GOVERNMENT OF PAKISTAN

(REVENUE DIVISION)

FEDERAL BOARD OF REVENUE

*******

TAX ADMINISTRATION REFORMS PROJECT

 Riffat Shaheen Qazi, Chief (Tax Policy and Reforms)

            It is generally perceived that ’s tax effort is much below when compared with its regional neighbors. There is thus realization in the Federal Board of Revenue that its revenue effort and service standard needs drastic improvements.  Accordingly Reform of Tax Administration has been on the agenda of the government.

2.         In June, 2000, Government of appointed a Task Force on Reform of Tax Administration. This Task Force presented its report in May, 2001. The report was conceptually approved by the government with the directions that an implementation strategy be framed in respect of viable recommendations after due consultation with stakeholders.  The report apart from trade bodies, accounting institutes, tax bar associations was also discussed with donor agencies.  On a request from the Government of for input in its FBR reform effort, an IMF Mission visited in August, 2001.  This Mission carried out in-depth discussion with various stakeholders including Ministry of Finance, Establishment Division, Federal Public Service Commission and trade bodies.  The Mission presented its draft report in August, 2001.  These reports and various other studies recommended a tax system, which has simpler laws and efficient procedures that promote self-assessment, reduce physical controls and creates reliance on audit and risk assessment.

Reform Strategy for FBR:

3.         FBR on the basis of these reports and discussions with various opinion makers prepared a tax reform strategy, which was approved by Government of in November, 2001.  The reform strategy has three main planks (a) policy reforms, (b) administrative reforms and (c) organizational reforms.  The policy reforms include simple laws, universal self-assessment, elimination of exemptions, less dependence on withholding taxes, effective dispute resolution mechanism.  The administrative reforms aims at (I) to transform income tax organization on functional lines; (ii) re-engineering of manual processes of all taxes with the aim to reduce face to face contact between taxpayers and tax collectors, increasing effectiveness of FBR and improve skills and integrity of the workforce. The organizational reforms include re-organization of FBR headquarter on functional lines, reduction in number of tiers and reduction in workforce.

Progress On Reform Initiatives:

4.         FBR has already re-structured it’s headquarter.  With a view to supplement the level of skills in FBR, the Government in March-April, 2002 appointed professional Members from private sector for Human Resource Management (HRM), Information Management System (IMS), Audit, Taxpayers Education and Facilitation (TPE&F), and Fiscal Research & Statistics (FR&S). The FBR has prepared new recruitment policy (with greater emphasis on skills that match FBR needs), incentive and merit based remuneration and promotion mechanism and extensive training.  FBR through its reform program is strengthening sales tax audit and enforcement activities. 

5.         In 2002 FBR received a Project Preparation Facility of US $ 2.9 million from World Bank which was used on hiring of international consultants M/s. Maxwell Stamp PLC, UK, and establishment of Large Taxpayer Unit and Model Sales Tax House at Karachi and a Medium Taxpayer Unit at Lahore.  M/s. Maxwell Stamp prepared a Comprehensive Medium and Long term Tax Reform Strategy including an implementation time table defining the precise reform steps and time frame etc.          

6.         FBR has made commendable efforts in transforming the tax system from conventional to operational functioning.  The legacy taxation system was suffering from major weaknesses in the shape of complicated laws and procedures, high tax and tariff rates, wise range of exemptions, and many other distortions. Consequently, the taxation system was rendered inefficient and open to abuse.  In an effort to correct this situation, a comprehensive reform agenda focusing on wide ranging revisions in tax laws and procedures and tax and tariff structure, as well as improvement in tax administration was envisioned.  A brief description on these initiatives is highlighted below:

Tax Policy Reforms:

7.         Tariff Rationalization: To make home industries more competitive, efficient and responsive to face the future challenges, the move towards tariff rationalization and reduction was initiated. The maximum tariff which was 150% in 1980s has been gradually reduced to 25%, presently in vogue.  Similarly, the number of tariff slabs has also been reduced to encourage fair application of rates.

8.         Introduction of General Sales Tax (GST): The other significant improvement at the early stages of tax policy reforms was the introduction of General Sales Tax (GST) in VAT mode. The GST rate has been rationalized and a single rate of 15% both at import and domestic goods has been introduced.  In the past there used to be a combination of tax rates applicable for sales tax collection like, higher rate of 20%on certain commodities and also the further tax @ 3% applicable to non-registered persons. Recently, the concept of zero-rating has been introduced for the entire chain of five export-oriented industries including textile, leather, surgical, and sports goods. This step was essential to improve cash-flow situation of the investors, and to avoid the cumbersome system refunds and rebates.

9.         Changes in Income and Corporate Taxes: The income and corporate tax structure has also gone through substantial changes and improvements in recent years.  These include enhancement in basic threshold of exempt income, change in the advance tax regime, and continuous revision in corporate rates to promote corporate culture and to have parity by the tax year 2007.  The corporate rates were at their peak in 1993, where Banking companies were charged @ 66%, Public companies @ 44% and for Private companies @ 55%.  These rates have been gradually reduced in 2006 to 39%, 35% and 37% for banking, public and private companies respectively, and parity of 35% will be ensured in 2007.  A new slab of lower rate has also been introduced for SMEs. Another important development in the income tax structure has been the introduction of the concept of Universal self-assessment Scheme.

Tax Administration Reforms:

10.       The main emphasis of the tax administration reform is on promoting voluntary tax compliance through an enhanced level of taxpayers facilitation.  In the long-run, these administrative reforms will also enable tax administrators to effectively tackle delinquent taxpayers through a system of audit and penalties.   

11.       To achieve these objectives substantial investment has been made in infrastructure development, end-to-end automation of business processes, and human resource development.    FBR has established a large taxpayer unit at Karachi and Lahore encompassing all domestic taxes, Model Sales Tax House at Karachi to test new business and customers services procedure, Six Medium Taxpayer Units at Lahore, Karachi, Quetta, Peshawar, Faisalabad and Rawalpindi to test the re-organized structure of income tax and an automated re-engineered tax administration system, automated the Sales Tax refund verification system, and is establishing Taxpayers Education and Facilitation Centres to improve the voluntary compliance. The Customs processes are re-engineered and Customs Administration Reform (CARE) has started working that has minimized the time of clearance of goods to few hours.

12.       The future set up envisages to clear segregation in the operations of domestic and international taxes.  Whereas all domestic taxes will operate through Regional Tax Offices (RTOs), the international trade taxes will be handled by Model Custom Collectorates where the One-Customs setup will be gradually replaced by PACCS currently being used with the CARE project.  The creation of RTOs will not only lead to co-location of the offices of Income and Sales Tax (including excise duties), the strengthening of hard-and software will also ensure that information sharing between all taxes also takes place instantaneously. Simultaneously, the One-Customs and PACCs will ensure equal treatment of taxpayers at each entry point, i.e. at sea and dry ports at airfreight units.

13.       With the introduction of the wide-ranging reforms and close monitoring of targets, FBR has not only achieved the start of the year targets since FY 2002-03, but has substantially surpassed them.  A breakthrough was achieved when for the first time federal tax receipts exceeded the target in 2002-03 by a very small margin. This accomplishment was repeated in 2003-04 and 2004-05.  The performance exhibited in FY:2004-05 was historic because the targets were revised upward and was successfully achieved. The FY:2005-06 was highly successful when FBR collected Rs:713.4 billion against the target of Rs:690 billion. Similarly the target of FY: 2006-07, of 835 (billion) was also surpassed to 841.4 (billion). 

14.       The second outcome of the reform process has been the change in tax mix; Reliance has now shifted from customs duties and federal excise to income tax and Sales tax.  The share of income tax has gone up from 18% in 1990-91 to 39% and within indirect taxes sales tax has assumed the highest position.  Thus, the emphasis has shifted towards taxation on income and consumption rather than investment and trade activities.

15.       Similarly, broadening of tax base is intended to ensure the fair distribution of the tax burden among various sectors of the economy.  This particular area has been focused for the last few years and with the help of reforms measures the registrant persons in sales tax has increased from 0.1 million in 2002-03 to 1.2 million at the end of third quarter FY: 2006-07, with a growth of around 24.6%.  On income tax side the situation is more encouraging.  The return filers have increased from 1 million in 2002-03 to 1.66 million during 2006-07.  The growth has been 66%.

16.             Another marked achievement of FBR has been the disposal of pending appeals related to both direct and indirect taxes.  Excluding disposal of fresh appeals FBR has also disposed off more than 80,000 pending appeals during the last two to three years.  The department  is now current at first appeals level.

Main Phase of Tax Administration Reform Project (TARP):

17.       ECNEC in its meeting held on 25-2-2005 approved the Main phase of Tax Administration Reform Project with a capital cost of Rs: 9500.617 million. Completion period of this main phase of TARP is five years starting from 01-01-2005.  The main objectives of this project is to raise tax revenue through improved compliance with Tax Laws and broadening of the tax-base, improving the effectiveness, responsiveness and efficiency of Tax Administration through institutional and procedural reform; high quality of tax services; and strengthening audit and enforcement procedure. Component wise breakup of approved cost of TARP is as under:-

18.       Physical Progress:

I.          Technical Assistance:

In the following areas/field the services of reputed International /National Consultants have been engaged so far.

            i.          Audit.

            ii.         Human Resource.

            iii.        Communication.

iv.                 Impact Evaluation.

II.          Customized Software:

For Application Software solution for integrated Tax Management System (ITMS)   Two Stage Bidding process has been initiated with the approval of World Bank In the first stage bids have been received and currently evaluation is under process.

III.         Computer Hardware and Allied Equipment:

During the first phase 1650 PCs and other allied equipments procured and  distributed amongst the FBR HQ and field offices of Customs, Sales tax and Income Tax including Large Taxpayers Units  (LTUs), Medium Taxpayers Units (MTUs) and Regional Tax Offices (RTOs). To meet the actual requirement of Model Offices procurement of more PCs/Servers are under process.

IV.        Infrastructure Development:

-     M/s. NES Pak has been appointed as Consultant for Design, Procurement Support   and Supervision of refurbishment Activities in the FBR’s owned Buildings for Establishment of Regional Tax Offices (RTOs), Large Taxpayers Unit (LTU), Islamabad, Model Customs Collectorates (MCCs), Taxpayers Facilitation Centres (TFCs) and Construction of Transit Accommodation with RTOs/LTUs.

-          Contracts for completion of Civil/Electrical Works for 11 RTOs have been awarded and work is in progress.  For RTOs Rawalpindi, Peshawar, Abbottabad, and Hyderabad the work has been completed whereas at other locations it is nearing completion. 

-          For establishment of third Large Taxpayer Unit at Islamabad, contract for completion of refurbishment activities has been awarded and work at site is in progress.

-          For establishment of Model Customs Collectorates (MCCs) Bidding process has been started. 

-          For establishment of Passenger Facilitation Centres at Wagha Border Customs Station and Railway Stations work is nearing completion.

-          TFCs (Taxpayers Facilitation Centers) at all the LTUs and RTOs are to be established. Whereas a total  of 67 are to established throughout the country.

V.        Training:

-          For conducting Short Term Training Programs in various skills Contract Agreements with M/s. IBA, Karachi and LUMS Lahore have been signed.

VI.        Program Management:    

-          Services of Program Manager having rich International exposure in the field of Project Management have been engaged.  Procurement Specialist and Advisor on Finance also recruited.  Selections of these individuals were made on merit through wide circulation of jobs in the print media/websites.

 ISSUES:

19.       More than 50% of the total budget of this project will be spent on the IT related activities i.e. Software/Hardware.  For selection of Software Firm for Integrated Tax Management System (ITMS),FBR on the World Bank’s recommendation initiated the selection process under Quality & Cost Based Selection (QSBS) and accordingly the EOIs were invited and seven firms were short-listed on the basis of internal & external evaluation report. FBR discussed the draft of RFP with the World Bank who after reviewing the documents suggested to adopt “Two Stage Bidding Procedure” due to complex nature of this procurement.  Accordingly as per World Bank’s instruction the process started a fresh.  However due to this change in strategy the selection process has been delayed which effected the physical progress of IT related activities and also the funds utilization under the relevant heads.

FEDERAL BOARD OF REVENUE ACT, 2007

20.       The Federal Board of Revenue Act, 2007 has since been framed by the parliament giving complete autonomy to the Federal Revenue Board as it would be called. Till such time that the rules/regulation are framed and finalized and the provisions of the Federal Board of Revenue Act, 2007 are brought into operation then the Board would be the Federal Board of Revenue as it exist. This will help in further speeding up the reform process through quick decision making.   

Automated Tax Payment System:

CAP Phase – 1        (Completed)

22.       Through this phase of CAP, the traditional tax payment through Challans Forms is replaced by single part Tax Payment Input form. The information from the Tax Payment Input Form is electronically captured at the bank’s Tax Collection Counter. Various parts of information provided on Tax Payment Input Form by taxpayer are verified (against FBR’s master data) while it is being captured such as taxpayer’s identity, payment type, collection jurisdiction etc. After the data entry is completed, a signed and stamped Computerized Payment Receipt (CPR) is provided to taxpayer.

23.       The electronic collection data from all bank branches is transmitted to bank’s head office at the end of working day. At the start of next working day, this data is merged at bank head office and sent to FBR through secure data transfer. The received data is then used for loading into FBR’s central data repository, sent to DPC for uploading into their servers and for production of various collection reports being shared by various departments of FBR.

CAP Phase – 2        (In progress)

24.       As further improvements of services to taxpayer, PRAL has developed an Electronic Payment Portal (e-FBR Portal, an internet based Tax Payment Input Form recording facility) where taxpayer is allowed to fill his/ her payment details from any Personal Computer (PC) at home or work. After the verification of information being captured, the taxpayer is issued a reference number to the information entered. The taxpayer is then advised to approach a nearest bank branch’s Tax Collection Counter.

25.       The bank cashier accesses the payment details (entered by taxpayer) using the reference number provided by taxpayer and prints the CPR after the required payment is received. Advantages of CAP Phase-2 over previous approach are fast processing of payment collection since no data entry is involved and reduced chances of error since the data is being entered by taxpayer.

26.       The data transfer to FBR follows the same route as mentioned under CAP Phase-1.

CAP Phase – 3        (Future Planning)

27.       As further improvement to existing process, PRAL has initiated linking the payment information with bank’s Electronic Transaction Processing Interface for its customers.

28.       Using the banks transaction processing system, the account holders (and taxpayers) will be allowed to make tax payments through transfer from their bank accounts. The obvious advantages of this approach are elimination of taxpayer’s visit to bank’s Tax Collection Counter and streamlined documentation of transaction.

29.       In order to facilitate the taxpayers, the FBR has simplified and automated the process of payment of income tax, sales tax and federal excise duty. The FBR has introduced a single page return for the payment of these taxes for all registered persons in lieu of ten returns forms, one for corporate and one for non corporate tax payers. The FBR has also introduced the concept of electronic filing of  income tax, sales tax and federal excise returns as well as with holding tax statement through the computerized system. The electronic returns can be filed directly by a registered taxpayer or through an e-intermediary, duly licensed under the relevant Tax Rules. The computerized system shall assign a user ID, Secure Pin code and password to a registered person or an e-intermediary, who enrolls himself for electronic filing of returns/statements. In order to file the return statements, the registered user shall logon at FBR’s web site by using assigned user ID. The user will find desired forms which he will fill in accordance with the instructions laid down in the aforesaid Rules. The user can make payment of income tax, sales tax and federal excise duty by selecting either of below mentioned two options:-

i. Payment  through Challan: This option is to be utilized by persons who want to deposit tax amount in a designated branch of National Bank which is not online with FBR. The payment challan shall be printed and taken to the bank where payment shall be made and CPR number shall be obtained. This number shall be fed in the System using the “Feed CPR” button.

ii. e-Payment: This option can be availed by persons opting to deposit tax amount in an NBP branch which is online with FBR server. After verifying the return, e-Payment button can be clicked and a payment slip number shall be generated which can be taken to the bank and amount deposited against the same. The bank shall accept the payment and provide an acknowledgement/computerized payment receipt(CPR). The payment will be reported on line to FBR. 

Record Cleansing:

30.       The cleansing of record/data has been one of top priorities of the Income Taxes well as  Sales Tax Administrations during last couple of years. The Income tax has updated the data of taxpayers and keeps it as an ongoing process. Sales tax side has during 2005-2006 updated the data of NTN of 71000 registered persons out of 82324 operative return filers. During the process of cleansing of data, the FBR identified people and businesses who were having more than one Tax registration number. Such persons were subsequently asked to retain only one Tax registration number. The cleansing of record is also on high priority and the process is on going. All the  Regional tax offices have cleansed their records and weeded out the old records whereas, the Collectorates have been provided with the list of large and medium category of taxpayers. The purpose of the exercise on sales tax side is to transfer such persons in those commodities in which they are actually dealing. This exercise shall be accomplished within couple of months. The Central Receiving Office is already maintaining the tax profile of all the persons subsequent to their registration. In July, 2004, the FBR deregistered 6835 registered persons whose annual turnover was below the threshold as required under the law. The FBR has also undertaken a hectic exercise to weed-out the old and undesired record. This exercise is being conducted at field offices and at FBR (HQ) simultaneously. At FBR (HQ), the next phase in this regard is file archiving and digitizing for which all files are to be scanned and put in to a Content Management Sever.  

Automated System of Refund in Sales Tax:

31.       In order to ensure early payment of admissible sales tax refund claims and to control/stop inadmissible/undue refund payments, the FBR started the process of automation of payment of sales tax refund in the year 2002-2003. In this regard a central data base namely, STARR, was established. The central data base contained the data of profiles of all sales tax registered persons, data of monthly sales tax returns filled by the sales tax registered persons and data relating to all GDs (bills of entry and shipping bills). Moreover, softwares for refund claimants and the Collectorates were also developed. The STARR system was further enhanced and a new system namely STREAMS was introduced which has now been up-graded with a new system CREAST. The new automated refund processing system is based on risk assessment which is called RRAS (Risk-based Refund Analysis System). The automated refund processing system is running successfully and has helped in substantial liquidation of pending refund claims. During the period form 01.07.2006 to 31.07.2007, the field offices have disposed off 39357 refund claims and paid Rs.30353 million of refund to the refund claimants.

32.       Whereas, in the Income Tax refund of Rs. 32,198 million was issued involving 195, 820 during the period 01.07.2006 to 30.06.2007. The  Income tax is also  working on developing  automation in refund processes through amendments in relevant Rules.

Various projects have been undertaken by FBR to bring about transparency and efficiency in its working. Some of the projects undertaken are development of software as discussed under:

PACCS Project

Pilot Phase

33.       The project was started in 2002 with ambition to reform entire Customs and cargo system. The initiative called the Customs Administrative Reform (CARE) enhanced the functioning of Customs and Cargo System by

a.       Business process re-engineering of Customs and port processes;

b.       Changes and modernization of national legislations with respect to Customs and creation of electronic and paperless environment; and

c.       Development of hardware, software, networking and other facilities as per CARE requirements to create the Customs Computerized System (PaCCS).

34.       PaCCS is an integrated, web-enabled, paperless, real-time system launched on March 23 2005 and is successfully working for Customs clearance of Containerized imported and exported cargo through KICTL, PICT and QICT.

35.       The Pilot was initially launched at KICTL (March 2005) but in view of emerging requirements from stakeholders (especially Terminal Operators and Shipping Lines/Agents) it was expanded to other two terminals PICT and QICT (September 2006).

Roll Out Plan:

36.       The Government of , as a component of National Trade Corridor Improvement Program, intends to build an automated nation-wide commercial community single window system to:

a.         Integrate all the stakeholders engaged in international trade (and its domestic linkages); and

b.         Provide one stop shop for commercial, industrial and other transactional needs of the stakeholders. The stakeholders include importers/exporters, government regulatory authorities, duty/tax collection authorities, logistic service providers, agents/brokers, sea/land/air carriers, terminal operators, banks and financial institutions, etc.

37.       This initiative will be implemented through a public-private partnership (PPP) on Built Operate and Transfer (BOT) basis involving multi million dollar investment.

38.       The Public Private Partnership formed as result of above association between Government of and the finally qualifying firm / company / consortia / joint-venture will provide services in the following areas:

-          Business Process Re-engineering (BPR) for various sectors/ segments in consultation/association with the relevant stakeholders in order to integrate the diverse requirements in a single automated community environment.

-          Design, develop, procure, implement, maintain and upgrade hardware, software, networking, infrastructure etc. suitable for a nation wide commercial community system on mutually agreed standards and for a mutually agreed time period.

-          Any other activity identified for the effective creation, implementation, and maintenance and up gradation of the commercial community

39.       The activities in the roll-out have been phased as under:

Proposals received for building PACCS on PPP basis

40.       In response to Request for Proposal (RFP) for building Commercial Community System (PACCS) on PPP basis, FBR has received a proposal from the vendor M/s Agility of Kuwait who what developed / customized Customs Computerized System (PaCCS). FBR has also received a G-G proposal for developing commercial community system from Singapore through Singapore Cooperation Enterprise (SCE).

41.       The above two proposals are to be evaluated by FBR. FBR is hiring a consultant for evaluation of these proposals. Currently the process of hiring the consultant is in the Contract negotiation phase between FBR and PriceWaterHouseCoopers (A. F. Ferguson). In next 2-3 weeks the Consultant for evaluation will be selected. They have been given a period of maximum three months to evaluate the two proposals.

One Customs

42.       One Customs, a parallel automated clearance system to PaCCS, is operating and being developed side by side to PaCCS to create a conducive environment for automation ready to be assimilated by PACCS as and when it is rolled out, so that the gaps can be filled once the roll out is completed. In addition to the 25 Customs stations already interconnected with One Customs Link, One Customs Online Documents Processing System has also been implemented at Sust from 2^nd July 2007. Except for a few border stations, all customs stations are now connected by One Customs. 

43.       One Customs now provides web based filing of imports and exports, electronic manifest filing at airports, monitoring of transshipment consignments, linkages of valuation rulings with appraisement process. Other projects like the development of Risk Management System, paperless GD Processing, customs information exchange portal between Sust and Chinese Customs, incorporation of ATA Carnet in One Customs are under development.

NTN

44.       The issue registration of tax payer and audit has also improved with reforms. NTN is issued to business individuals, salaried individuals, AOP and companies through a prescribed application. It is being issued by 15 NTN Cells through out the country and request may be made online for issuance of NTN. To facilitate the taxpayer, the processing of application has been decentralized w.e.f. 01.07.2007 through respective RTOs all over the country.

Number of NTN issued so far is 20,23,349 up to 31.08.2007.

Post Clearance Audit

44.       The Federal Board of Revenue is in the process of setting up of Customs Post Clearance Audit for imported goods. The set up includes a central organization located in FBR (Hqrs) and local audit units in respective clearance Collectorate. The central organization will select cases on the basis of certain risk criteria and would assign these audits to local audit units for initiation of audit. The Board has issued an order specifying therein structure of Post Clearance Audit and its functions. A post clearance audit manual is also under preparation and would be finalized in the current month. The Board has decided that PCA will initially be run as pilot project in three clearance Collectorate located at Karachi and Lahore.

Audit Paras:

45.       The Audit Wing of  Federal Board of Revenue in coordination with the Auditor General Of managed to agree and verify about 15747 paras/cases, amounting to Rs. 43,327 million relating direct taxes and 1169   paras/cases, amounting to Rs. 38,692 million relating to indirect taxes  which are submitted to PAC for settlement.

Litigation:

46.       The Federal Board of Revenue has as reform initiative enable to dispose off 19252 adjudication cases in Indirect Taxes whereas 4087 appeals were decided. Similarly a total number of Direct Taxes appeals 7561 were disposed off in direct taxes. Whereas, the tribunal brought down its pendancy from 34000 to 7000 appeals at present , moreover due to FBR efforts special Benches were formed in the High Courts and the Supreme Court of , appeals were identified issue wise and early hearings were fixed. As a result 1177 cases were decided/disposed off by the Honorable High Courts and Supreme Court of .

47.       The reforms is an ongoing process and changes for the ultimate are being worked by the FBR with its dedicated team of workers in line with its vision, mission and values.