Prime Minister Shehbaz Sharif has decided to lead the reform process in the Federal Board of Revenue (FBR) himself amid the startling revelation that over 80% of bank accounts in Pakistan are not declared to the tax authorities.
The prime minister has appointed himself as the chairman of the Steering Committee, which will oversee the implementation of the approved FBR reforms plan. A separate implementation committee has already been notified three days ago under the chairmanship of the finance minister.
Sharif’s decision to chair the steering committee underscores the priority he attaches to bringing reforms to a system that, according to former Finance Minister Dr Shamshad Akhtar, causes trillions of rupees less revenue collection annually.
The premier was informed in a recent meeting that “less than 20% of bank accounts appear in tax returns filed with the FBR,” as shown by official documents.
It is an alarmingly low number, indicating that the FBR has no idea about the wealth and sources of wealth parked in over 80% of bank accounts. The existing law obliges commercial banks to share the details of bank account holders and their credit card details with the FBR. However, banks do not comply with the law, posing a challenge for the new finance minister, who is a banker, to enforce the law in letter and spirit.
Details from the meeting held at the PM’s house suggest unanimity between the previous cabinet and the prime minister regarding reforms in the FBR.
PM Sharif was fully convinced that separating the Inland Revenue Service and the Customs Organisations was the correct approach, based on a presentation given by former Finance Minister Dr Shamshad Akhtar two weeks ago.
In the meeting, the PM decided to personally monitor the implementation of the approved reform plan, as increasing the tax-to-GDP ratio will remain a core priority for the government.
The prime minister will chair the steering committee, with the ministers for Finance, Commerce, Industries & Production, and Law and Justice as its members. Other members include the secretaries of the Finance Division, Ministry of Industry, Revenue Division, Ministry of Commerce, and the Board of Investment. The chairman of FBR has not been made a member of the steering committee.
The committee will assess the implementation status of the approved FBR reforms plan and issue directives to facilitate the expeditious implementation of the FBR reform agenda.
The finance division will provide secretarial support to the committee and take further necessary action for the notification of the committee’s jurisdiction.
During a meeting on the FBR’s reform initiative, the PM was informed that currently only 2.4% of the population files returns as against 6% in India. Out of these, 55.6% are Nil filers – paying no taxes. Just 3.3% of taxpayers account for 90% of income tax collection.
The PM was informed that Pakistan’s current tax-to-GDP ratio stood at 11.4%, with an existing gap equivalent to 7.6% of GDP.
Former finance minister Dr Shamshad Akhtar believed that the actual requirement of the government is to mobilise revenues up to 24% of GDP. However, she looks at the public debt problem only through the prism of revenues, completely ignoring the irrationality in expenditures.
According to the FBR’s restructuring plan, Customs and Internal Revenue will be separated. Both organisations will be headed by respective director generals and brought under the governance structure of oversight boards. Both organisations will work under the Revenue Division.
A tax policy board will be established, headed by the finance minister, to deal with tax policy issues, revenue targets, coordination, integrity policy, industry consultation, valuation policy, and digitalisation. There will be a Tax Policy Office within the Revenue Division to conduct research, analysis, and develop budget proposals to promote data-driven and equitable taxation for reducing tax expenditure.
The Tax Policy Office will be staffed by professionals with analytical, financial modelling, and IT capacities.
The former finance minister further explained the rationale for a separate Customs organisation, citing it as an international best practice, with 73% of tax administrations organised under this model.
The meeting proceedings revealed that the FBR’s automation process was still at level one and for complete transformation, it has to reach level three, where it becomes fully automated.
It was also underscored in the meeting that revenue administration needs to develop a data access and management system and strong protocols for data sharing.
Published in The Express Tribune, March 22nd, 2024.
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