RECENTLY Prime Minister Imran Khan has shown his concern about the capacity and ability of FBR. He announced to abolish the Federal Board of Revenue (FBR) if could not be improved and establishing a new organisation instead. In the past many attempts were made to rationalize the institution with the help of foreign technical and financial assistance but nothing substantial could be achieved. Recently, World Bank worked seven years on Tax Administration Reform (TAR) project and finally gave up declaring unsuccessful. Now eyeing a $400 million loan from the World Bank, overlooking the failure of earlier $149 million on TAR with aim at outsourcing the functions of catching tax evaders, employing new staff or setting up a another department to perform the task of broadening the tax base. The last two have already been experimented without any substantial success. Here new staff means inducting people from other services than from revenue services.
I have already mentioned in my article on Governance Issues in Pakistan that present governance system has been obsolete to meet the present challenges and need new system replacing existing CSS system. Prime Minister reiterated his target to double the tax collection in five years – principally it is double the tax-to-GDP ratio which cannot be achieved by inducting people in FBR from other existing services groups. Even private sector leaders failed to make any difference. Some set-up already exists in the name of broadening the tax base. The opening of new recovery wing will not be effective except expanding bureaucracy structure. Outsourcing the functions of catching tax evaders needs to be implemented very carefully. It should not be another FIA otherwise it will damage the incentives being announced to ease investment in the country. In this context the guidance may be taken from European model where all types of recoveries including from bank loans defaulters are being made by independent body.
A careful radical operation is required to restructure the FBR. The first decision, the separation of tax policy from collection, has already been taken. A similar policy needs to be introduced in provinces along with close coordination and cooperation. It needs legislation and changes in rules of business to separate tax policy formulation and tax collection from each other. The legislation should clearly define the function of tax formulation and tax collection agencies. Tax policy formulation may be done through a separate Council of Experts representing federal, provincial and local governments with a secretariat of its own. Tax collection should also be through one agency also means one agency for all taxes. It should be the only one window for tax payment – federal, provincial and local.
One window collection point has been found as the major contributor to the ease of doing business. All federal and provincial revenue collection bodies should be merged into new tax collecting agency for the collection. To make it constitutionally possible, the new tax authority may be placed under the Council of Common Interests. Both the agencies should be made autonomous in their operations. It will be more appropriate to de-link new setup from the budget. To ensure financial autonomy, the authority may be allowed to retain some per cent of the taxes collected for its own expenses. The provincial governments mostly have complaints of not receiving their complete share on time therefore authority may be entrusted the task of directly disbursing the shares determined by the NFC and the PFC awards.
Besides administrative reforms, technical reforms are also required to reduce the number of taxes. As a first step the government has announced to reduce the numbers of taxes from 48 to 38. The evolution process to a new organisation needs to be carefully executed to avoid any interruption of revenue inflows and, consequently, the business of the state. The work may be started to establish these two organizations without immediately disturbing the existing organisation. The new agencies should be headed by professional persons fixed for a tenure – five years. All other staff will also consist of professionals to be paid market salaries.
—The writer is ex-Chief, Planning Commission of Pakistan.