New tax agency under consideration

FBR to present overhaul plan on Oct 19; current target being missed by Rs650b

ISLAMABAD:

The government is considering establishing a new tax collection agency, or further restructuring the existing machinery, after finding the Federal Board of Revenue's (FBR) performance unsatisfactory despite repeated reform attempts.

The FBR will present "comprehensive proposals on HR reforms, revamping and restructuring" to the prime minister on October 19, according to directives issued by the Prime Minister's Office on Thursday.

Government officials said the idea of an altogether new organisation was floated at a meeting at the highest level last Saturday. Internal discussions have since begun, with FBR Chairman Rashid Langrial tasking officers to prepare a plan for Prime Minister Shehbaz Sharif.

When asked whether a new agency was under consideration, the FBR spokesperson said: "The FBR's reform is a robust and ongoing process, and dozens of ideas and proposals come under discussion." He added that "until any of them becomes a formally approved policy, no comment can be made".

In a second reply on the same issue, the FBR confirmed the prime minister had directed it to bring forward comprehensive proposals for human resource reform and restructuring, adding that work was under way.

"The government's aim is a stronger, more efficient and more taxpayer-friendly FBR, and the prime minister is personally overseeing an ongoing reform process to that end," it said.

The FBR further said substantial reforms had been put in place across people, technology and processes, and that to build on these and fill the remaining gaps, the prime minister had directed the FBR to bring forward comprehensive proposals. Work was under way, it said.

The FBR said the focus was on reforming the board itself and denied "talk of outsourcing revenue collection function to a private company", calling it "totally baseless".

Sources said discussions were at an initial stage, with no concrete proposal finalised on the future shape of the FBR or a revenue agency. Setting up a national tax agency was among the discussion points.

Any decision to transfer the FBR's powers to a new agency would require amendments to a host of laws, including the FBR Act 2007 and at least four tax laws.

Reform attempts since 2000 include restructuring the Central Board of Revenue into the FBR, merging service cadres, redefining the entity on functional lines and, in 2024, an over Rs55 billion transformation plan. During the caretaker setup, an attempt was also made to split the FBR into Customs and Inland Revenues.

According to an official involved in the deliberations, the thinking so far is that the FBR would not be dissolved, and officers who do not opt for a new body would remain until retirement.

Sources said a narrow tax base, a stagnant tax-to-GDP ratio and below-par tax collection were among the reasons behind forming a new organisation.

The FBR's tax-to-GDP ratio remained at 10.3% last fiscal year, and the FBR missed its original annual target by over Rs1.1 trillion.

This year's target of Rs15.263 trillion requires over 17% growth. The FBR surpassed its first-quarter target but grew at hardly 7%. Sources expect growth of around 12%, a shortfall of over Rs650 billion that would affect planning for over Rs1 trillion in spending under the National Economic Initiative through provincial cash grants.

On the transformation plan's outcomes, the spokesperson said collection rose from Rs9.2 trillion to Rs13 trillion in two years.However, the reply does not fully reflect ground realities, as the spokesperson has counted the impact of additional taxes and nominal economic growth towards the contribution of the transformation plan. The government imposed one of the highest taxes under the International Monetary Fund (IMF) plan, which in the first year also contributed to an increase in the tax-to-GDP ratio.

Secondly, the Economic Coordination Committee of the Cabinet had approved the first spending package of Rs32.5 billion for six months in November 2024. Out of the Rs32.5 billion, an amount of Rs5.6 billion was approved for buying 1,087 new cars of 1,300cc engine capacity. About Rs19.7 billion were for spending on anti-smuggling initiatives.

For giving up to four extra salaries, the ECC accorded approval for Rs2.5 billion for six months while another Rs3.4 billion had been given for enhancing the FBR's operational capacity. An annual Rs4 billion is also given for transformation of the Pakistan Automation Revenue Limited (PRAL), with the latest tranche approved this month.

The FBR is also struggling to broaden the tax base. Of the 19 million people who have national tax numbers, only 6.9 million submitted returns by Thursday evening. The 8.5 million returns had been filed in the last tax year.

The government had also launched the fixed tax traders' scheme in the hope of bringing 3.7 million retailers into the net, including one million this year.

However, the FBR spokesperson said that as of Tuesday 137 new traders had filed their returns and paid Rs5 million in taxes, on average Rs36,465 per new trader.

The FBR said many reforms were under implementation. It said on the human resource side, to name just a few, third-party auditors have been engaged from chartered accountancy firms to add capacity, officers are being trained through programmes with institutions such as LUMS, and a new performance management regime now assesses officers on actual results rather than routine ratings.

On the technology and process side, Customs has moved to faceless assessment and Inland Revenue is moving the same way, which reduces discretion and direct contact between officers and taxpayers. Digital invoicing and POS integration now track business transactions in real time, an AI-based risk management system guides selection for audit and clearance, and third-party data is being integrated. These are only some of the many interventions under way.