The Federal Cabinet has approved a proposal for a digital and technology-driven tax body that uses big data. This reform requires substantial financial resources to build the necessary infrastructure and obtain specialised software. However, the cabinet greenlighted the transformation without making any budgetary allocations.

This initiative shall not focus on generating new positions for retiring tax officials and others. Big data technology requires a solid infrastructure capable of handling massive volumes of data. This includes servers, storage, and networking equipment, which can be expensive.

Similarly, big data technologies frequently necessitate specialised software for data gathering, storage, analysis, and visualisation. These software packages can be expensive, especially if they need to be tailored to specific use cases. As a result, the government should allocate an adequate budget for it.

The tax reform project anticipates a strong outcome from these digital and administrative reforms, which seek to enhance tax collection to Rs31.72 trillion by FY27, a huge increase from Rs7.16tr in FY24. According to forecasts, the tax share in GDP will expand significantly, reaching 20pc by FY27, up from 8.5pc.

As part of the approved project, the government will establish a new autonomous body named the Autonomous Data Access and Management Systems (ADAMS) Agency to facilitate the shift to a data-driven tax administration and to set up a strong system for managing and accessing data. It will be legally mandated and operate under data-sharing regulations. It will operate through IT bridges and a web of data flows.

The government will enact a National Documentation Law that will make it mandatory for public and private sector organisations to share data to transition to digitised tax administration while adhering to access, quality, and security protocols. This means that the government will also enact rules regarding the quality of data ensuring the data used is accurate and reliable. Additionally, there will be a need to frame access rules to determine who can access the data and protect unauthorised access to data.

The implementation committee will have to keep in mind that the proposed agency will streamline data management, improve compliance, and potentially promote transparency. However, it may raise worries about privacy and data security. To preserve taxpayers’ trust, the agency must act under privacy and data protection rules. The real impact of the agency may differ depending on how it is implemented and managed. The agency is proposed to be an independent body.

A comprehensive plan for Pakistan Revenue Automation Ltd (PRAL) restructuring is also being developed as part of the digital changes. The PRAL board will also include two National Data Registration Authority (Nadra) nominees. PRAL’s excess personnel will also be laid off as part of a one-year transition period.

The FBR and government have tried to expand tax bases using Nadra data for years. However, no notable results have been achieved. The approved proposal would now establish cooperation between Nadra and the tax administration.

Currently, intermediaries like wholesalers, dealers, and SME vendors are among the most undocumented segments of the economy. It is imperative to digitise and record B2B transactions between manufacturers and wholesalers, dealers, distributors, and finally retailers, which are currently largely undocumented. The major aim is to digitise B2B transactions through ‘Digital Invoicing’, which captures sales and purchase transactions throughout the supply chain. This will assist in documenting the economy, plug huge compliance gaps and improve sales tax payment by all intermediaries.

Tax administration digital reform relies on Nadra’s expertise and collaboration. However, Karandaaz and the Bill & Melinda Gates Foundation will also be involved in digitising tax collection.

Digitising withholding tax collection would close another compliance gap in tax administration, as many withholding agents commit violations and malpractices that the manual and outdated process misses. The new Synchronised Withholding Administration and Payment System (SWAPS) will connect the payer, payee, bank, and FBR via the SWAPS portal to digitise the entire process. This allows real-time withholding tax rate, non-filer status, and exemption inspections.

The real outcome of digital reform depends on the political commitment to implement it.

Published in Dawn, February 4th, 2024