Sunday April 21, 2024

ECP pours cold water on cabinet plans for FBR revamp

The cabinet approved in principle to forward the revamp plan to the coming government.

By Mehtab Haider & Mumtaz Alvi
January 31, 2024
Caretaker Prime Minister Anwaar Ul Haq Kakar chairs a meeting of the Federal Cabinet in Islamabad on January 30, 2024. — PID
Caretaker Prime Minister Anwaar Ul Haq Kakar chairs a meeting of the Federal Cabinet in Islamabad on January 30, 2024. — PID

ISLAMABAD: The FBR restructuring plan faced a roadblock on Tuesday when the Election Commission of Pakistan directed Caretaker Prime Minister Anwaar-ul-Haq Kakar to leave the matter to the upcoming elected government.

The commission reminded the caretakers that their role was limited to addressing the day-to-day matters necessary to run the government, emphasising that they should avoid making major policy decisions.

Earlier in the day, the federal cabinet approved the FBR restructuring and digitization amid reservations of its senior officials and fears of a clash of interests.

Chaired by Caretaker Prime Minister Anwaar-ul-Haq Kakar, the cabinet approved the FBR restructuring and digitization on a summary forwarded by the Revenue Division.

When this reporter asked a top government functionary if there was any possibility of promulgation of an ordinance to implement the restructuring plan on immediate basis and leaving the legislation matter to the upcoming government, he replied, “No. I think, the legislation is to be done by the next elected government. However, it will depend on the official minutes to be issued by the cabinet for today’s meeting”.

The cabinet approved in principle to forward the revamp plan to the coming government.

There is no doubt that the FBR is in dire need of reformation but it was not understandable why the caretaker minister for finance is pursuing it in such haste.

Almost the entire December was wasted on this futile exercise. The secretary Revenue Division/chairman FBR finalized the summary and forwarded it to the minister for finance in the wee hours of Tuesday after receiving the official minutes of the last cabinet meeting.

The caretaker premier also made all-out efforts to convince the cabinet members as well as other stakeholders on the reform plan but remained unable to develop consensus. Ultimately, the summary was approved in principle but for all practical purposes, the cabinet granted its nod to the third point of official minutes of the last cabinet meeting, suggesting that its implementation and legislation be left to the next government.

After the ECP directive, the Ministry of Finance kept mum and preferred not to issue any official statement till the filing of this report in the evening.

The letter, available to The News, was written by ECP Secretary Dr. Syed Asif Hussain to caretaker prime minister’s Secretary Capt (Retd) Muhammad Khurram Agha.

The letter referred to the constitutional provisions and relevant laws, including the Elections Act 2017.

“In continuation of this officer’s letter of the same number dated January 27, 2024, I would like to draw your attention to the editorial in annex-A and news items in annex-B that appeared in daily Dawn and daily The News, respectively. These reports suggest that the federal government is undertaking a major decision to revamp the FBR through an ordinance, along with other concerns,” the letter reads.

It continues, “Improvement and reformation of state-owned institutions are undoubtedly core responsibilities of the government to enhance overall performance. However, under the constitutional scheme and legislative intent, as expressed in Section 230 of the Elections Act 2017, the functions of the caretaker government are defined. Attention is specifically invited to Sections 230 (1) (a) and (c) and 230 (2) (a) and (b) of the act reproduced below.

“Section 230: Functions of Caretaker Government. — (1) A caretaker government shall—(a) perform its functions to attend to day-to-day matters necessary to run the affairs of the government;

“(c) restrict itself to activities that are routine, non-controversial, urgent, in the public interest, and reversible by the future government elected after the elections; and

“(2) The caretaker government shall not—(a) take major policy decisions except on urgent matters; (b) make any decision or a policy that may have an effect on or preempt the exercise of authority by the future elected government.”

The letter concludes that the planned overhaul of FBR falls under the above statutory provisions and constitutes a major policy decision, which is the prerogative of the elected government. The Election Commission of Pakistan, responsible for conducting elections under Article 218(3) of the Constitution, is obligated to highlight the role and actions that the caretaker government should refrain from under Section 230 of the aforementioned act.

“In light of the above, I have been directed to convey that the honourable caretaker prime minister of Pakistan may be advised not to pursue major reforms in FBR and to keep it pending for consideration by the newly elected government following the general elections in 2024,” the ECP secretary states in the letter. Terming it good news, Caretaker Minister for Finance Dr Shamshad Akhtar Tuesday night shared the salient features of the plan under which the FBR’s tax to GDP ratio would be jacked up to 18 percent in five years till FY2029.

In her televised speech Tuesday night, Shamshad did not mention anything related to the ECP letter.

She said the federal cabinet, on 30th January, approved the FBR restructuring and digitization plan in preparation and under deliberation since September 2023.

The plan, a home-grown product, is the outcome of considerable consultations among the minister for finance, FBR chairman and members along with independent highly qualified tax experts.

The plan does draw on substantive research and recommendations of the long-standing multilateral engagement and technical assistance studies that were sponsored by the FBR over the years.

The caretaker government recognizes the macroeconomic challenges, and it has prioritized critical reforms, particularly the urgency for domestic resource mobilization. Pakistan’s tax-to-GDP ratio has been declining, with FBR tax/GDP ratio barely 8.5% in 2022/23, while country’s tax capacity has remained largely around 22% 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% of commercial and industrial electricity users and GST registered entities are barely 13% 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 have served 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.

The plan for FBR’s restructuring and digitization approved by the Federal Cabinet has two components. One pertains to a number of initiatives & 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 results, rather aggravated the problems of malpractices.

Going forward, the Tax Administration will be driven by advanced technology, utilizing Big Data, leveraging data analytics and Artificial Intelligence guided systems. The blueprint for the digital transformation of the Tax authority has been prepared, which has the following main components:

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. 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 & the rules for operationalizing digital invoicing have been prepared, and the implementation is at an advanced stage. Leveraging the technological prowess of Nadra and bringing in Karandaaz and support of Bill Melinda and Gates Foundation to help digitize 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 organizations holding the data of assets, transactions, and payments. Digitization 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 & malpractices, which are currently not being detected in the manual & 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.

A new & 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 rationalization of the FBR structure key elements of which are:

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.

Establishment of separate Customs and Inland Revenue organizations headed by DGs from respective service cadre, given that these organization handle different taxes. This is in line with the international best practices – almost 73% of countries have separate Customs organizations, 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.

Strengthening the governance of FBR structure by institutionalizing 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 & 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 harmonized policies as well as coordinate and collaborate matters between the Customs and IRS, where needed. Secretary Revenue by his presence in both the Oversight Boards shall offer the needed guidance.

A Tax Policy Office will be established in the Revenue Division with mandate to conduct solid research and offer empirical analysis on taxation structure issues and based on it recommend tax policy changes and assess the projections of possible revenue from different sectors which currently may not be estimated properly. Focus would be on developing the tax policies to expand the base, and control rampant avoidance & evasion.

With this new structure and measures of broadening tax base and integration of data enhancement and technology, and transformation of PRAL into a cutting-edge technology company with the support of NADRA, expectations are that the tax administration would be able to lift the tax/GDP ratio to 18% in 5 years (by 2029). The competence of the caretaker government to develop the proposals for Restructuring & Digitization of FBR was endorsed by the Cabinet and an implementation committee will be notified to carry out follow up activities to prepare the required package of legislative & administrative changes. The whole package of legal amendments, rules & regulations, and required administrative interventions for FBR restructuring and digitization will be operationalized by the new Government. There will be no retrenchment of Staff and they will retain their civil service status. FBR will carry out this restructuring within its existing resources and budget.