FBR unable to implement key reforms

The Federal Board of Revenue (FBR) was unable to implement some key reforms and measures for documentation of economy during 2010, including introduction of the proposed ''reformed general sales tax'' (RGST), e-payment facility to commercial banks, Sales Tax Lucky Draw Scheme-2010, ''List of Active Taxpayers'', filing of sales tax returns by government departments, punishments to tax defaulters, and enforcement measures to recover arrears, along with broadening the tax base.
Sources told Business Recorder here on Friday that the FBR last year tried to introduce different measures for documentation of economy, but tax authorities were unable to implement these measures due to one reason or another. The FBR showed satisfactory performance in establishing a Centralised Sales Tax Refund Office (CSTRO) at the Headquarters to print sales tax refund cheques at the board level. The sales tax registration and e-filing of returns also showed visible progress in 2010.
During the period under review, the FBR did not offer any kind of amnesty scheme in 2010 for legalisation of undisclosed assets/income or regularisation of non-duty paid smuggled vehicles in the country. The FBR tried to take major initiatives to implement ''Direct-Indirect Taxes Enforcement Plans'' in the field formations, but there was no visible result of enforcement actions in the field offices.
One of the most important reforms in 2010 was to enforce regular filing of sales tax returns by government departments and companies. The government departments have to file sales tax returns in time and submit the details of tax withheld. The FBR was unable to convince the government organisations to file their sales tax returns. However, the FBR expressed its inability to enforce the documentation measure and said, "The issue has to be dealt with at political level."
The FBR failed to implement a key enforcement measure under reforms to consistently apply penalties to non-compliant taxpayers and prosecute cases of serious frauds and evasion. The FBR was also required to draft a policy to allow automatic application of penalties for non-compliant taxpayers. As the FBR was unable to fully enforce this measure, now the new date for this action is June 2011. The FBR is determined to consistently apply penalties to non-compliant persons and prosecute cases of serious tax frauds by June 2011. It was one of the key reform measures and the target has been missed by the FBR due to failure of concerned authorities.
Another most import measure was to propose a change in legislation in the budget to allow the application of fines and default tax automatically by the IT system without human intervention. This would enable the IT system to issue notices to the taxpayers without requiring authorisation by an officer to have the same effect as those notices currently issued by field officers. The implementation of this key reform measure has been postponed from June 2010 to June 2011.
Another major reform measure was to establish taxpayer ledgers, and FBR accounting system at all reformed units. This feature would provide tax accounting information by taxpayer, tax type, tax period for all obligations ie sales tax, income tax and the federal excise duty. The system was required to be launched from June 2009, but has been further postponed till 2011.
During 2010, the biggest enforcement measure was to publish the ''List of Active Taxpayers'' to stop the non-compliant persons from carrying out businesses with the registered persons. So far, the provisional ''List of Active Taxpayers'' has not been placed on the FBR website. It is expected that the "List of Active Taxpayers" may be placed on the FBR website in January 2011.
The FBR was required to introduce the scheme of e-payment directly from the accountholders to the commercial banks in December 2010, but the scheme was not implemented. Under the plan to implement reforms, the electronic tax payment facility had to be extended to the commercial banks in December 2010. The first phase of the Electronic Payment and Refund System (EPARS) has to provide the facility to the taxpayers for making the tax payments electronically by debiting their bank accounts maintained in any bank operating in Pakistan.
Thirdly, the FBR has also delayed the issuance of the statutory regulatory order (SRO) of the Sales Tax Lucky Draw Scheme. Despite approval of around Rs 120 million from the government for launching the scheme, the FBR is still thinking whether the restricted scope of the scheme to the restaurants would achieve the desired results. Originally, when the scheme was drafted in 2010, the FBR wanted to cover hotels, restaurants, bakeries and caterers. Later, the scheme was only restricted to registered restaurants, reducing the scope of the scheme. Now, it is being considered whether the scheme would fulfil the objectives of broadening the tax base. This would have been the first Consumer Incentive Scheme of its sort to be launched by FBR. The FBR endeavours to cover restaurants and similar food outlets, registered under Sales Tax Act 1990, through a lucky draw scheme in order to encourage voluntary registration of all those who are liable to pay/collect sales tax and to ensure that the tax deducted is also deposited into government treasury.
Fourthly, the FBR was required to design and place a system to control sales tax withholding by the government and the large taxpayers in December 2010. However, the FBR postponed the plan till June 2011. It was also a documentation measure, but the same could not be implemented during 2010. Fifthly, the FBR also tried its best to ensure 100 percent e-filing of withholding tax statements on the FBR Web-Portal. However, the FBR was unable to enforce 100 percent e-filing of withholding statements on e-portal.
By July 2010, the FBR had committed to bring down the number of stop filers to less than one percent at the Large Taxpayer Units (LTUs). At the same time, the Regional Tax Offices (RTOs) have to bring down their medium size taxpayers'' non-filing rates to close to 7 percent and for small taxpayers to below 20 percent. However, the FBR remained unable to achieve these objectives in 2010 and the enforcement process would continue in 2011.
Seventhly, the FBR had constituted a Task Force to clear all pending sales tax refunds of exporters in Karachi, Faisalabad and Lahore. However, the Task Force could not liquidate all pending refunds by end December 2010. The pending refunds would be cleared in 2011 by the Task Force constituted by the FBR in this regard.
Eighth, the FBR had launched a recovery drive in January 2010 to arrest the chronic defaulters having huge tax arrears. At that time, the FBR had issued a directive to the field formations for starting arrest process in cases of big tax defaulters, who were not ready to pay any amount after completion of all legal formalities. In February, 2010, the Board had withdrawn arrest orders of 100 biggest defaulters of sales tax and income tax, which were earlier issued for recovery of arrears under enforcement exercise. According to FBR instructions issued in February 2010, the field formations immediately suspended board''s earlier orders on the arrest of tax defaulters. The decision would remain suspended till the FBR gives go-ahead signal following formal approval of the competent authorities. The FBR changed its policy on the argument that it is the policy of the board for not to arrest anyone during the enforcement exercise.
Ninth, the FBR made an attempt to introduce a broad-based integrated federal value-added tax (VAT) Act, 2010. The Federal and Provincial VAT laws were not implemented as the same were not cleared by respective provincial assemblies to empower the FBR to collect VAT on services. The Federal and Provincial VAT Bills talked about a single unified authority to collect VAT under an integrated arrangement. For implementation of these laws, there should have been a single administrator and single collector across the board. Thus, the idea of Federal and Provincial VAT Acts was dropped during 2010.
Tenth, the government has not yet been able to implement the RGST due to strong opposition by political parties, and failure of the FBR to take the stakeholders into confidence.
Eleventh, Taxpayer''s Audit continued to remain a weak area during 2010. When contacted, sources said that the Board had achieved increase of 29 percent in broadening the tax base by discovering new taxpayers including companies, Associations of Persons (AOPs), individuals, salaried persons and employers during the last one year. There was an increase of 29 percent in the existing tax base during the period under review.
As compared to previous fiscal year, there was an extraordinary increase in the number of new companies, AOPs, individuals and salaried persons, who filed returns and statements as a result of enforcement strategy of the tax department. Every year, the government fixed 20 percent as target for broadening the tax-base. However, the achievement of 29 percent increase in the tax base showed successful implementation of the enforcement plan, monitoring policy and voluntarily compliance by the new taxpayers, sources added.