FBR restructuring to broaden tax base, enhance revenue collection: Minister

ISLAMABAD: Caretaker Minister for Finance and Revenue, Dr Shamshad Akhtar said on Tuesday that the Federal Cabinet has approved the restructuring and digitization of the Federal Board of Revenue (FBR), which would help to broaden the tax base as well as enhance revenue collection in the country.

In her televised address, the minister said that the Federal Cabinet approved the FBR restructuring and digitization plan in preparation and under deliberation since September 2023.

She said that the plan, a home-grown product, is the outcome of considerable consultations among the Minister of Finance, FBR chairman, and members, along with independent, highly qualified tax experts. She said that the plan does draw on substantive research and recommendations from the long-standing multilateral engagement and technical assistance studies that were sponsored by FBR over the years.

Shamshad Akhtar said that the caretaker government recognizes the macroeconomic challenges and has prioritized critical reforms, particularly the urgency of domestic resource mobilization.

She said that Pakistan’s tax-to-GDP ratio has been declining, with the FBR tax/GDP ratio barely 8.5% in 2022/23, while the country’s tax capacity has remained largely around 22% of GDP, including the taxes under the purview of provinces that yield barely one percent of GDP revenues.

She further said that the number of taxpayers in Pakistan is barely 2.3 million, adding that corporate tax filers are 0.8% of commercial and industrial electricity users, and GST-registered entities are barely 13% of the 1.4 million taxpayers.

The minister said that the FBR’s ability to tap tax sources under its jurisdiction has been constrained by complex and opaque tax administration, top-heavy management that lacks delegation and accountability, an excessively large pool of staff, and conflict of interest between policy and collection functions that are under one roof.

A high level of policy gaps exists because of the high revenue sources assigned to provinces, and the large undocumented sector serves as an impediment. In parallel, the compliance tax gap is too large because of a lack of failure to bring in tax net of what is feasible to achieve, such as wholesalers and service providers, she added.

The overwhelming undocumented sector, the absence of data, the lack of digital integration, tax evasion and avoidance because of loopholes in the legal and administrative systems, and integrity issues are some of the critical gaps in tax administration, she observed.

The plan for FBR’s restructuring and digitization approved by the Federal Cabinet has two components, as one pertains to a number of initiatives and interventions that are expected to reduce leakages because of a lack of adequate documentation that has complicated raising the number of filers, significant tax evasion, and avoidance, she added.

The minister said that the traditional model of relying on tax officials to identify tax evasion and leakages has not delivered results but rather aggravated the problems of malpractice.

Going forward, the tax administration will be driven by advanced technology, utilizing big data, data analytics, and AI-guided systems. She said that the blueprint for the digital transformation of the tax authority has been prepared, and the documentation has already been introduced, making it mandatory for organizations, both public and private, to share data about assets, transactions, and income with the FBR through a digital platform.

She added that the blueprint for the digital transformation of the tax authority has many components, including digital invoicing to capture sales and purchase transactions across the entire supply chain, leveraging the technological prowess of NADRA, bringing in Karandaaz, and the support of the Bill Melinda and Gates Foundation to help digitize tax collection, and strengthening the governance of the FBR structure by institutionalizing a new oversight mechanism (separate for Customs and Inland Revenue).

Shamshad Akhtar explained that the Federal Policy Board would be headed by the Finance Minister and would include academic professionals as members to be nominated by the Finance Minister on predetermined fit and proper criteria, with no conflict of interest, and approved by the Federal Government.

“The policy board’s mandate would be to focus on policy and strategy, while operational performance would be in the domain of oversight boards.”

She said the competence of the caretaker government to develop the proposals for restructuring and digitizing FBR was endorsed by the Cabinet, and an implementation committee will be notified to carry out follow-up activities to prepare the required package of legislative and administrative changes. She said the FBR will carry out this restructuring within its existing resources and budget.