ISLAMABAD: Caretaker Finance Minister Dr Shamshad Akhtar has stated that the FBR restructuring and digitisation plan is a home-grown product and was approved after months of deliberations.
In a televised speech on Federal Board of Revenue (FBR) restructuring late night on Tuesday after the cabinet meeting, the minister said that the plan is an outcome of considerable consultations among the various internal stakeholders. The plan has been in preparation and under deliberation since September 2023, she added.
The minister said that the plan does draw on substantive research of the long standing multilateral engagement and technical assistance studies that were sponsored by the FBR over the past many years. She said that the caretaker government recognises intensity of macro-economic challenges and is of course trying to deal with these challenges in a sequential manner given the short period of time.
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It started with the process of prioritisation of critical reforms and most critical today is to leverage the domestic resource mobilisation so as to enable the government to meet fiscal deficit without excessive borrowing and reduce the burden on the government borrowing on the banking system as well as to also generate enough resources to enhance investment-to-GDP ratio to double it from existing 15 per cent. Pakistan’s tax-to-GDP ratio has been declining with FBR tax-to-GDP ratio barely 8.5 per cent.
Meanwhile, the minister’s speech shared by the Finance Ministry stated that Pakistan’s tax-to-GDP ratio has been declining, with FBR tax-to-GDP ratio barely 8.5 per cent in 2022-23, while the country’s tax capacity has remained largely around 22 per cent of GDP including the taxes under purview of provinces that yield barely one percent of GDP revenues.
The number of taxpayers in Pakistan is barely 2.3 million. Corporate tax filers are 0.8 per cent of commercial and industrial electricity users and GST registered entities are barely 13 per cent of the 1.4 million taxpayers.
The 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 exist because of high revenue sources assigned to provinces and large undocumented sector 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.
She highlighted the plan for FBR’s restructuring and digitisation approved by the federal cabinet has two components; one pertains to a number of initiatives and 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, rather aggravated the problems of malpractices. Going forward, the tax administration will be driven by advanced technology, utilising Big Data, leveraging data analytics and Artificial Intelligence (AI)-guided systems.
The blueprint for the digital transformation of the tax authority has been prepared, which has the main components; (i) 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; (ii) 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 and the rules for operationalising digital invoicing have been prepared, and the implementation is at an advanced stage; (iii) leveraging the technological prowess of NADRA and bringing in Karandaaz and support of Bill Melinda and Gates Foundation to help digitise 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 organisations holding the data of assets, transactions, and payments; (iv) digitisation 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 and malpractices, which are currently not being detected in the manual and outdated process. 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; (v) a new and 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.
The second component focuses on rationalisation of the FBR structure key elements of which are, (i) 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; (ii) Establishment of separate Customs and Inland Revenue organisations headed by DGs from respective service cadre, given that these organisation handle different taxes. This is in line with the international best practices – almost 73 per cent of countries have separate Customs organisations, 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; (iii) strengthening the governance of FBR structure by institutionalising 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 and 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 harmonised policies as well as coordinate and collaborate matters between the Customs and IRS, where needed.
Copyright Business Recorder, 2024
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