By Abdul Wajid Khan
ISLAMABAD, May 16 (INP-WealthPK) The Federal Board of Revenue (FBR) said its Inland Revenue Strategic Reform Plan (2021-25) will structurally improve the tax system performance and significantly facilitate revenue mobilization to promote sustainable economic growth, reports WealthPK.
According to an official document of the reform plan, a copy of which is available with WealthPK, four strategic reform areas – improve effective compliance, strengthen tax administration, build institutional capacity and strengthen legislative framework – have been identified as the foundation for building the reform program till 2025.
The FBR said under the plan, domestic revenue mobilisation, an essential driver for the reform program, was key to realizing sustainable development and providing fiscal space to fund public expenditures.
There is a global recognition of the importance of developing strong tax systems that encompass tax policy and tax administration. The reforms should seek to create a tax system that improves the progressivity and distributional impact.
Such reforms should create efficient tax systems which leave a low cost of administration and compliance, contribute to the business development and investment-friendly environment and ultimately promote economic growth.
The FBR said Pakistan’s revenue performance was relatively weak with tax to GDP ratio decreasing from 12.9% in 2017-18 to 11.4% in 2019-20 while comparator countries in the region show averages of 14% to17%.
Although the economy grew in recent years, tax performance stagnated or increased at a slower pace. This goes against the conventional fact that revenue performance tends to improve as countries become richer.
Moreover, the tax to GDP ratio that remains below the tipping point needs to achieve the sustainable development goals (SDGs) and more generally secure a robust and stable growth.
There is evidence supporting the hypothesis that it is hard to secure a lasting growth with a tax ratio below 15%. Indeed, higher levels may be needed to secure broad-based sustainable development outcomes.
Estimates indicate Pakistan’s tax revenues to be only at 62.9% of their potential. This is due to a narrow tax base with a low number of registered taxpayers and a low filing rate.
The complexity of the tax system, the high level of informality, low tax morale and weak tax administration are considered the main underlying causes.
Pakistan’s tax revenues rely heavily on federal taxes (about 90% of total tax revenues, which are mainly from indirect taxes). For instance, about 60% of the FBR’s revenues of Rs3361 billion in fiscal year 2017 were collected from indirect taxes.
Most of the direct taxes come from businesses (corporate income tax) and property related taxes with a very low share of personal and agricultural income taxes.
Under the program, the FBR will increase the quality of audits and make compliance with the audit process easier with a broader suite of options delivering a more targeted approach. Comprehensive audits will be conducted for large taxpayers. Issue-based audits will be conducted in risk areas.
Transfer pricing audit capacity will be built by establishing a set of officers who will be retained in the audit unit for a pre-established duration. These audit officers will be given training and peer learning to help build specialization in conducting such audits.
A transfer pricing manual will be developed and periodically updated and the services of experts will be accessed to develop capacities and software solutions.
Tax simplification will be carried out across all processes and procedures. This will include; (i) process simplification to minimise administrative and compliance costs; (ii) using technology to further capitalize on simpler processes and minimize the effort and time required by taxpayer for compliance; (iii) specific measures to facilitate various categories of taxpayers according to their needs; and (iv) implementation of appropriately designed communication strategies for taxpayer facilitation.
A communication strategy will be designed using behavioural precepts to develop trust between the taxpayer and tax collector and to increase voluntary compliance, thus freeing up resources for high priority administrative tasks. The Strategic Plan will be reviewed on an annual basis to ensure the programme is still a sustainable and viable reform strategy.
Addressing the launching ceremony, Chairman of FBR said the Inland Revenue Strategic Reform Plan 2021-25 encapsulated the FBR’s vision for the future. The country’s premier revenue collection organisation aspires to build a stronger and more modern institution, driven by the principles of integrity, efficiency and effective service delivery, he added.
He reiterated that the plan envisaged the transformation of Inland Revenue into a world-class, technologically-savvy and taxpayer-centric service.