The volatile political situation, terror threats, terrorist attacks, widespread perception of corruption, unfavourable economic circumstances and weak basic infrastructure services have negative impact on the World Bank's funded Tax Administration Reform Project (Tarp) of the Federal Board of Revenue (FBR).
Sources told Business Recorder here on Thursday that the WB review mission has informed the Federal Board of Revenue (FBR) about the operational environment of Pakistan under which the Tarp project was executed during the last seven years (2005-11). In its latest report of December 2011, the WB has held terrorism threats as one of the major negative factor responsible for slow progress on the implementation of the Tarp.
According to the WB report on the operational environment of the Tarp during 2005-11, any assessment of Tarp results has to take into consideration the environment it has been operating in for the last seven years. This context was characterised by: (a) a volatile political landscape including an active terrorism threat; (b) weak basic infrastructure services, in particular the supply of electricity; (c) widespread perception of corruption; and (d) unfavourable economic circumstances, such as the 2010 and 2011 floods.
The WB report said that the political situation in Pakistan has been very volatile during the project with successive governments, significant public activism (eg the lawyers' rallies), renegotiations of power sharing within the federation (major impediment for introducing sound tax policy reforms) and an active terrorism threat (eg attacks on government infrastructure). This has caused priorities to shift significantly for FBR during the duration of the project and has limited FBR focus on structural reforms which typically bear their fruits in the medium- and long-term.
It said that the basic infrastructure availability is a serious problem in Pakistan. The Tarp implementation has been influenced by this problem, in particular by the unreliable and frequently interrupted supply of electricity to FBR offices and IT systems. The FBR problems related to physical and IT infrastructure have been considerably mitigated through the project in the last two years.
The WB report further said that the perception of corruption in Pakistan is a critical issue that has also negatively affected Tarp implementation in many ways. High level of perception of corruption have resulted on the delayed of key areas of reform supported by TARP. Tax audit, for example, was not active for 3-4 years (until June 2009). Payment of tax refunds also was severely affected by the perception of corruption and only in the last year has FBR been able to put in place a more effective and safer system to pay refunds.
The WB report said that the terrorist attacks have also affected TARP progress. The attack on the Islamabad Marriott Hotel in 2008 and the attack on a UN office in 2009 had negative impacts on the ability of some technical experts to travel to Pakistan. Several technical assistance missions had to be held from abroad (Dubai, Turkey, Washington) rather than in Pakistan. These attacks impacted the Pakistan economy in general and the tax administration in particular, as well as made it more difficult to recruit technical experts to assist FBR in its modernisation quest.
The 2010 floods had a strong adverse impact on the Pakistan economic outlook. In particular, it impacted the agricultural sector, which accounts for 21 percent of GDP and more than 45 percent of the jobs in the country. It is estimated that 8 percent of the total cropped area was flooded. This affected manufacturing output and exports as well as revenue collections. Something similar has occurred with the Sindh floods in 2011, but details are unknown yet as the damage assessment is still under preparation, the WB report maintained.
The WB report further stated that the project features that have positively impacted TARP were: (a) adequate resource allocation for improvement in physical and IT infrastructure; (b) emphasis on taxpayer services; and (c) adequate identification of the risks to the project. The FBR infrastructure was in severe need of improvement and Tarp provided significant assistance to modernise buildings, furniture and expand computerisation. Today, FBR staff works mostly in quite comfortable offices and the IT infrastructure has been improved considerably. There is public consensus that improvement in service to taxpayers by FBR has been significant and is positively changing the FBR image.
Also, it is important to highlight that the main risk factors identified in the project have occurred during its execution and, consequently, have affected its results, the report said.
The project features that have had negative impact on the project are: (a) carrying out both Customs and domestic tax administration reforms at the same time was too ambitious (overestimated the local capacity to manage both reforms, which is actually very limited); the project's policy assumptions were over-optimistic; (c) some project performance indicators were inadequate; and (d) legal constraints were underestimated.
The project's objectives as originally envisaged were too ambitious and not compatible with FBR implementation capacity. Customs and domestic tax administration reforms implemented at the same time required strong implementation capacity and political commitment which, generally speaking, did not exist at the FBR. Also, some tax policy assumptions never materialised, in particular the implementation of a modern Value Added Tax (VAT) or a reformed General Sales Tax (RGST) as it has been called in Pakistan. Co-ordination with the provinces, which have the constitutional powers to charge taxes on services, has been more difficult than expected, and this important source of revenue has not been able to be adequately exploited so far, the WB report said.
In particular, the internal resistance in FBR to the reorganisation required moving to a function-based organisation rather than a tax specific structure was underestimated. This reorganisation was only implemented through the creation of an Inland Revenue Service (IRS) in 2009, which converted staff from the existing Customs and Excise and the income Tax groups into the new group - significant challenges were experienced during this conversion, including judicial challenges to the creation of the IRS group, the report said.
The WB review mission added that some of the project's outcome indicators were not adequate. Specifically, using the tax-to-GDP ratio is not an adequate ratio to measure progress in revenue administration. Many factors that affect tax-to-revenue ratio are out of control of the revenue administration. For example, the decision to implement a new VAT, the change of tax rates, or the concession of new zero rates, exemptions or special treatments are out of FBR control, but affect revenue. A better indicator to measure FBR performance would be the tax gap indicator, in particular for Sales Tax. There has been one tax gap calculation done for 2006-07 Sales Tax. However, for lack of resources and political will, the tax gap has not been calculated again.
The WB report added that some legal issues were underestimated. This was particularly critical for the integration of revenue administration structure to operate under functional lines and for the harmonisation of legal issues to implement measures for administering the different taxes. This resulted in limitations to FBR ability to reorganise and to take computerised actions or reallocate functions to different staff because of specific references in the tax Acts (eg only commissioners may undertake some functions) that could not be easily changed through appropriate amendments in the legislation.
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