World Bank downgrades tax project

Decision comes on back of slow progress on govt’s $400m venture to reform taxes

ISLAMABAD:

The Pakistan Tehreek-e-Insaf (PTI) government’s risky $400 million venture to fix the ailing tax system meets the fate predicted by many before its inception, as the World Bank has downgraded the project due to slower-than-expected progress.

There has been widespread opposition to the $400 million project, including by Federal Board of Revenue (FBR) former chairman Shabbar Zaidi, as tax reforms cannot be done by signing off on expensive foreign loans.

The overall implementation and progress rating has been downgraded from satisfactory to moderately satisfactory, revealed the third Implementation and Result report on the $400 million Pakistan Raises Revenue Project. The Washington-based lender released the report last Wednesday. The World Bank has so far disbursed $101.7 million or one-fourth of the loan amount. The project had been signed in June last year despite opposition.

The $400 million project is the second full-scale attempt by the World Bank to reform the FBR in the past 15 years. Its earlier $150 million Tax Administration Reforms Project failed badly to deliver the desired results and the money went down the drain. In its latest report, the World Bank has kept the project’s development objective rating unchanged at satisfactory. The project’s objective is to “contribute to a sustainable increase in domestic revenue by broadening the tax base and facilitating compliance”.

Out of the $400 million, $320 million has been earmarked for simple and transparent tax system, control of taxpayer obligations, compliance facilitation and institutional development - the functions that require political will rather than US dollars.

A portion of the $400 million is meant for giving performance rewards to FBR officers. The remaining $80 million is meant for upgrading the FBR’s information technology system. The World Bank report showed that in spite of the $400 million loan, the tax-to-gross domestic product (GDP) ratio, which was 13% in June 2018, slipped to just 11%.

Under the programme, the target was to increase it from 13% to 17% by 2024. But during the first year of implementation, it further slipped to 11%, which should be a concern for both Prime Minister Imran Khan and the World Bank that is lending money in the name of reforms.

The number of people who paid income tax along with tax return increased from 1.27 million to nearly 2 million. The actual return filers were 2.76 million. However, Dr Ishrat Husain, Adviser to Prime Minister on Institutional Reforms, said last month that the number of filers had increased but the average tax paid by them actually decreased. The time to file return and pay taxes remained unchanged at 243 hours a year during the first year of implementation, according to the report. It has to be cut to 130 hours by 2024.

The time spent for customs clearance at borders also remained unchanged at 89 hours during the first year of implementation, although it was slightly better than the first year target of 90 hours in a year. The end-project target is 48.5 hours.

There was significant progress on the number of entities automatically sharing data of taxpayers. In 2019, only three entities were sharing the data, which has now increased to eight. The end-project target is 20 entities. There was no progress on the detection of violations at ports. The progress on another important goal, resolution of refund issue within three months, remained unchanged during the first year of implementation.

On the goal of imparting technical training to FBR officers, there was no progress. However, the World Bank pushed the FBR to distribute performance rewards to its employees out of the loan money.

What appears to be sheer wastage of resources, the World Bank and the FBR have set aside a portion of $400 million loan to be distributed among FBR officers as reward. During the first year of implementation, there was no progress on the goal of upgrade of ICT systems of the FBR, according to the report.

Talking to The Express Tribune on Monday, Special Assistant to Prime Minister on Revenue Dr Waqar Masood said his focus was on expanding the tax base by using the information technology tool. Out of 2.7 million income tax return filers, 240,000 did not show any income despite paying Rs14 billion in withholding taxes. He said the prime minister has now asked to abolish all the withholding taxes that do not yield any revenue or contribute very little.

The FBR showed progress on the goal of signing MoUs on data-sharing with eight out of 12 provincial tax authorities. The FBR badly failed to initiate the track and trace system, and electronic monitoring of production in key sectors. It had begun the process to award a contract for tracing the production of tobacco sector aimed at ending annual Rs50 billion worth of tax evasion.

However, due to mishandling of the project and problems in the award of contract, the Islamabad High Court has cancelled the deal.

According to one of the conditions of the programme, the FBR is required to regularly publish reports on key performance indicators (KPIs). It has adopted KPIs endorsed by the Ministry of Finance and published them on its website.

However, lately, there has been disagreement between the FBR’s member operations and special assistant to prime minister on revenue over the number of KPIs for field formations. The World Bank report noted that the $400 million project achieved three out of four project development objectives and six out of 10 performance-based conditions.

The achievements include a reduction in the number of withholding lines from 58 to 49 and the first-time publication of a detailed estimate of tax expenditures.

Published in The Express Tribune, October 28^th, 2020.

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