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FBR: reforms, refunds & cleansing   

Dr. Ikramul Haq

If we realise that the FBR cannot be fixed, we will create a new FBR. This is because Pakistan’s survival is linked to it. It’s not about our liking or disliking: if our tax collection authority does not function properly, it could lead to a security risk. No nation that relies on loans can maintain its pride and independence“—address of Prime Minister to the 11th All-Pakistan Chambers President Conference in Islamabad on March 7, 2019

After 18 months of the above statement by Prime Minister and telling the nation that “reforming FBR is essential”, things have changed from bad to worse. The claim of exceeding target by Federal Board of Revenue (FBR) and celebrated as great success by the coalition government of Pakistan Tehreek-i-Insaf (PTI) is now exposed as refunds of Rs. 710 billion are admittedly outstanding. If from collection of Rs. 3.9 trillion, this amount is deducted, the actual collection comes to Rs. 3.2 trillion (7.9% of GDP).

The PTI Government removed the third head of FBR on July 4, 2020 giving “additional charge” to Member Customs for 3 months. Till today, it has failed to find any suitable candidate for at least a term of three-years to undertake and complete comprehensive reforms for which a separate wing was recently created discussed in Modernising & reforming FBR, Daily Times, August 30, 2020. Everyone asks: How long will FBR remain a house in disorder?

In FBR’s collection and unpaid refunds, Daily Times, August 9, 2020, FBR’s claim of exceeding the target of Rs. 3908 billion was exposed showing that refunds payable were not subtracted to give the correct net collection figure. Surprisingly, the data released by Ministry of Finance in respect of federal and provincial fiscal operations for fiscal year 2019-20, is still showing collection of FBR at Rs. 3998 billion. FBR on September 2, 2020, before the National Assembly Standing Committee on Finance [hereinafter “the Committee], confessed that actual liability of income tax and sales tax refund as on June 30, 2020 was Rs. 710 billion (sales tax Rs. 142 billion and income tax Rs. 568 billion).    

The misrepresentation of figures when we are under $6 billion Extended Fund Facility (EFF) programme of International Monetary Fund [IMF] is quite amazing. After its first review and seeing that FBR was far behind the original target of Rs. 5555 billion, the IMF revised it to Rs. 5238 billion, then to Rs. 4803 billion on the eve of incomplete second review, held prior to Covid-19 pandemic, and after coronavirus outbreak, finally to Rs. 3908 billion.

The target fixed by the PTI Government for the current fiscal year 2020-21 for FBR is Rs. 4963 billion, amid heavy economic toll of Covid-19 endemic and minus growth. Interestingly, even according to Adviser to Prime Minister on Finance and Revenue, Dr. Abdul Hafeez Shaikh, it is not achievable! In a statement, he “advised the provinces not to make their budgets on the basis of proposed Rs. 4.963 trillion tax collection target fixed for FBR for fiscal year 2020-21” and added: “The provinces should make their budgets while keeping in mind the Federal Board of Revenue’s past performance and difference between performance, projections and reality”. It can only happen in Pakistan where the head of Finance Ministry is openly admitting that budget is prepared on exaggerated revenue figures!

Instead of blaming FBR’s officials, the PTI Government must admit lack of will to reduce exemptions, concessions, waivers and amnesties to powerful segments of society. Total tax expenditure was of Rs. 1.5 trillion in fiscal year 2019-2020 as per own admission of FBR in Annex-II appended to Economic Survey 2019-20. In fact, more exemptions and benefits have been given to the influential, while proudly claiming “no new tax” is levied in budget for 2020-21”. If only 40% of taxes waived/forgone in fiscal year 2019-20 were recouped in Finance Act 2020, there would have been a fiscal space of Rs. 600 billion to reduce taxes. But It showed apathy towards the weaker sections of society and small/ medium enterprises (SMEs), facing the unbearable toll of Covid-19 outbreak/lockdown by not reducing exorbitant sales tax, withholding taxes and high cost of utilities and oppressive 12.5% advance income tax from mobile users. The total number of cellular subscribers as on July 31, 2020 was 167 million that included 81 million 3G/4G subscribers and 83 million broadband subscribers. They also pay 19.5% sales tax on services to provinces and 17% federal excise duty if based in Islamabad Capital Territory (ICT).

The need of the hour is to reduce the huge tax expenditure by withdrawing exemptions available to the rich and mighty, give relief to taxpayers and pay all outstanding refunds, which is their right and not a favour. According to a Press report, before the Committee, “FBR showed its inability to release the refunds from its revenue collection and sought a supplementary grant to clear the backlog”.  

The Committee also took detailed briefing from Adviser to Prime Minister on Institutional Reforms & Austerity, Dr. Ishrat Husain, about FBR’s reforms. The Committee, headed by PTI MNA, took strong exception to unpaid tax refunds and pilferages in Afghan transit trade and issue of “the monopoly of one company over tracking of Afghan containers”, according to the Press report. The report further says that the Committee dominated by treasury members, termed FBR’s reforms agenda “more of a talk than having substance”.

Dr. Ishrat told the Committee that he was assigned the job of reforming the FBR about six months ago and at that time, “there was no clarity about the reforms process and various organisations were doing different things. He aptly said: “Without fixing the tax system, Pakistan’s dependence on IMF will keep on increasing”. He added. “If there is one bipartisan issue, it is the FBR reforms where all the political parties have to come together.”

Dr. Ishrat exactly repeated what was emphasised in Modernising & reforming FBR, Daily Times, August 30, 2020, that automation and digitisation alone could improve transparency and end interaction between taxmen and taxpayers. He added that there was a need to simplify the tax codes, procedures and rules, as “the current tax-related documentation is so complex that hardly a few people could claim to know it”. He admitted that “the FBR does not enjoy a good reputation because of a few black sheep in the organisation—we want to weed them out”.

It is heartening to see that the issue of FBR’s reforms, cleansing and unpaid refunds have been taken up seriously by the Committee. If the PTI Government is really sincere to reform the tax system, it must dismantle FBR as it is simply incorrigible! It must be reconstructed as suggested in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016], the second revised edition of which will soon be made public giving a roadmap for holistic reforms in all areas to boost growth, leading to tax collection of Rs. 12 trillion, cumulatively at federal and provincial levels, getting rid of IMF and heavy dependence on domestic and foreign loans.


The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS)

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