Key issues behind low revenue identified: Cabinet concerned at ‘integrity’ of FBR board members?

ISLAMABAD: The caretaker Federal Cabinet has reportedly expressed its concerns over the integrity of private members of the Board of FBR and identified key issues for low revenue generation which include massive corruption, policy gaps, misuse of power, inadequate number of tax filers, extremely complex tax return forms, as well as several economic sectors and professions not being taxed, well-informed sources told Business Recorder.

On January 30, 2024, the Revenue Division informed the Cabinet that in pursuance of the proposal for restructuring of the Federal Board of Revenue (FBR) and associated initiatives, submitted by the Ministry of Finance, Revenue and Economic Affairs, the Federal Cabinet, in its meeting held on 23rd January took the following decisions: (i) the Cabinet considered the summary titled ‘Restructuring of Federal Board of Revenue and Digitisation on January 21, 2024, submitted by the Revenue Division and constituted an Inter-Ministerial Committee, to be convened by the Finance Minister, and including the Ministers for Foreign Affairs, Privatisation, Law & Justice, Energy, Commerce, Information Technology & Telecommunications as member to deliberate on the FBR reform proposals and refine consideration of the Cabinet in its next meeting ;(ii) Federal Board of Revenue shall make the tax return form simple enough for the common-person to understand and fill out; and reduce its length to no more than two pages, with provision for supplementary information where required and; (iii) in view of its constitutional and legal mandate, the care-taker Government would only carry out the groundwork for the Federal Board of Revenue’s structural reforms, keeping in view public interest, but legislation to effect these reforms would be left to the new elected Government.

FBR restructuring: Body formed for critical tasks

The Cabinet was apprised that as decided by the Cabinet, an Inter-ministerial committee was constituted under chairpersonship of the caretaker Minister for Finance and comprising the caretaker Ministers for Commerce, Privatisation, Information Technology, Energy, Law and Foreign Affairs.

The committee held its meetings on 23rd and 24th and 25th January, 2024. It examined all proposals for restructuring of FBR as well as associated matters and deliberated extensively on all aspects.

It was further noted that the Chairman FBR and Members of Customs and Inland Revenue remained associated with the meetings of the Committee.

The Cabinet was informed that there was broad support for the FBR restructuring including the separation of the tax policy functions from taxation operations, constituting new IRS and Customs Organisation, headed by DGs, and establishing oversight mechanism with the right expertise.

An in-depth discussion followed the presentation on the reform proposals. The Cabinet argued that the public interest must be protected, and the Government was obligated to serve the people, for which effective tax collection was critical.

It was emphasised that the key issues for low revenue generation were primarily corruption, policy gaps, misuse of power, inadequate number of tax filers, extremely complex tax return forms, and the fact that many economic sectors and professions were not being taxed.

It was also observed that quite frequently tax policy had been shaped by politically influential industrial, business and professional groups with vested interests, which was against the welfare of the country.

Elaborating on the observations of the Inter-Ministerial Committee of the Cabinet on FBR restructuring, the Revenue Division noted that the Committee sought reconfirmation from the Chairman FBR, Members from Pakistan Customs and Inland Revenue services regarding ownership of the restructuring plan.

The Committee was assured that IRS and PCS were fully committed to ensuring the ownership of the plan amongst officers at all levels.

It was stated that the Inter-Ministerial Committee had observed that there were capacity issues in FBR, especially in defending its tax revenue in litigation.

The recommendation of the committee for strengthening in-house legal setup and inclusion of in-house tax accountants was also made part of the overall reform proposal.

The Revenue Division stated that these recommendations were included in the revised proposal submitted to the Cabinet and that in view of the detailed deliberation on the issue and modifications/recommendations of the Committee, a revised proposal was being submitted to the Cabinet for its consideration and approval: (i) Federal Policy Board will be reconstituted and will be chaired by the Finance Minister.

The Revenue Division Secretary shall serve as the Secretary to the Policy Board but, as recommended by the Cabinet Committee, will report to the Finance Minister. This Board with the support of the Secretary, Revenue Division will have a new mandate and play an instrumental role in formulation of Tax Policy, in coordinating an effective litigation defence system, assignment of revenue targets, and coordinating all strategic issues amongst stakeholders.

The previous decision of the Federal Cabinet of April 9, 2019 to place tax policy in Finance Division may be annulled; (ii) Customs and Inland Revenue Organisation will be separated, with each organisation headed by a Director General (DG) to be appointed by the Federal Government from the respective service cadres, for a fixed tenure however, as recommended by the Cabinet

Committee, there will be conditions defined in legislation for their removal in line with the best practices, including recording of reasons, in writing, for removal by the competent authority.

The two establishments will be attached departments of the Revenue Division.

The DGs will have administrative, financial and operational autonomy including budgeting and posting and transfers for their respective establishments. As recommended by the Cabinet Committee, the Revenue Secretary will be appointed from the service cadre of Customs or IRS, with a fixed tenure, who could only be removed in accordance with specified procedure.

The officers of both service cadres of Customs and IR will continue to retain their status as civil servants like all other service cadres of the Federal Government; (iii) Both the Customs Oversight Board and the IR Oversight Board will be chaired by the Finance Minister, contrary to the recommendation of the Cabinet Committee of appointing the Secretary Finance and Secretary Commerce with concerns being aligning hierarchy and expertise.

Both the Oversight Boards will include Secretaries of Finance, Revenue, Commerce, Chairman NADRA, and domain experts. All Oversight Board members will be rigorously subjected to predefined Fit and Proper criteria and will have domain knowledge required on tax policy expertise with no conflict of interest and would be selected based on their integrity. Both DG Customs and DG Inland Revenue will act as the Secretaries to their respective Boards.

The Oversight Boards would set KPIs, monitor performance including achievement of targets, and approve policies of Customs and IR establishments relating to administrative matters; (iv) in line with Cabinet Committee discussions, the DGs of both Customs & IRS shall take all necessary steps including digitisation of processes, providing grievance redressal mechanisms, and adopting global best practices to promote transparency and integrity in their Organizations; (v) targets of Customs Organisation would include taxes collected at import or domestic level and would comprise Customs Duty, Additional Customs Duties, Duties, Regulatory Duties, Export Development Surcharge and any other duty, taxes & charges levied by the Customs Department or entrusted by any other department or government; (vi) targets for IR Organisation would comprise Income Tax, Sales Tax, Federal Excise Duty, WWF, CVT, and any other taxes/charges, entrusted to the Inland Revenue Department by any other department or government; (vii) Customs Organisation will act as withholding agent for the administration of Inland Revenue taxes at the import stage for smooth functioning and continuity of operations; (viii) all matters connected to International Taxes, valuation of goods and assets, IT and digitalisation, and policies relating to Data Exchange between the two DGs, Integrity and HR shall also be placed in Revenue Division and decisions will be taken jointly based on consultations with both Customs and IR DGs. Should there be a major difference, the matter can be escalated to the Minister for Finance; (ix) the determination of value for imported goods through valuation rulings will be done by a committee comprising equal representation from Customs and Inland Revenue, in line with the respective laws, and shall be placed in the Revenue Division ;(x) in line with Cabinet Committee recommendations, the respective, legal wings in the Customs and IR organisations will be strengthened by establishing in-house legal expertise as well as by having competent tax accountants within the organisations ;(xi) transfer of assets to Customs and IR organisation may be done on the advice of Asset Distribution Committee to be notified for this purpose;(xii) Finance Minister would constitute an Implementation Committee to prepare the amendments in the legal and regulatory framework, and enactment of new laws (wherever necessary;(xiii) the scope of restructuring envisioned in the above proposals is wide- ranging and its implementation would require strong commitment, dedication & tireless efforts of all Members of the Board to transform tax administration into high-powered revenue generation organisations.

It would also require changes (1) on the legislative side in various tax statutes and related laws, enactment of legislation for Customs and Inland Revenue Establishments, and in addition, changes in respective rules, and Rules and Business 1973; and (2) on administration side budget and expenditure allocations, establishment of new administration and division of existing assets between the two administrations.

Accordingly, the legal and administrative formalities would be completed as soon as practicable. Law Ministry has assured of support to review and help finalize the legal amendments;(xiv) the attachment of Cabinet summary for FBR restructuring and digitisation proposals including further details of tax reforms is an integral part of the summary.

By approval of full reform package would stand approved and will be implemented on a fast track basis. In line with Cabinet Committee recommendations, revenue aspirations were adjusted. Tax administration will strive to raise incremental tax to GDP ratio by 1.8 per cent annually, raising it from 9 per cent of GDP in FY 2024 to 18 per cent by FY 2029.

In the ensuing discussion, it was observed that the FBR performance in realizing the tax potential of the country has not been satisfactory.

The policy and structural reforms are aimed at improving these areas, which are critical for the country. It was stated by several members of the Cabinet that politically influential industrial, business and professional groups with vested interests had frequently shaped the tax policy, which was against the welfare of the country.

It was proposed that the existing proposal also needed a review to constitute only one Federal Tax and Policy Oversight Board under Minister for Finance. Suggestions were also made to enhance the domain knowledge so as to empower both PCS and IRS officers.

Explaining the rationale and urgency for reforms, the Minister for Finance, stated that the FBR structure had been static for years, further adding that both fiscal and debt sustainability were not possible without a robust tax administration structure. It was pointed out there were serious microeconomic problems and debt liability issues.

The Minister added that although the true tax potential of Pakistan has been enormous, even higher than the regional countries, yet it remained untapped owing to a narrow tax base, with a large segment of the economy, including agriculture, real estate, retail and professional persons etc. remaining outside the tax net; a large informal sector; and non-documentation.

On inclusion of private sector in boards, some of the members of the Cabinet observed that in the past there had been instances of senior private sector professionals serving in the FBR who had a conflict of interest. To this, the Minister responded that a “fit and proper criteria” shall be followed to bring in the private sector only to the extent of experts and academia, and it will be ensured that they have no corporate affiliation or conflict of interest. Many members observed that some of the proposals had been altered after approval by the Inter-ministerial Committee. This was considered inappropriate.

It was proposed that the Oversight Boards may headed by Secretaries of Commerce and Finance. It was also observed that in last meeting, the Cabinet members had a clear understanding about the prerogative of the Government to post the most suitable officer belonging to any service as Secretary Revenue and that the post shall not be reserved for only IRS or Customs officers.

However, it was decided that position of Secretary Revenue would be limited to only two cadre services. After discussion, the Cabinet had a consensus that it was the prerogative of the Government to appoint the Secretaries, and the post of the Secretary of any Division shall not be reserved for any specific cadre.

In the same proposal, many members supported security of tenure in principle; however, they objected that removal clause should not have the words “through legislation” and these words should be deleted. The Cabinet agreed to this observation.

After threadbare discussion the Cabinet decided that Revenue Secretary shall be appointed from any service cadre instead of being limited to the Pakistan Customs Service or the Inland Revenue Service. It is the prerogative of the Government to post any suitable officer; and removal clause not to be made a part of the law, however, security against premature transfer may be provided through other means, for instance through rules.

Copyright Business Recorder, 2024