FBR still functions on 20th century model

ISLAMABAD: Prime Minister Imran Khan is committed to meeting the Rs5.5-trillion tax target without first reorganising the Federal Board of Revenue (FBR) that still operates on the 1980s model and cannot perform efficiently without large-scale restructuring of posts.

A recent note by FBR Chairman Shabbar Zaidi to heads of all field formations revealed that 75% of the Inland Revenue Service collected only Rs102 billion or 7% of the Rs1.5 trillion income tax collection in the last fiscal year. Rest of the Rs1.4 trillion was either collected automatically or with very little effort by the remaining 25% workforce.

The field formations, intellectual input, capacity for improvement, other resources and physical infrastructure at present are not in line with the actual composition of tax collection, according to the note sent to 23 heads of field formations.

The chairman wrote that in the 1980s, around 60% of the revenue was collected by efforts related directly or indirectly to the assessment process by the taxmen, which now shrank to a little under 7%.

In the past 20 years, particularly in the Pakistan Muslim League-Nawaz's (PML-N) 2013-2018 tenure, the withholding tax regime was expanded exponentially and there are now around 50 types of withholding taxes that cover almost every possible transaction and expense of the people.

This also provided an easy source of revenue generation to the FBR, but its workforce has not been able to fully tap it.

The situation cannot improve until the government restructures posts at the headquarters and field formations. But all attempts to restructure and reform the FBR in the past one year have remained unfinished, partially because some of the prime minister's aides are still living in the 1980s era. The FBR's restructuring plan also remains on paper.

"Over 95% of the payment is practically made voluntarily and not as a result of any assessment or audit effort," said Zaidi while talking to The Express Tribune. He said there was unanimity of views that resources and priorities had to be realigned.

The FBR's field formations are divided into Regional Tax Offices (RTOs) and Large Taxpayer Units (LTUs). In LTUs, the workforce is almost equally divided into audit and enforcement functions.

The assessment of returns filed by companies still remains an important function in the total four LTUs. For instance, the LTU Islamabad collected Rs25.4 billion or 13.1% of income tax last year by amending the returns filed by the firms.

However, in the RTOs the contribution of taxes through FBR officers' own efforts was around 5%. In the RTOs, there is only one officer who looks after the withholding tax out of six officers. One officer is responsible for 66% of the withholding tax monitoring whereas five officers look after just 7% of the revenues.



What is at stake?

PM Imran has placed a huge bet on the FBR by agreeing to the Rs5.5 trillion revenue collection target with the International Monetary Fund (IMF). He did this without first restructuring the FBR which, according to Zaidi's letter, operates under the 20th century model.

The FBR has already sustained Rs70 billion shortfall in tax collection in just two months, despite chasing a very low target compared with the overall mammoth task.

The July-August tax target was just 11.7% of the annual target. To hit the Rs644 billion two-month target, the FBR needed 29.3% growth but it actually achieved 15% growth and collected only Rs574 billion.

There FBR missed the two-month target for all four taxes. The income tax collection fell short of the target by Rs11.7 billion and stood at Rs196 billion. The sales tax collection also remained behind the target by Rs23.6 billion and amounted to only Rs262.6 billion. The federal excise duty target was missed by Rs1.5 billion and the customs duty target by Rs23 billion.

About 39% or Rs2.1 trillion of the Rs5.5 trillion target has to be generated on account of income tax in the current fiscal year. The government and the IMF rely heavily on sales tax collection but it seems that the bureaucracy is more inclined to mislead the chairman than doing real things to ensure prompt sales tax payments.

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Source-wise contribution

Out of the total Rs1.5 trillion income tax collection in last fiscal year 2018-19, the share of withholding tax stood at Rs960.7 billion or 65.5% of the total income tax collection.

By redeploying the workforce, the FBR can enhance withholding tax collection by another 30%, said Zaidi.

The chairman has given directives for establishing specialised withholding zones from where maximum withholding tax is coming. The action plan includes capacity building of taxmen for performing withholding tax audit of banks, insurance companies, government agencies and utility companies.

Out of the 23 field formations, 11 collected more than 80% of their total taxes on account of withholding tax. Another five jurisdictions collected more than 90% of their total taxes through withholding tax.

The Corporate Regional Tax Office (CRTO) Karachi, CRTO Lahore, RTOs of Islamabad, Karachi-III, Peshawar, Hyderabad, Sialkot, Bahawalpur, Sargodha, Sahiwal and Abbottabad collected more than 80% of their taxes through withholding tax.

Similarly, the LTU Karachi-II, RTO Karachi-II, RTO Lahore-II, RTOs of Rawalpindi and Sukkur collected more than 90% of their taxes through withholding tax.

The LTU Karachi generated 56.4% of its total collection through advance taxes, both under the provision of law and also by arm-twisting of big firms.

The LTU Islamabad also received 52.2% of total taxes through advances. The share was 54.4% in the case of LTU Karachi.

The FBR received Rs342.7 billion in advance income tax, which accounted for 23.3% of the total income tax collection. Taxpayers paid Rs47.2 billion with their income tax returns, which contributed 3.2% to the total income tax collection.

The 16,000-strong Inland Revenue Service collected Rs84 billion by generating tax demand, which was just 5.7% of the total income tax collection. Another Rs18.5 billion was collected through the audit process, which amounted to a mere 1.3% of the total income tax collection.

The chairman wants to redeploy this workforce for monitoring and ensuring recovery of withholding taxes.