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I.
INTRODUCTION
Pakistan’s fiscal crisis is deep
and cannot be easily resolved. The low level of tax collection has jeopardized
national goals of poverty alleviation and improvement in public services like
health care and education. Taxes collected are insufficient even for debt
service and defence. Therefore, reform of tax administration is the single most
important task for the government.
To address the problems
emanating from low tax to GDP ratio, lack of transparency and the inability to
keep pace with the requirements of an economy in rapid transition, a number of
studies over the years have been undertaken. These include the recent reports of
the Task Force on Reform of Tax Administration (May 2001) and Aide Memoire of
IMF/FAD Mission of August 2001. These reports point out shortcomings in the
administration of taxes that require a major reform effort over a sustained
period of time. The Finance Minister of Pakistan in his budget speech to the
nation promised to take concrete steps for reform of the tax administration.
II.
STRATEGIC FRAMEWORK
A workshop of top management of
FBR (30 persons) was held on October 26-28, 2001. The management team developed
the Vision, Mission, Values, Goals and Strategy of the future organization as
follows:
Vision:
To be a modern, progressive,
effective and credible organization for optimizing revenue by providing quality
service and promoting compliance with tax laws.
Mission Statement:
Enhance the capability of the
tax system to collect due taxes through application of modern techniques,
providing taxpayer assistance and by creating a motivated, dedicated,
professional work force.
Values:
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Integrity
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Professionalism
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Teamwork
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Courtesy
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Fairness
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Transparency
Goals:
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To improve compliance with the
tax and customs law
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To develop and manage an
efficient revenue administration by developing a well trained and motivated
workforce.
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To design and deliver fair,
responsible and effective enforcement mechanisms in a way that directly responds
to change in the environment.
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To make the taxpayer service
taxpayer friendly
Strategy:
To achieve these goals the
reform program aims to build a tax system and an effective administration that
facilitates and improves voluntary compliance with the law. The objective is to
build and enhance community participation in the tax system and increase revenue
contributions on an ongoing basis, while minimising the costs of compliance and
collection. This will be achieved by introducing a universal system of self
assessment and risk management that places the responsibility for determining
and meeting the obligations to tax on all taxpayers, supported by:
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simple laws and a
comprehensive and ongoing program of taxpayer education and support;
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the automated processing of
documents and accumulation of data;
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a selective program of audits
and related strategies to improve compliance based on assessment of risk to the
revenue;
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minimal interface between
taxpayers and tax collectors;
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an accountable, transparent,
honest, modern and capable tax administration.
The indicated structural,
systems and staffing measures will help to achieve.
III.
KEY ELEMENTS OF THE REFORM STRATEGY
A.
Organization of the Tax Administration
Introduction:
The FBR will remain a Division
of the government (i.e Revenue Division) under the Ministry of Finance with
enhanced legal powers, capabilities and autonomy in order to:-
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formulate its own
budget and administrative policies: government to meet budget needs;
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spend (within its
budget) as it deems appropriate;
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decide its own
structure for monetary rewards and allowances;
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formulate and enforce
its own operational rules;
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adopt its own human
resource recruitment and development strategy;
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protect itself
against undue intrusion from outside influence.
The greater autonomy of FBR
calls for greater accountability. Therefore, Supervisory Council will be
constituted to monitor its working. The Council will have following structure
and role.
Supervisory Council:
The
Council headed by Minister for Finance will comprise Secretary General Finance,
Deputy Chairman Planning Commission, Secretary Establishment and Chairman FBR as
Member/Secretary. Besides the aforesaid Members, the Council may co-opt Minister
for Commerce, Minister for Science & Technology, Secretary Law and private
sector representative (based on agenda) on needs basis.
The role of Supervisory Council will revolve
around oversight of the reform process of FBR. The Council will approve revenue
targets, FBR budget, human resource policy and compensation package. The Council
will generally exercise federal government powers pertaining to issues
concerning FBR. The Council will have the status of a committee of the Cabinet.
Structure of the Tax
Administration:
Tax Administration of Pakistan
is structured on type of tax basis. The longer term vision for the FBR is to
establish a functionally integrated tax administration, however, recognising the
challenges of the change process, during the transitional period, separation of
functions by tax type will be required, but gradually reduced over time.
Consequently, initially the
reformed FBR would continue to be structured on a “type of tax” basis, with a
more explicit and independent role for new ‘functional’ departments. This would
require major structural reform at FBR Headquarter and its operational
organization. Within this, the FBR would continue to move towards integration of
various taxes e.g Income Tax, Sales Tax & Central Excise. Initially a model
Large Taxpayer Unit (LTU) would be established in July 2002 at Karachi. This
Unit will be fully tested for integration of taxes over medium term. A similar
model unit of small/medium taxpayers will be established in July 2003 and fully
tested for all functional purposes particularly with reference to integration.
The future structure of FBR Headquarter and its operational office at the
regional level is represented by the following organogram :
*During transition period
of 2-3 years, the number of Members would be more than indicated above
**Line Members for sales
tax and income tax would be concurrently responsible for the functions of
information processing and enforcement (collection)
*** Outlying districts
**** Large Taxpayer Unit
(See Organization on page –05)
The current structure of income
tax is operated through 5 regions, 32 Zones, and 757 Circles and Deputy
Commissioners. In phase 1 of the reform, the income tax structure will be
transformed on functional basis. Therefore, today’s four layer structure will be
reduced to 2 layers of management i.e headquarters and 7-15 regions, that will
be operated on a functional basis managed by a Regional Commissioner. The
circles and zones will disappear. The sales tax will also have Regional
Collectors initially at three-five locations. Keeping in view the plan for the
future integration of sales tax and income tax, effort will be made to co-locate
the offices of sales tax and income tax at close proximity.
The inspection functions of
income tax and sales tax will be jointly carried out by internal audit wings of
income tax and sales tax at early stages of the reform program. These functions,
however, will also be integrated gradually on lines of future integration of the
two taxes. The regional internal audit heads would report directly to Chairman
FBR.
Large Taxpayer Unit:
A Model and separate office of
Large Taxpayer Unit (LTU) at Karachi will fully manage the affairs of designated
large taxpayers. This unit will represent a sizable proportion of the tax base
(ultimately 50-60%). The following organogram gives the proposed organizational
structure of LTU:
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