ISLAMABAD: The caretaker government has decided that in view of its constitutional and legal mandate, it would only carry out the groundwork for the Federal Board of Revenues (FBR) structural reforms, but legislation to this effect would be left to the new elected Government, well informed sources told Business Recorder.

Revenue Division gave a detailed briefing to the federal cabinet on the restructuring of the Federal Board of Revenue (FBR) by the Ministry of Finance. It was stated that in order to promote fiscal and debt sustainability over the medium term, Pakistan needed to launch major governance and tax policy reforms; and that an overhaul of the tax structure and administration had also been necessitated by very low tax collection, despite country’s huge potential.

The presentation included proposals for separation of the tax policy functions from taxation operations, constituting new Boards, and instituting new measures for revenue generation. It was pointed out that for years the tax system in the country had faced serious challenges, as a consequence of which FBR revenue generation was inadequate, standing at only 8.5 percent of the GDP in FY 2023, while the public expenditures, despite being compressed, were 19.1 percent of GDP.

The cabinet was apprised that the urgency for tax reforms stemmed further from the need to achieve robust and sustainable growth. It was added that although the true tax potential of Pakistan had been estimated to be 22 percent of GDP (2015 IMF estimates), and that the ratio was even higher than 15 percent in regional countries 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.

It was further explained that significant tax distortions had complicated collection and had led to a disproportionate incidence of taxes falling on the formal sector, and in particular on the existing taxpayers. It was pointed out that the share of tax collection by provinces had remained below 1 percent of GDP.

Restructuring of FBR on the cards

The cabinet was informed that the current taxation system suffered from problems of inefficiency, lack of fairness, inequity (both horizontal and vertical), integrity issues, and complexity, accompanied by harassment of taxpayers. Furthermore, there was a high level of non-compliance owing to the very high cost of compliance.

It was informed that the Ministry of Finance had adopted a broad-based approach to develop tax reforms; and that several tax diagnostic reports had been prepared, and background work had been carried out by a Technical Task Force, which included the Chairman FBR, Board Members and experts in taxation, customs technology and industry. The ministry further informed that tax reforms were a key component of discussions with the IMF, but that they were nevertheless a home-grown solution.

It was further informed that the proposals for restructuring the tax administration along with digitalisation of processes had been presented to, and approved by the Apex Committee of the SIFC on 3rd January 2024, subject to inter-ministerial discussions, as required under the Rules of Business 1973.

It was pointed out that after approval of the cabinet, the Ministry of Finance would constitute an implementation committee to prepare the amendments required in the legal and regulatory framework, which would be vetted by the Law Division, and that the new structures would be operationalised as soon as legal and administrative formalities had been completed.

The Revenue Division placed the following proposals, before 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 and report to the Policy Board. 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 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, there will be conditions defined in legislation for removal in line with the best practices. 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. The Revenue Secretary will be appointed from the service cadre of Customs or IRS; (iii) two Oversight Boards will be chaired by Minister for Finance and Revenue.

Customs Oversight Board and IR Oversight Board will include Secretaries of Finance, Revenue, Commerce, Chairman NADRA and domain experts. All Oversight Board members will need to be subject to rigorously predefined Fit and Proper criteria and have domain knowledge required on tax policy expertise with no conflict of interest and selected based on their integrity. Both DG Customs and DG Inland Revenue will report 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) Targets of Customs organisation would include taxes collected at import or at domestic level and would comprise: (a) Customs Duty; (b) Additional Customs Duties; (c) Regulatory Duties, (d) Export Development Surcharge; and (e) any other duty, taxes & charges levied by Customs Department or entrusted by any other department or government; (v) targets for IR Organisation would comprise: (a) Income Tax; (b) Sales Tax; (c) Federal Excise Duty; and (d) WWF, CVT and any other, taxes/ charges entrusted to Inland Revenue Department by any other department or government; (vi) Customs Organisation will act as withholding agent for administration of Inland Revenue taxes at import stage for smooth functioning and continuity of operations; (vii) all matters connected to International Taxes, valuation of goods and assets, IT and Digitalization 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 of Finance; (viii) 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 Revenue Division; (ix) transfer of assets to Customs and IR organisation may be done on the advice of Asset Distribution Committee to be notified for this purpose; (x) Finance Minister would constitute an Implementation Committee to prepare the amendments in the legal and regulatory framework, and enactment of new laws (wherever necessary); (xi) The scope of restructuring envisioned in the above proposals is wide-ranging and its implementation would require strong commitment, dedication and tireless efforts of all members of Board to transform tax administration into high-powered revenue generation organisations. It would also require changes, (a) on the legislative side in various tax statutes & related laws, enactment of legislation for Customs and Inland Revenue Establishments, and in addition, changes in respective rules, and Rules of Business 1973; and (b) on administration side, budget and expenditure allocation of establishment of new administrations, and division of existing assets between the two administrations.

Accordingly, it is proposed that legal and administrative formalities are completed soon. Further attachment of Cabinet Summary for FBR Restructuring and Digitisation proposals, including further details of tax reforms is an integral part of this summary.

An in-depth discussion followed the presentation of the reform proposals.

The cabinet was of the view that public interest must be protected, and the government was obligated to serve the people, for which effective tax collection was critical. Members of the cabinet felt that the FBR’s performance was not up to the mark, given that tax collection stood at only 8.5 percent of the GDP, most of the potential taxpayers were not paying their due share, and majority of taxpayers belonged to the salaried class.

The cabinet was also perplexed as to how the proposed restructuring of FBR would lead to an increase in revenues or fill the gap between tax policy and its compliance. It was emphasised that the key issues for low revenue generation were primarily corruption, 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.

The cabinet noted with very serious concern that only 2.3 million persons, out of the total 5.9 million tax filers, were actually paying taxes. A cabinet member suggested that all persons other than BISP beneficiaries should file tax returns and pay tax once their incomes exceeded the threshold, and that for this purpose the tax return form, which was at present too complex even for educated persons to fill out, needed to be simplified.

On the proposal regarding the Policy Board, which would be tasked with tax policy, the cabinet desired that the conditions of ‘fit and proper criteria’, appropriate qualifications and experience, and certification of ‘no conflict of interest’ be introduced for members to be appointed on the Board.

A consensus also emerged that members of the legislature who were not a part of the executive should not be appointed on forums of an executive nature, so as to ensure a separation of powers. A member also opined that the Oversight Boards should not be headed by the Finance Minister, as it was not an international practice, and that the Secretary Revenue should not report to the Policy Board, but to the Finance Minister.

During the discussion, the Ministry of Finance emphasised that FBR was an opaque and non-transparent organisation and the existing setup could not deliver the goals and targets of the ambitious reforms agenda, necessitated due to debt crisis and foreign loans; and that lack of integrity was a major problem, to resolve which, an Integrity Unit would be established.

It was clarified that the FBR would be bifurcated at the management level under two Oversight Boards, one for IRS and the other for Customs; that the Director Generals of the two streams would be appointed for fixed terms and would exercise the powers of a Principal Accounting Officer; and that the Secretary Revenue would be drawn from either the IRS or Customs. The Cabinet was informed that the use of Artificial Intelligence and digitisation were a key component of the reform plan, and that NADRA would be fully involved in the effort.

After discussion, the Cabinet reached a consensus that it was the prerogative of the government to appoint the Secretary, Revenue, and that the post could not be reserved for any specific cadre.

The cabinet also discussed in detail as to whether or not the proposed restructuring was legally within the mandate of the caretaker government, especially when it entailed amendments, as informed by the Ministry of Law & Justice, in the FBR Act and other laws as well in the Rules of Business, 1973. It was noted that, in terms of constitutional design, as well as, the Elections Act instituting legislation to effect large-scale structural changes did not fall within the ambit of the caretaker government, and that it was appropriate only for the new elected government to legislate on the reforms.

In view of the constitutional and legal position, most members were of the view that the caretaker cabinet might carry out the groundwork, keeping in view the public interest, but that legislation should be left to the new elected government. The cabinet appreciated the efforts of the Minister for Finance and Revenue for preparing very comprehensive proposals to reform the FBR.

It decided that 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.

In view of its constitutional and legal mandate, the caretaker government would only carry the groundwork for the Federal Board of Revenues’ structural reforms, keeping in view the public interest, but legislation to this effect these reforms would be left to the new elected government.

Copyright Business Recorder, 2024