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BR Research

FBR: Beyond MoUs and reform packages

Last week, an MoU was signed between the Federal Board of Revenue and the UKs Her Majestys Revenue and Customs office for exchange of inform
Published September 24, 2014

Last week, an MoU was signed between the Federal Board of Revenue and the UKs Her Majesty's Revenue and Customs office for exchange of information and cooperation on improvement in taxation and revenue collection.
Under the MoU, the UK will provide technical assistance to the FBR over the next three years to help build its capacity and improve tax collection to support economic integration, stability and growth. The two bodies "will work together to help Pakistan achieve its tax targets by helping to develop skills, knowledge and other resources essential for improving its performance in tax collection," according to a Finance Ministry press release.
The Finance Ministry says the UK body will also advise the FBR on innovative solutions and measures to improve tax enforcement and reduce opportunities for tax evasion, where "specific areas of assistance include off-shore taxation, strategic communications and the use of information technology - particularly forecasting and analyzing available information and assessing risk."
All this is hunky dory, but those at UK Department for International Development (DFID) - the organisation that will provide technical assistance under the MoU - the HMRC and indeed the Pakistani Finance Ministry would do well to remember that is not the first time such an exercise has taken place. About the same time last year, Pakistan signed a similar MoU with Turkish tax authorities.
With the help of system automation to bring efficiency and transparency, Turkey has more-than-doubled their tax to GDP ratio in the last 10 years to more than 30 percent today. The idea behind the MoU with Turkey was to co-ordinate the two countries tax departments, so that Pakistan can learn from them. But, as Abdullah Yousuf former FBR chairman noted in a recent sit down with BR Research, there hasn't been any significant progress on that front as yet.
Aside from MoUs, the stakeholders would also like to recall how FBRs story has in fact been a story of failed reforms. In an earlier article written for this newspaper, Dr Ikram ul-Haq, one of the country's renowned tax experts noted how the first domestic initiative for reform between 1996-1999 failed to bring any meaningful results.
"The government had introduced simple taxation but due to poor enforcement it failed to enhance revenues at a satisfactory pace. These were half-hearted reforms and by 1999 tax-to-GDP had slipped to 9.1 percent from 11.6 percent in 1996-7," he said. This was followed by the second phase of reforms at the demand of IMF-World Bank between 2000-2004, where also no serious effort was made to restructure the FBR and improve the processes.
Then there was the famed World Bank-funded Tax Administration Reform Project (TARP) between 2005-09. "Under TARP project, FBR initially planned to allocate $54.3 million to develop a computer software programme for establishing connectivity among all major four taxes in Pakistan. FBR failed to achieve any such connectivity-on the contrary court battle started between the income tax and sales tax officers. In fact FBR miserably failed to improve universal tax compliance under the TARP between 2005 to 2009," Ikram noted.
TARP was later followed by an extended TARP between 2009-2011 after the "Economic Affairs Division requested World Bank to extend its deadline for meeting the target envisaged under TARP by two years from December 2009 to December 2011," said Ikram.
But whether these packages brought about fruitful change in the FBR, history is a better judge of that. The World Bank itself in its study, titled Implementation, Completion and Result Report issued on the completion of TARP observed that "the current narrow-base of general sales tax (GST) in Pakistan remained almost entirely unchanged throughout 2005-2012, despite efforts to overhaul the indirect taxation structure by introducing a reformed GST featuring few exemptions and wide coverage of goods and services."
The moral of the story is that FBR seems to have gone beyond the stage of MoUs and reforms. The institution is in shambles, and no amount of reforms will work until it is shaken upside down with systems in place to improve governance, bring transparency, remove corruption, and more importantly a change in mindset at the top. A 2013 BR Research survey of leading businessmen showed that ethics of tax officials was their biggest concern. No amount of MoUs to develop skills and knowledge can bridge such moral deficit.

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