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Article on Reforms

Pakistan continues to face deep fiscal crisis which cannot be resolved easily. Taxes are insufficient to meet Pakistan's debt servicing and defense needs. The tax-to-GDP ratio does not enable Pakistan to counter inflation or improve governance, deliver quality public services or improve human resource to reach a take-off stage for economic development. To address these issues, GoP initiated a Tax Administration Reforms Program (TARP) in FBR in the year 2005 to achieve objectives to include overall increase in the revenue collection for achieving fiscal targets; increase in tax to GDP ratio through broadening of the tax base; strengthening audit and enforcement procedures through professional capacity building of FBR officials; ensuring more equitable & transparent application of tax laws through provision of high quality tax services. By completing TARP in 2011 FBR has substantially achieved the desired objectives despite various obstacles in the existing operational environment. The successful completion of TARP rests upon Government's firm resolve to reform FBR's Tax Administration

In June, 2000 when GoP appointed a Task Force on Reforming the Tax Administration. This Task Force presented its report in May, 2001 which was shared with stakeholders to include trade bodies, accounting institutes, tax bar associations and donor agencies for framing an implementation strategy in the light of viable recommendations from the concerned stakeholders.

Subsequently, on the request from the GoP for input on FBR's reform effort, an IMF Mission visited Pakistan in August, 2001 which carried out in-depth discussions 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 which was condensed with other similar studies to extend recommendations for a tax system having simpler laws and efficient procedures for promoting self-assessment, reducing physical controls and creating reliance on audit & risk assessment.

Consequent to these reports and discussions with various opinion makers FBR prepared a tax reform strategy, which was approved by GoP in November, 2001. The reform strategy had three main planks (a) policy reforms, (b) administrative reforms and (c) organizational reforms. Policy reforms included simple laws, universal self-assessment, elimination of exemptions, less dependence on withholding taxes, effective dispute resolution mechanism. Administrative reforms aimed at (I) transforming 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 and facilitation of taxpayers. Organizational reforms also included re-organization of FBR on functional lines, reduction in number of tiers and reduction in workforce.

With a view to supplement the level of skills in FBR for meeting the above said objectives, the Government in March-April, 2002 appointed professional Members from private sector for (i) Human Resource Management (HRM), (ii) Information Management System (IMS), (iii) Audit, (iv) Facilitation and Taxpayers Education (FATE) and (v) Fiscal Research & Statistics (FR&S). FBR prepared new recruitment policy (with greater emphasis on skills that match FBR needs), incentive & merit based remuneration, promotion mechanism and extensive training.

In 2002, FBR received a Project Preparation Facility (PPF) of US $ 2.9 million from World Bank which was used for hiring of international consultants, namely M/s Maxwell Stamp PLC, UK, and establishing Large Taxpayer Unit & 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 their time frame.

To bridge the financial gap between the PPF and the funding for main phase of Tax Administration Reform an amount of US $ 6 million was also allocated out of World Bank funded "Public Sector Capacity Building Project" which was later utilized for completion of Pilot Projects i.e. Large Taxpayers Unit at Lahore, 5-Medium Taxpayers Units at Karachi, Peshawar, Rawalpindi, Quetta and Faisalabad and a Dispute Resolution Complex (DRC) & Model Customs Collectorate at Karachi, capacity-building & training of FBR's employees, Taxpayers Education Programs, introduction of Universal Self Assessment Scheme (USAS) and holding of Change Management Workshops. Part of this funding was also utilized for appointment of M/s. NESPak Pakistan as Consultants for preparation of design layouts, procurement support and supervision of works at sites for LTU Lahore, 5 MTUs at Karachi, Quetta, Peshawar, Rawalpindi & Faisalabad, DRC and Care Pilot Project Karachi.

To achieve Reforms objectives, FBR established Large Taxpayer units (LTUs) and Regional Tax Offices (RTOs) to test the re-organized structure of income tax & Sales Tax and various Taxpayers Education and Facilitation Centres to improve voluntary compliance. Customs processes were also re-engineered by initiating Customs Administration Reform (CARE) which aimed at minimizing the clearance time of goods and reducing the cost of doing business. Re-engineered business processes were automated for e-filing of Income Tax returns and Goods Declarations, followed by establishment of an FBR website for information dissemination and a helpline for taxpayers.

Executive Committee of the National Economic Council (ECNEC) in its meeting held on 25.02.2005 approved the main phase of TARP with a capital cost of Rs. 9,501 million. Completion period of this main phase of TARP was five years starting from 01.01.2005. During the World Bank Mid-Term Review Mission in August-September 2007, the Bank reviewed the implementation progress of this project in detail and on the basis of slow utilization of funds mainly due to problems in development of Information Technology Systems during first two and half years, recommended restructuring of TARP budget for remaining life of the project on the basis of anticipated expenditures. Accordingly, a detailed exercise was undertaken on the basis of which a revised PC-I with reduced capital cost of Rs. 6,473 millions was prepared and submitted to the competent forum i.e. CDWP/ECNEC. Revised PC-I was approved by the CDWP on 30.04.2009 and ECNEC on 20.08.2009.

TARP has so far gained Stakeholders respect through improved performance and creating business friendly environment. Imbuing professionalism, integrity & responsiveness, and introduction of transparent ssimplified procedures have reduced the cost of doing business. Moving towards optimum use of automation and IT, professional training and better working conditions have further infused confidence among tax collectors who intend to strive hard for increased taxpayers facilitation in the areas of Income Tax and Customs.

TARP has been closed by 31.12.2011 at a cost of Rs. 5,528 million against revised project cost of Rs. 6,472.817 million. All the physical progress has been achieved. i.e. (a) establishment of 57 RTOs, MCCs, TFCs & Transit accommodations, (b) four soft wares i.e., Integrated Tax Management System (ITMS), Human resource Information System (HRIS), SAP Materials Management (MM) & Financial (FI) Modules, & Data Warehouse software have been completed and are functional (c) 11,445 machinery & equipment as per PC-I target were procured and distributed. Tax revenue of Rs. 1,558 billion has been collected during 2010-11 against PC-I set target of Rs. 1,350 billion. TARP PMU, during this process, through professional training and hands-on exposure, has gained sufficient professional capability to utilize the same for achieving any future project development objectives in terms of project planning, procurement of works, Goods and services and subsequent monitoring & evaluation.

FBR has successfully achieved the objectives of reforms. The last five years revenue collection Flow Chart reflects the greater revenue collection as follows;