The Federal Board of Revenue is working on a proposal to obtain yet another loan of $300 million from World Bank to carry out a second tax administration reform.

Unlike the previous arrangement, the Bank will only reimburse funds against the achievement of each targeted indicator.

The new arrangement with the World Bank will not be done in a hurry and without proper homework as this will not bring desired results while piling up foreign debt.

While it is mandatory to prepare a feasibility report before launching of any project, FBR has yet to carry out a study to determine the factors that led to the failure of the first World Bank-funded tax administration reform project (Tarp).

The overall performance of the first reform project originally spread over five years — which stretched to seven year — was declared by the World Bank as ‘moderately satisfactory’.

The project was conceived and executed in such a way that out of the committed amount of $149 million dollars, only $60 million loan were utilised. All three institutions — BR, government and to some extent the World Bank — share the responsibility for failure of the project.

Last year, the World Bank, in its post-project valuation report on Tarp, listed the short-comings and problems that caused delay in implementation of the reforms.

The report also admitted that most of the indicators, especially those related to the tax policy, largely remained unachieved because of various factors.

These factors include lack of preparation on key strategic choices on information technology strategy, fiduciary arrangements, and Bank’s inadequate technical support, absence of ownership of reform by FBR rank and file officers, frequent changes of FBR leadership after 2008, and a delay in procurement of logistics.

One of the major target indicators of the Tarp was to increase the tax-to-GDP ratio. However, during the Tarp implementation period, the tax-to-GDP ratio fell to 8.6 per cent from 9.3 per cent.

This is not only the lowest ratio in Pakistan for the last 35 years, but also one of the lowest in the world.

Corruption, inefficiency and poor enforcement of tax laws are still the hallmark of the country’s top taxation machinery’s performance. While the FBR erected new buildings for its offices with new furniture, latest computers, and new cars for its staff, it failed to improve tax collector’s efficiency.

Not surprisingly, the net result of the first reforms ending on December 31, 2011 is low filing of tax returns, dip in the tax compliance level, tax gap — difference between potential and actual collection — hovering around 60 per cent, suspension of audit to unearth concealed income and fudging of revenue figures to show better results.

While the FBR is the only department where salaries have doubled across the board to improve efficiency of its officials, the staff performance is quite off the mark. As a result, tax compliance level has also fallen to 23 per cent in 2012 from 39.5 per cent in 2011. It was 65 per cent in 2010. As of now, only 0.5 per cent of the population is paying taxes.

This poor tax compliance level can be attributed to the suspension of the audit and lack of enforcement because of ill-planned integration of tax base — sales and income taxes. As a result, the tension between the customs and income tax group still looms large, causing a governance issue within the tax machinery. The compliance level in performing developing countries ranges between 70-80 per cent.

Contrary to this, all targets related to infrastructure and purchase of IT hardware were largely met.

The only problem that FBR is facing is how to use these software and systems because most of the human resource in the tax machinery is not fully trained to use them.

When going for another loan project, both the Bank and FBR will have to sit together to seriously discuss and find ways to resolve issues that had caused problems in the previous project.

The reform team will have to work out performance indicators keeping in view the domestic political and economic environment. Clear performance indicators with consultation with all stakeholders are inescapable for success of the project.

However, we need to first address a simple question: can the tax system be made transparent and equitable for all? If not, there no need for negotiating another World Bank loan.

For the next programme, FBR will have to pick up a dedicated team for the project to ensure its full implementation. During the previous Tarp implementation period, four FBR chairmen and eight project directors (PDs) were changed for various reasons including retirement from services.

More importantly, three PDs were changed during the last one year were involved in the project preparatory work for next programme.