Establishment of ''Tax Policy Unit'' in Finance Ministry: TARP key measure not implemented: World Bank

The government has not implemented a key institutional measure to take away the tax policy function from the Federal Board of Revenue (FBR) and create a specialised Tax Policy Unit in the Ministry of Finance to deal with tax policy matters of all federal taxes, under the Tax Administration Reform Program (TARP).
Sources told Business Recorder here on Saturday that a latest report of the WB review mission on TARP has highlighted the main problems affecting the TARP project implementation. According to the report, lack of conviction for implementing some key institutional measures was another significant limiting issue. Even though the authorities seemed to have agreed that tax policy functions should be removed from FBR and that a ''Tax Policy Unit'' should be created at the Ministry of Finance, these measures were never fully implemented.
The WB was of the view that the businessmen who unduly benefited from the old systems were also against the new systems and reforms. The corrupt tax officers, who benefited from the old system, were also against the new systems. There was internal fight in the FBR on the powers to develop IT systems. Different groups within the FBR ferociously fought for the power to develop the IT systems to be deployed within the tax machinery.
Also, the counter-reform of the FBR reorganisation implemented in early 2011 showed a lack of conviction on the principles of the reform. The intent to eliminate self-assessment for amendments of tax returns is another signal of lack of conviction for moving forward some reforms. Finally, another example is the delay in moving taxpayer notification, application of fines and audit selection powers to the FBR Board - this has limited FBR''s ability to move some functions to other job positions because of limitation in the law (eg only Commissioners can perform some functions under the tax acts; moving these powers to the FBR Board and delegating them to specific positions would provide increased flexibility in structuring the FBR and in providing more options for further computerising FBR work).
The FBR review mission has termed lack of political commitment as one of the major problems affecting the project implementation. Overall, problems that have negatively affected TARP implementation are: lack of effective political commitment; insufficient tax policy reforms to expand tax bases and simplify the tax system; lack of follow-up on the measures agreed to be implemented; lack of co-ordination among different areas; lack of management conviction to implement key measures; high turnover of top managers; lack of accountability and leadership; lack of ownership on the project; weak implementation capacity and a rigid and inappropriate legal framework.
The report said that the high turnover of top authorities severely affected the project. The TARP has been implemented under three ministers of Finance, four Chairmen of FBR and a number of FBR Board members. A situation of permanent instability has also been aggravated by vested interests both within FBR and the business community, undermining support of the project and its ability to fully meet the development objectives.
The main tax policy envisaged in TARP did not materialise the introduction of a modern VAT, combined with an effective excise tax system. Also, removal of exemptions and zero rates in sales tax were below expectations. Zero rates for non-exporters and special regimes (eg retailers) remain intact.
The WB observed that lack of leadership and accountability was also a critical feature of the TARP implementation. The relevant managers were not held accountable for implementing instructions from HQ, which in turn did not exercise effective sanctions against non-performing staff. No system to reward compliance and punish non-compliance with plans and targets was in place. As a result, many measures proposed to strengthen FBR, although agreed with the authorities, where not promptly implemented by FBR managers.
There was limited active follow-up on important initiatives. For example, the refund task force results were not actively tracked to ensure achievement of results and the Action Plan that identifies specific actions that were to take place to move the project forward were not given the attention they needed to meet their target implementation dates. A member in charge of co-ordination, monitoring and follow-up was not established. This problem definitively affected TARP results.
The lack of co-ordination also produced inefficiencies. Ineffective co-ordination among the Operations (now Inland Revenue - IR), Enforcement, Audit Wings, PRAL and RTOs /LTUs seriously undermined the effective implementation of instructions from HQ to field formations resulting in ineffective operations and non-achievement of TARP objectives.
Lack of institutional ownership also played an important role in TARP results. FBR staff many times seemed to not own components of the project. They, for example, seemed to consider the FBR Risk Analysis System as the World Bank''s system, and the FBR Action Plan as the World Bank''s Action Plan. This made it more difficult to hold staff accountable for progress of the TARP program tasks, it said.
The WB report further said that the FBR showed weak implementation capacity. Based upon circumstantial evidence, this might be due to corruption, influence of vested interests, and internal fights among FBR staff for power. Regarding corruption, officers who benefited from the old system''s limitations were against the new systems and made every possible effort to stop their implementation. Generally speaking, the new systems developed by TARP operate based on objective rules, reduce or eliminate tax officials and taxpayer contacts, and reduce tax officials'' discretion. Regarding vested interests, obviously, businessmen who unduly benefited from the old systems were also against the new systems. Regarding internal fight for power, it was observed that different groups ferociously fought for the power to develop the IT systems to be deployed throughout FBR and, therefore, to get the power to decide how the systems would operate and how much freedom they would give to the tax officials.
The WB further said that the antiquated legal framework has hindered TARP development. The legal issues delayed implementation of changes regarding FBR integration under a functional structure -restrictions on who can perform certain functions were imbedded into the tax acts whereas in modern tax administrations the functions are mandated to the top tax administration executive (the Chairman in FBR) who delegates them through the organisation to the appropriate position. Civil Service rules that cover FBR severely affected appointment of managers - this elongated the process to create a functional organisation by requiring the creation of a new group (Inland Revenue Service) and moving staff from their current groups to it. Finally, the tax legislations were not harmonised with respect to penalties and enforcement tasks, which complicated the integration of the functions under a function-based organisation, the WB report said.