consolidation”.

The big picture amid abysmal past performance

Akhtar mentioned a World Bank report, saying that Pakistan’s economy could reach almost $2 trillion by 2047 from the current $350 billion.

“However, this requires the formulation and implementation of sound economic and sectoral policies and our determination to actually pursue difficult, challenging structural reforms to achieve the potential of this economy,” she said.

“Pakistan has all the requisites of being a major economic player in the region and Asia.”

“Unfortunately, looking back at the last three decades, the failure to initiate meaningful reforms has meant that Pakistan has fallen behind regional economies in terms of, if nothing else, of the human and social indicators,” Akhtar said.

The minister emphasised that the decisions over the next decade would determine the country’s future and its 240 million poeple’s fate.

“The big question is, will Pakistan rise to the challenges ahead and transform its economy?

“Of course, I think we will be able to rise up to the challenges. But what does Pakistan need? Pakistan needs more innovation and diversity in the structure of the economy for sustainable growth.

“The manufacturing base or the export base or the agriculture basket are all focused on a very narrow range of products and have failed to penetrate new markets because they haven’t been diversified - neither our agriculture, nor our exports, nor our industry, nor our workforce.

“So, effective implementation of ambitious reforms has to touch upon not only these four critical sectors, but more than that, introduce a technological revolution in Pakistan,” she said.

Exports need a boost but imports aren’t bad either

Akhtar said anti-export policies of the last three decades led to loss of competitiveness of Pakistan’s manufacturing base.

“Exports have failed to make a transition from low technology to high technology products as about 70% of the country’s exports continue to be low technology products. In addition, the country has failed to diversify its export commodities and its export markets.”

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She said the textile and clothing sector, which contributes about 5% of world trade, dominates the country’s exports, which account for 58% of total exports.

“It’s our strength, but it is our vulnerability too, because diversification reduces the vulnerability.”

Meanwhile, Akhtar said Pakistan’s loss of competitiveness is evident because export of goods and services declined to 10% of the GDP relative to the regional average of about 15% to 19%.

“We have to find mechanisms to lower the import content because of our balance of payment issues, but we don’t want to cut out the imports because imports will lift the game of our exports. And we will be able to recoup the foreign exchange that we deploy for the imports.

“That’s what the rest of Asia has done that has really moved towards 70% export orientation in its industry or in its export business,” she said.

SIFC attracts $10 billion Saudi investment

During the session, the minister also informed that under the Special Investment Facilitation Council (SIFC), a transaction pipeline expedite investment in critical infrastructure has been developed and it includes about $10 billion of investments, particularly the Saudi Aramco refinery project and the agriculture corporate farm lease of 85,000 acres of land to potential foreign investors.

Raast – the path for financial inclusion

Speaking about financial inclusion strategy, Akhtar said Pakistan authorities launched an ambitious strategy in 2018.

“An elaborate digital infrastructure is being developed. It has already helped us launch what we call the Raast Payment Gateway in 2021. This is going to be breaking new frontiers because we are connecting Raast to Buna.”

Buna is a cross-border and multi-currency payment system founded by the Arab Monetary Fund (AMF) in 2018.

“The project has already been launched in Dubai and it will connect us with the GCC market, which is going to be a greater export focus but also is a hub for the remittances that we have. But this Raast has enabled instant end-to-end digital payments between individuals, businesses and government entities,” she said.