FBR reforms: blessing or burden

Institutional framework of tax system has remained mostly unchanged for a century

ISLAMABAD:

The finance minister is leading a transformative agenda to restructure the Federal Board of Revenue (FBR). This move has faced opposition from the Inland Revenue Service (IRS) and some sections of the national press. On the flip side, businesses, especially the Pakistan Business Council, support these reforms.

It’s essential to ensure that internal resistance doesn’t overshadow the interests of key stakeholders, including taxpayers, the government striving for increased resources, and the general population impacted by resource constraints. Encouragingly, the Customs Department favours the proposed restructuring.

To build confidence in these structural changes, we should recognise the potential game-changing impact of FBR reforms on domestic resource mobilisation, addressing the urgent need for revenue enhancement and economic development. While acknowledging concerns is crucial, it’s equally important to emphasise the positive outcomes these reforms can bring.

There are three main criticisms of the proposed reforms. Firstly, some are sceptical about the interim government’s authority to make long-term decisions.

Secondly, there are concerns that the restructuring exercise is being rushed and that incomplete scrutiny could lead to major disruptions and hinder efforts to raise revenue during these challenging times.

Thirdly, there is a fear that the current proposals could make the organisational structure even more top-heavy, exacerbating bureaucratic red tape in the decision-making process.

The chief election commissioner is considering the interim government’s legal authority to undertake such wide-ranging reforms. It is important to note that the apex committee of the Special Investment Facilitation Council (SIFC) issued the directive for the proposed restructuring plan and has the legal authority to do so.

Moreover, unlike past caretaker governments, the current caretaker setup has been given powers to carry out such reforms through necessary amendments to Section 230 of the Election Act, 2017.

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The institutional framework of Pakistan’s tax system has remained mostly unchanged for a century since the establishment of the Central Board of Revenue (CBR). Only English-speaking countries in Sub-Saharan Africa and some Latin American countries adhere to the colonial model of a single revenue authority.

Even India, which had a Central Board of Revenue until 1963, recognised the impracticality of reforming a single entity and split their revenue administration into two distinct boards.

There has been criticism about creating policy and oversight boards to add layers to the governance. However, it is important to understand the necessity and role of these two types of boards.

The Policy Board aims to separate the functions of formulating tax policy and tax administration, which various task forces have recommended. Separating tax collection from fiscal policy is widely agreed to serve several critical purposes, such as preventing hasty decisions and ensuring predictability.

Possibly, the only alien proposal is the establishment of Oversight Boards to monitor the performance of Customs and IR establishments. This concept is based on the governance structure of central banks, which usually have an oversight board to ensure that the central bank is well-managed.

In addition, there is a Monetary Policy Committee to keep overall prices and financial markets stable.

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Having secretaries of other ministries and experts from the private sector on the Oversight Boards for the new FBR entities is making it unacceptable to the senior management of the FBR. Currently, the FBR head only reports to the finance minister, but after the proposed restructuring, they would be answerable to several board members.

Although some changes may be necessary to address the concerns of different stakeholders, the current proposals provide a significant opportunity for reforms.

To bring tax collection on a par with the average of developing economies, we need to modernise both tax policies and the tax collection agency, taking inspiration from other successful developing countries.

One reason India has been able to integrate its economy globally and attract tremendous foreign investment quickly is due to their comprehensive reforms of tax policies. For example, they were able to lower import taxes to a maximum of 10% on most products and implemented far-reaching GST reforms.

The proposed FBR restructuring is pivotal for facilitating digitisation, a critical step in streamlining the reform process. As a Chinese proverb wisely notes, the ideal time to plant a tree was 20 years ago, but the second-best time is today.

This underscores the importance of timely action, as delays, especially for technical reasons, could result in missed opportunities – a concerning prospect given historical challenges in implementing reforms by political governments.

By emphasising the positive aspects and addressing valid concerns, we can build market confidence in restructuring, ensuring effective delegation and accountability, ultimately enhancing revenue mobilisation.

The writer is a member of the Task Force on Tax and FBR Reforms. Previously, he served as Pakistan’s ambassador to the WTO and FAO’s representative to the United Nations in Geneva

 

Published in The Express Tribune, January 29^th, 2024.

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