ISLAMABAD: Pakistan has substantial potential to increase tax receipts without imposing new taxes or increasing their rates. The country’s tax revenue potential would reach 26 per cent of GDP, if tax compliance were to be raised to 75 per cent, which is a realistic level of compliance for lower middle income countries. This means that Pakistan’s tax authorities are currently capturing only half of this revenue potential — the gap between actual and potential receipts is 50 per cent, according to a new document prepared by the World Bank titled Pakistan Revenue Mobilisation Project, published recently.

Read: FBR recommends new taxes to bridge shortfall

This comes against the backdrop of revenue shortfall which the government has sought to diminish with the Washington-based lender’s assistance of $400 million for the revenue mobilisation project to be implemented by the Federal Board of Revenue (FBR) aiming to contribute to a sustainable increase in domestic revenue by broadening the tax base and facilitating compliance. The credit of $400m will come from World Bank affiliate, International Development Association (IDA).

However, the FBR has internal challenges which it needs to overcome as it has a negative impact on tax receipts. According to the project document, unlike most revenue authorities in the world, the FBR is not organised along functional lines, nor does it have a clear hierarchical structure. FBR is a large organisation with a nationwide presence and more than 21,000 staff, of whom about two thirds work for the Inland Revenue Service (IRS) and one third for the Pakistan Customs.

FBR has developed transformation roadmap which envisions it as semi-autonomous body

Also, lack of coordination between the federal and provincial governments has a negative impact on total tax receipts, as well as complicating taxpayer compliance. The different rules applied by the federation and the provinces generate frequent disputes, especially over input adjustments for GST taxpayers.

The document says that Pakistan needs to increase its tax revenues to ensure fiscal sustainability and generate fiscal space to finance much needed investments in human capital and infrastructure.

The project document also highlights the share of tax revenue collected by the provinces remains small at nine per cent of total receipts but has been growing rapidly, from 0.4 per cent of GDP in 2010-11 to 1.2 per cent in 2017-18. Despite this progress, tax receipts still fall short of 15 per cent of GDP, which is the minimum that international experts consider adequate to cover the basic expenditure needs of developing countries, it says.

Nevertheless, the country’s revenue performance has improved significantly in recent years, rising from 9.5 per cent of GDP in 2011-13 to 13 per cent in 2017-18. This increase in tax revenues has resulted from tax policy measures, notably reduction in tax exemptions for specific industries, and improvements in tax administration at the federal and provincial levels.

Transformation roadmap

The current government is quite keen to increase tax revenues and improve performance of the FBR which has, according to the policy document, developed a transformation roadmap which envisions that the FBR would become a semi-autonomous revenue authority with financial, managerial and operational autonomy.

This would involve a degree of financial and managerial autonomy from the regular controls and procedures of the federal government.

Key changes would include security of tenure for the FBR chairman for a fixed mandate, a financing formula whereby the FBR’s budget would be fixed as a share of previous year’s receipts — one per cent and flexibility to use its budget across budget lines as needed.

The proposed project will support the implementation of the FBR’s roadmap over the next five years. The roadmap consists of three parts: a ten-year vision for the FBR’s institutional transformation, three-year dynamic implementation plan (1920-22) to be updated annually and short-term action plan for accelerating revenue collection in 2019.

The roadmap also highlights measures to strengthen the technical expertise and improve the performance of the FBR’s human resources. Technical expertise will be strengthened by establishing technical streams for core tax administration functions for career FBR officials and by externally hiring specialised staff for procurement, human resources, and communications.

The project will support key initiatives and targeted results under the FBR’s transformation roadmap. The project’s interventions therefore focus on equipping the FBR with the needed ICT tools and technical skills to make effective use of taxpayer information using big data techniques and modern risk-based tools for more efficient, targeted compliance control and enforcement.

FBR has already launched several initiatives under the roadmap including new payment options for taxpayers and ongoing review of tax laws and regulations to simplify and make them more accessible to taxpayers.

Published in Dawn, May 6th, 2019