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Reforms plan sets tax to GDP ratio target at 17pc

Updated May 19, 2019

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Pakistan has finalised a comprehensive tax reforms programme to increase tax to GDP ratio to 17 per cent by 2024 for which benchmarks in 10 key areas have been set, official sources told Dawn on Saturday. — AFP/File
Pakistan has finalised a comprehensive tax reforms programme to increase tax to GDP ratio to 17 per cent by 2024 for which benchmarks in 10 key areas have been set, official sources told Dawn on Saturday. — AFP/File

ISLAMABAD: Pakistan has finalised a comprehensive tax reforms programme to increase tax to GDP ratio to 17 per cent by 2024 for which benchmarks in 10 key areas have been set, official sources told Dawn on Saturday.

The World Bank has committed to providing $400 million assistance to Pakistan for implementation of the reforms over the next five years. The reforms programme was evolved in the light of recommendations of the Working Group, which was constituted in December 2018.

The last WB-funded reforms project, which was launched in 2004 during Musharraf’s military rule, concluded in the year 2011 costing $149m. Of this amount, $102.9m was provided by the WB.

A senior tax official told Dawn that the programme had already been negotiated with the economic affairs division. The project document was likely to be approved by the Word Bank Board in its meeting scheduled for May 30, the official said.

WB-funded project document likely to be approved by end of May and signed in June

“The final agreement will be signed in the first week of June,” the official said, adding that almost everything related to the package had already been finalised last month. The transformation programme has been designed and finalised within a short span of six months.

Read: Pakistan doesn’t need additional taxes to cover revenue shortfall: WB

Aimed at increasing tax to GDP ratio to 17pc by 2024, the reforms programme has set benchmarks in 10 key areas. To establish solid and sustained revenue base, a systematic approach has been followed to design comprehensive reforms in the Federal Board of Revenue.

For finalising a reforms plan with the collaboration of the World Bank, a dedicated Working Group was set up for identification of major risk areas and devising a five-year transformation programme. The ICT-based tax administration would be the bedrock of the programme, the official said.

According to the official, an in-depth analysis of the organizational structure, processes, human resource and taxation laws was carried out during the last quarter of financial year 2018-19, realising the importance of increasing revenues with growing needs.

As a result of the analysis, a number of measures have been undertaken for setting the direction right and to prepare the organisation for comprehensive overhaul. Most important of these measures are several pro-growth and easement measures taken through two Supplementary Finance Bills, which even lead to revenue loss.

The pre-reform measures taken so far at FBR level include the issuance of notification of tax policy unit, setting up of operational units for processing offshore data, notification of revised double tax agreement with Switzerland, setting up of currency declaration system and launch of advance passenger system, matrix for performance management of field formations, launch of a dedicated complaint management system for processing complaints against FBR staff, ICT-based retail monitoring system for textile and leather outlets, setting up of project management unit for early implementation of track and trace system for electronic monitoring of production in major sectors.

Other measures implemented so far are campaign against high-net-worth individuals, setting up of dedicated tax benches in Supreme Court/ Lahore High Court, launch of tax mobilisation campaign to encourage taxpayers to file returns, launch of DIRB for controlling smuggling of mobiles and approval of five-year ICT strategy.

The official said a programme office had been set up in the FBR for effective implementation, monitoring and reporting of the programme. It would report directly to the recently appointed FBR chairman, he added. A steering committee to be headed by finance minister or his representative would do periodic monitoring and evaluation of the reforms.

It has been realised that the FBR lacks a proper tax policy framework, which should enshrine key principles of tax policy. To this end, the FBR with the assistance of WB staff and consultants set up a team of experts which drafted a medium-term revenue framework after carrying out a detailed analysis of the taxation system and taxpayers data.

Read: World Bank to help FBR strengthen tax system

According to the documents seen by Dawn, a comprehensive analysis of the taxation system was undertaken with the WB assistance to devise a programme for taxation system overhaul.

Within the short period of six months, five workshops were held and 16 reports were completed for identification of issues and finalisation of a comprehensive reforms plan. With the help of World Bank staff and consultants, studies were conducted to gauge the amount of tax evasion. The studies highlighted huge tax gaps in the sugar, steel and cement sectors.

As the foremost contributor to Pakistan’s total tax receipts, the Federal Board of Revenue (FBR) has a critical role in expanding fiscal space and enabling Pakistan to achieve its economic and human development potential.

Increasing tax receipts is a matter of urgency to alleviate the country’s fiscal constraints by narrowing the budget deficit. Likewise, as a medium-term measure, Pakistan needs to achieve sustained growth in tax revenues to reduce its reliance on short-term debt financing and bring down associated borrowing costs.

Published in Dawn, May 19th, 2019