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November 10, 2018

Reforming the tax system


November 10, 2018

The PTI has taken the first steps towards tax reform. The first step is to separate revenue collection from tax policy formulation. The question is whether this will be significant enough to improve tax collection in the country. The decision is intended to take away policy formation powers form the Federal Board of Revenue, which will now only be responsible for tax administration and collection. The decision seems to mirror the larger shifts in governance advocated by international lenders. Similar moves to separate policy formulation and administration in the electricity and gas sectors has not worked well in terms of improving the actual operation of the sectors. A special committee will be formed to formulate a larger tax reform framework, which could mirror the government’s Economic Advisory Committee. Independent tax experts are expected to be put on board.

Would making the FBR an autonomous body be in line with the PTI manifesto improve tax collection? FBR reform is a crucial part of the PTI’s 100-day reforms agenda. PM Imran Khan in his first speech promised to start the reform process with the FBR. The change looks good on paper like most other tax reform proposals to have been implemented, but there has been little success apart from the indirect taxation proposals. Tax reform has been on the cards for the last four decades. Previous efforts have included the Qamarul Islam report in the 1980s, the Shahid Husain Task Force in the 1990s, and the decade-long Tax Administration Reform Project.

There has always been a problem in how tax issues in the country are diagnosed. The narrative is that tax reform involves getting rid of decades of failure to adapt on the part of the bureaucracy. The reality is different. The tax bureaucracy is known to have adjusted well to the changing nature and growing scale of the Pakistani economy in terms of its ability to enrich itself through corrupt practices. Governance and service delivery in Pakistan are not connected to taxation. If anything, the feeling exists that tax does not go into providing services to the taxpayer. One can separate tax collection from policymaking, but how does that repair the relationship between the state and the local taxpayer? When service delivery involves informally bribing a state official to get an electricity connection or to get roads repaired, then the money should go directly into the tax coffer. The FBR is showing that it is in action – but the 3,000 notices are nowhere near sufficient to improve tax collection in the country. It will be important to see what the overall idea of tax reform is under the current government. For now, we are seeing a piecemeal, rather than a holistic, approach.

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