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ISLAMABAD: The Federal Board of Revenue (FBR)’s new reform plan would establish sectoral benchmarks to identify tax gaps and risk areas in various sectors/industries of Pakistan.

The draft of the new reform plan expected to be launched on Wednesday (April 20) by the FBR revealed that detailed sectoral studies will be conducted and sectoral benchmarks will be established for inputs, outputs, accounting ratios, energy use, value addition, and profit ratios.

These studies and benchmarks will be used to collect sector-specific information in the tax returns and determine the risk profile of the taxpayer; and identify tax gaps and risk areas in different sectors.

Comprehensive studies of various sectors and processes will be made to identify and quantify the gaps in the value-addition chain. Documentation, remote e-monitoring, enforcement, and data analysis based on risk management and automation tools will be designed to close these gaps.

The draft of the Inland Revenue reform plan talks about the ineffective organizational structure. The tax administration is also constrained by an inefficient organizational structure, weak governance, and a weak strategic planning function.

Further, there is a lack of, or inadequate, focus on the medium-term strategic and performance management approaches. Overall, administrative and human resource (HR) management issues make it difficult to attract and retain quality human resources from the market.

Also, staff turnover remains high particularly at the management-level positions (especially in the FBR), thereby, adversely impacting the continuity of reform implementation.

The plan also discussed the weak arrears management system. Currently, this manual process which is and maintained in multiple registers that exist between sales and income taxes and across units of the FBR.

This arrangement renders it almost impossible to classify, analyze, or strategically manage liabilities. Reconciling payments is equally cumbersome. The FBR maintains a separate register of write-offs. It also prioritizes the collection of current demands, and recoveries are made after payment options are unsuccessful.

The tax administration-related weaknesses are evident from the low level of compliance and large tax gaps. Under-reporting or non-reporting of formal income is a significant issue across the country (only 30 percent of the 3.98 million FBR-registered taxpayers filed tax returns during FY 2017).

A World Bank’s Doing Business Report identified that medium-sized firms report paying taxes as a cumbersome activity. This is particularly the case for the GST because of the existence of too many authorities and laws (for firms operating in more than one province and federal areas), and several requirements and the manual payment system.

The multiple laws and ad-hoc policy changes, often conflicting with other development objectives, govern the tax system in Pakistan. Tax policy is largely formulated by the tax administration, with a single-minded focus on revenue collection, ignoring other policy objectives. Tax policy measures are often taken without much analysis.

The lack of, or incomplete, automation emerges as a main challenge, affecting the compliance and core operations of tax administration. Despite investments within the FBR, (for example, the Inland Revenue Information System [IRIS], the invoice-matching sales tax filing system, and e-payments), the available systems are not fully integrated, resulting in duplication and limited use of data. Most of the provincial taxes are manually filed and paid, the reform document added.

Copyright Business Recorder, 2022

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