Pakistan has embarked on an ambitious $400 million tax reform programme in partnership with the World Bank. At a macro level, the project has two components: the results-based component and the investment financing component. The results-based component is worth $320 million and is further divided into four main objective areas, namely, Controlling Taxpayer Obligations ($104.5 million), Simple and Transparent Tax System ($98 million), Facilitation of Compliance ($72 million) and Institutional Development ($45.5 million). The investment financing component, worth $80 million, will be used to upgrade the ICT systems currently being used by the Federal Board of Revenue (FBR).
One of the best parts of the programme is that the federal government and provinces will automatically exchange data. This in turn will help the FBR and the provincial revenue boards to audit taxpayers better. One of the key problems in enforcing taxes in developing countries is the huge size of the informal economy and the lack of data to audit taxpayers. This data sharing would help address this problem to an extent.
Another positive component is the rationalising of tax exemptions and disclosing the beneficiaries of the exemptions, as by making the government conduct cost-benefit analysis and disclosing the beneficiaries of the exemptions, there will be added pressure on the government to rationalise these exemptions. The big question is whether the public and media can keep a check on the government when it provides this information. Other positives include the simplification of the Sales Tax Return and removing low-yielding withholding taxes.
On the questionable parts of the programme, there are three major concerns that might undermine the reform effort. First, the programme’s cost is huge. For instance, $32 million are being spent to help rationalise the withholding tax regime, $40 million to make a risk-based assessment tool and $35.5 million on redesigning FBR’s business process. A lot of money across all programme components is being spent on conducting workshops and paying consultants, which is problematic.
Second, the main strategy for the broadening of the tax base relies entirely on automated data sharing and recruiting data analysts to help identify new taxpayers. The narrow tax base has been one of the central problems of taxation in Pakistan. Hence it is slightly disappointing that the main strategy to broaden the tax base is so limited in its scope. Simply investing in ICT infrastructure and hiring data programmers will not help expand the tax base unless coupled with changes in the tax law, the incentive structure of FBR officials and addressing the larger political economy issues around taxation.
Third, arguably the most important part of this reform programme will be its implementation, which seems to have received little attention so far. The official World Bank document has hardly one page on implementation, where it simply states that the FBR is primarily going to be responsible for the process. The tricky thing about reforms in developing countries is that implementation holds the key to success. Even the most well-designed reform programmes fail miserably when the implementation is not customised according to the unique context.
The programme certainly takes a few much-needed steps to transform Pakistan’s tax administration. However, the strategy to broaden the tax base needs to be bolstered so that it does not solely rely on data-sharing provisions and hiring data analysts. For instance, one of the biggest bottlenecks in the broadening process is the exceptionally long process to bring new people into the system. There are many other factors that contribute towards the low tax base which need to be addressed. Additionally, the implementation of this programme needs serious attention. This is what will eventually determine the success of the programme and of the current government in reforming the tax administration.
Published in The Express Tribune, December 11th, 2019.