Due to inherent weaknesses in the Federal Board of Revenue (FBR), successive governments have tried to expand the tax base of the country, fix excessive scope of discretion and rent-seeking behaviour, eliminate corruption, tax evasion, complex and non-transparent tax system and improve taxation machinery for which restructuring of FBR is critical for the fiscal consolidation and making tax system more responsive to growth.
Prima facie, this writer has observed that FBR is rife with political interference, corruption, tax evasion, grossly unfair practices of fake and illegal demands to meet revenue targets, criminal negligence, staff incompetence, frequent transfer and postings, irrational revenue targets, inefficient and uncoordinated interaction between FBR wings, blocking of refunds, hostile attitude towards taxpayers, unwillingness to work, lack of motivation and low automation, etc., that constitute its underlying fundamental weaknesses that led to its institutional collapse. The following are the stages for complete restructuring and overhauling of FBR which are required to be implemented to accomplish the high economic growth of the country and finance the imbalances:
All the 11 wings of FBR require complete restructuring in a phased manner and the respective wings are systematically arched to function independently in the following three stages:
Stage 1:
Independent Policy Board
Despite separation of FBR's policy board, it has not been effectively functioning independently. It is to be ensured that Policy Board consists of truly independent, proficient, technically sound professionals and quality human resource who possess command on recent taxation issues and knowledge of international tax regimes. Policy Board should also have ground experience of fundamentals of contemporary taxation systems and policymaking. It must have not intervened in operations, administration, audit and/or other critical functioning of FBR wings and thrust of formulated policies by the Independent Policy Board should be aimed at accelerating tax and non-tax revenues by taking taxpayers into confidence.
Through simplification and harmonization of income tax, sales tax and provincial laws, the Policy Board should also formulate separate simplified Income Tax Laws for corporates and individuals. Policy wings of FBR should be merged with the Policy Board. Strategic Planning Reforms & Statistics (hereafter "SPR&S") should report to Independent Policy Board at this stage and merged with Policy Board in the second stage.
Independent IT body
Following the independent functioning of Policy Board, Information Technology body should also be made independent on the urgent basis. Pakistan Revenue Automation (Pvt) Limited (PRAL) system needs to be upgraded and updated. The existing online systems operated by other jurisdictions for tax assessments and collections should be pursued accordingly, while for further automations, single online platform for smooth collections and assessments of all types of taxes should be enforced. In order to achieve the deadlines, benchmarks should be set for upgrading, monitoring and capacity building of IT body.
Federal Audit Tax Authority
Given the high sensitivity of taxpayers' audit function which is also placed as high-risk factor in corruption index, taxpayers' audit function should also be categorized under a separate Federal Tax Audit Authority. In order to reduce likelihood of human interference, audit assessments should be moved to online/digital mode and for this purpose, FBR's existing staff serving under the audit wing, be appointed in the newly-formed authorities presently. To ensure transparency and autonomy, appointments should be made through Federal Public Service Commission exams to induct competent manpower from junior auditor to executive director over the period of two years. Following the Turkish model, the newly-appointed team should be trained in such a way that they possess specialized skills in audit, an in-depth understanding of accounting principles and treatments of complex business transactions.
Federal Tax Legal Authority
Pursuing similar strategy in line with the Federal Tax Audit Authority, Federal Tax Legal Authority should also be formulated as a separate body considering its high-risk sensitivities. Existing manpower of FBR serving under legal wing may be appointed in newly formed authorities currently. Similarly, appointments should be made through Federal Public Service Commission exams. The fresh team should be trained to acquire specialized skills in litigation, in-depth understanding of accounting principles, treatments of complex business transactions and legal principles. In order to ensure Litigation Authority's independence in its true spirit, policy of relocation of relevant officers back to FBR may strictly be avoided while writing judgments. The existing multiple appellate cadres should be reduced to make a single Federal Tax Legal Authority for Income Tax, Sales Tax, FED, Custom Duty and provincial taxes.
Broadening of tax base under Nadra
To ensure effective utilization of data base available with the National Database and Registration Authority (Nadra), Broadening of Tax Base (BTB) wing should be formed over a period of three years. Potential tax evaders may be identified, utilizing Nadra data base through BTB specialized officers. The results may then be shared with FBR for further action i.e. issuance of notices, making inquiries, and make assessments.
Stage 2:
Merger of Administration, Facilitation and Taxpayer Education (FATE) and Human Resource Management (HRM) Functions
In the second stage, functions of administrations, FATE and HRM should be merged under a single independent body over a period of one and half years.
Merger of Strategic Planning Reforms & Statistics (SPR&S) with Policy Board
SPR&S function should be merged with Policy Body and it should be ensured that policies and strategies are formulated on the basis of up to date statistics and research results. This will also help in providing direction to the efforts of SPR&S.
Stage 3:
Overhauling of remaining functions
The remaining functions of FBR such as operations, administrations, etc., should be revamped and overhauled at this critical stage. Enforcement and collections should be ERP (enterprise resource planning system)-based and operations should also be digitized with least human intervention.
Change within FBR is inevitable to spur economic growth with the changing economic dynamics of the country. According to the World Bank, Pakistan's tax revenue potential is estimated around 26% of GDP against the stagnant tax to GDP ratio of 11.6% during 2018-19 which is amongst the lowest in the world. This means that tax authorities are only targeting half of the tax revenues, while around 15% of GDP is lost by not restructuring and overhauling THE FBR. The untapped potential warrants a speedy implementation of the suggested carefully crafted in-depth structural reforms that are needed to reduce the country's vulnerability to economic shocks, ensuring fiscal sustainability, generating fiscal space to finance external imbalances and provide much-needed investment in infrastructure and human development of the country.
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