Reforming the FBR

Reforming the FBR is a formidable challenge for the government

Reforming the FBR


he performance of the Federal Board of Revenue has been an issue for all governments in Pakistan. Most recently it has missed monthly tax collection targets for the last three months. The number of income tax return filers has shrunk over 30 percent to just under 4.2 million compared to 5.7 million last year. The FBR has also failed to implement reliable track and trace systems and the tax to GDP ratio has remained stagnant for years.

Last year, the FBR missed the annual tax collection target by Rs 496 billion. It collected Rs 7.144 trillion in taxes against the target of Rs 7.640 trillion. The tax target was missed despite the imposition of nearly Rs 800 billion in additional taxes, including a mini-budget introduced in February 2023.

Out of four taxes, namely income tax, sales tax, federal excise duty and customs duty, the FBR met only the income tax collection target. This year we may face a similar situation at the end of fiscal year. Hardly anyone from the FBR is likely to be held accountable for the failure.

Reforming the FBR has become a hot topic again as PM Shahbaz Sharif has directed the hiring of a foreign consultant to modernize it. This is not going to be an easy task.

The current tax policy regime is not taking Pakistan anywhere. However, it is favourable for the FBR as the current tax policy is overwhelmingly skewed towards indirect taxes. Even most of the direct taxes are collected in an indirect mode.

Fawad Hasan Fawad, the caretaker privatisation minister, said in November 2023 that 93 percent of the tax revenue was either paid voluntarily or collected as withholding tax so that a meagre 7 percent was collected by the FBR. “In the last three years, the revenue board sent Rs 600 billion tax notices, but the actual recovery was less than Rs 4 billion. Since 2016, the tax burden on corporate taxpayers has increased by more than 40 percent on an average. This burden is encouraging people to stay out of the tax system and corporatisation,” Fawad said.

Caretaker finance minister Shamshad Akhter tried to restructure the FBR. She introduced an FBR reform plan, proposing to separate the policy from enforcement and make Customs a separate board independent of the FBR. According to former caretaker finance minister, the move could help raise tax to GDP ratio to 15 percent. It has been stuck at around 9 percent for decades.

The 20,000 plus work force of the FBR wholeheartedly opposed the reform agenda of the former finance minister. The Special Investment Facilitation Council approved the FBR restructuring on January 3, directing its implementation in one month. However, the FBR did not budge and its chairman did not submit a summary in time. Some FBR employees also moved the Islamabad High Court against the proposed reform.

The FBR has failed to put in place a reliable track and trace system in four major sectors — sugar, cement, fertiliser and tobacco — despite spending millions of rupees. Prime Minister Shahbaz Sharif has set up a five-member inquiry committee to investigate the matter. 

Experts say that this was not the first time that the FBR bureaucracy had thwarted a reform plan. They are accused of caring more about their interests. They fear that the reforms will take away some of their privileges and that their discretionary powers will also be reduced.

Sources in the FBR say the current leadership of the FBR, including chairman Amjad Zubair Tiwana and its members, such as Mir Badshah Khan Wazir and Zaheer Qureshi are close to former finance minister Ishaq Dar. “No finance minister can broaden the tax base and implement a reform agenda without his own team in place,” they add.

Prime Minister Shahbaz Sharif has handed over the finance ministry to Muhammad Aurangzeb but also taken some steps that have undermined the latter’s authority. For instance, the prime minister, rather than the finance minister will head the Economic Coordination Committee and the Cabinet Committee on Energy. In another first, Foreign Minister Ishaq Dar has been named to the Council of Common Interests and the finance minister has been excluded.

The FBR has failed to put in place reliable track and trace systems in four major sectors — sugar, cement, fertilizer, and tobacco — despite spending millions of rupees on the project. Following an IMF complaint, the prime minister has now set up a five-member inquiry committee to investigate the issue. The committee is headed by former finance secretary, Tariq Bajwa. It will look into the reasons for the failure in the full implementation of FBR’s track and trace system and examine the role of various officers in the failure. The committee will also explore alternatives such as the adoption of stamp systems and vendor-based solutions instead of electronic tracking.

Requesting anonymity some FBR officials have said a committee under the chairmanship of Tariq Bajwa, as former FBR chairman, is unlikely to come up with a helpful report. “We have already seen findings of a similar inquiry committee on track and trace system back in September 2023. The committee failed to identify FBR officials responsible for failure to install a track and trace system. The current committee will also follow in the footsteps of last committee and is unlikely to hold any senior officials of the FBR responsible for failing to install the system,” they said.

On March 5, Prime Minister Sharif expressed displeasure over the non-implementation of his orders to install scanners for monitoring various manufacturing units. Some FBR officials reportedly informed the prime minister then that there were no funds available for procuring the scanners. Former finance minister, Shamshad Akhtar, who was also attending the meeting, said that the FBR had never requested her for the funds.

The writer is an Islamabad-based researcher and journalist with an interest in health and taxation

Reforming the FBR