Slow achievement of TARP objectives: FBR asked to exlpain reasons

The Auditor-General of Pakistan has asked the Federal Board of Revenue (FBR) to explain reasons for slow achievements of the objectives of the Tax Administration Reform Project (TARP), a project launched in 2004 for reforming the FBR into a more efficient and effective revenue administration system.
The audit authorities objected that one of the key objectives of TARP was to increase the tax-to-GDP ratio, but it has been deteriorating. The key objectives of reforms under the TARP included measures to increase tax collection, promote voluntary compliance, and guarantee fairer and more equitable application of tax laws.
Sources told Business Recorder here on Saturday that the AG office has drafted 'Audit Report 2009-2010' on the performance of FBR's project of TARP. The audit authorities have submitted the report to the FBR for comments, which would be ultimately submitted to the Public Accounts Committee.
Responding to the report, the FBR has drafted a detailed response highlighting some landmark achievements of the TARP and factors responsible for low tax-to-GDP ratio in the country.
According to the audit report, PC-1 of TARP had enumerated the following objectives in qualitative terms:- First, increase in tax-to-GDP ratio @ 0.2 percent per annum. Second, the objective of the reforms was to achieve financial and administrative autonomy (legal changes). Third, to restructure the COR along functional lines and develop a well trained and motivated workforce. Fourth, the FBR should remove redundancies and re-engineering of business process. Fifth, another objective of reforms was to increase voluntary compliance through the application and concerted taxpayer education and facilitation programme. Sixth, reforms would increase use of information technology to promote self-assessment and prudent audit selection. Seventh, another important objective of reform was to increase revenue net and to eliminate revenue leakage.
The audit report said that a brief review of project's proceedings transpired that FBR had utilised substantial amounts of the project mainly on infrastructure development (refurbishment of RTOs/LTUs/MCCs/TFCs buildings), purchase of automobiles, office hardware/equipments and on training. The funds so far utilised had not fully achieved the desired level of above-mentioned objectives, despite lapse of a period of four-and-a-half years.
The audit was of the view that the tax-to-GDP ratio has been on decrease by 5 percent, and 8 percent in last two years, rather than increase at a rate of 0.2 percent per annum. The restructuring of FBR on functional lines was not completed. The integration of income tax and sales tax on functional lines was in process till December 2009. The redundancies in the process of tax collection had not been removed. Business, Process Re-engineering (BPR) was not done, especially in customs as previous manual/procedures practices were in vogue. In income tax and sales tax, some improvements had occurred regarding filing of returns and registration of taxpayers but nothing was done for assessment of the taxes and processing/finalising the refund claims as previous practices were still in vogue.
The audit further stated that the taxpayer education and facilitation activities to promote voluntary compliance were still in beginning as TFCs were under construction throughout the country. The use of information technology was not materialised as no software as envisaged in PC-1 was developed. Consequently, no expenditure had been incurred on developing software. Only hardware relating to office work such as Personal Computers, Printers, Scanners and Servers etc had been acquired.
The report said that there was no significant increase in the revenue net. No software to check the accuracy of assessment declared by taxpayers and to plug the revenue leakages has been developed so far. Above-mentioned position was asked to be justified with further request to achieve the project objectives through optimum utilisation of funds within the project life.
The audit said that the matter was discussed in a meeting with the Project Director of TARP in November 2009. After detailed discussion, it was decided that the TARP authorities would provide the details regarding restructuring on functional lines, BPR done under TARP relating to Customs, Income Tax, Sales Tax & Federal Excise through Resource Specification Document and details of software developed so far to Audit. Nothing was, however, heard in this regard till finalisation of the report. The slow achievement of the TARP's objectives may be justified, the audit questioned.
Responding to the audit report, the FBR has drafted the preliminary reply on the observations of the report. In order to achieve the TARP objectives, FBR has established three Large Taxpayer units (LTUs), 12 Regional Tax Offices (RTOs), 21 TFCs and 12 TAs to test the re-organised structure of Income Tax and Sales Tax and Taxpayers Education and Facilitation Centres to improve the voluntary compliance. The Customs processes have been re-engineered and Customs Administration Reforms (CARE) has started working that has minimised the time of clearance of goods and reduced the cost of doing business. Facility for online filing of returns and goods declarations and a website for information dissemination and helpline for taxpayers have been established.
With the introduction of the wide-ranging reforms and close monitoring of targets, FBR has not only achieved the revenue targets but surpassed them since the start of reforms in 2002-03. In 2002-03, FBR collected Rs 461 billion, in 2005-06 this collection went up to Rs 713 billion. Now, in 2009-10, total collection has gone up to Rs 1327 billion. Main TARP phase was started in January 2005. In percentage terms increase over 2004-05 is 125percent which is not a small achievement.
The FBR said that funds are earmarked for specific activities (categories-wise) ie Technical Assistance, Software, Hardware, Infrastructure Development, Automobiles, Training & Program Management. Revised PC-1 with a reduced cost of Rs 6,472.817 million has been approved. Therefore, these funds are being utilised accordingly. As far as utilisation of project funds on infrastructure development is concerned, these are utilised for the establishment of Model Offices ie RTOs/LTUs/MCCs/TFCs and TAs. These Model Offices are contributing a lot towards achievement of TARP objectives, especially through taxpayers facilitation, increase in revenues, voluntary compliance, USAS and Taxpayers Education etc.
The partial Financial and Administrative Autonomy has been delegated through FBR Act, 2007. The restructuring of field offices on functional lines has been completed through co-location of Domestic Taxes in the LTUs/RTOs.
The FBR further responded that regarding integration of Income Tax and Sales Tax, necessary steps have also been taken. Integration at FBR Headquarter level has been completed, whereas at field level, jurisdiction/designation orders have been issued. A new occupational service group has also been notified by the Establishment Division. For harmonisation of tax laws and procedures necessary changes have been introduced in the relevant laws through Finance Act, 2010.
It said that the Board has planned 66 TFCs at various locations throughout the country. At 21 locations, FBR has its own buildings. Refurbishment works of these buildings are at the advance stage. Apart from this, 45 TFCs are presently working in the rented buildings. The Board also plans to establish these TFCs in its owned buildings for which, process for purchase of land / construction work has been started separately through GoP funding by the FBR, Admn Wing.
Most of the work on Business Process Re-Engineering (BPR) has been completed. For Customs side a detailed and voluminous Resource Specification Document (RSD) was prepared and the identical situation was there for Sales Tax and Income Tax. The FBR has saved substantial amount of loan through in-house development of software for Integrated Tax Management System (ITMS), human resource information system (HRIS), and One Customs clearance system.
High interest rate loan and credit amount of $49 million has been surrendered to the World Bank. Payable interest and other charges on this amount were $19 million plus, FBR response said.
The FBR said that a special FATE wing has been established and operational since inception of TARP for Taxpayers Education and Facilitation. Moreover, field offices ie LTUs/RTOs/TFCs are also providing necessary support and guidance for Taxpayers Education and Facilitation.
Slow utilisation of TARP was actually attributed to non-utilisation of software component of TARP for which huge amount was earmarked in original PC-1. Subsequently, as per decision of the Board this amount was saved due to in-house development of software solution for ITMS and HRIS. Besides this, Customs component was excluded from TARP as per decision of the Board. When actual utilisation is compared and committed liabilities are added for the remaining period as per revised cost after revision of PC-I, then there is hardly any under-utilisation except under the head of TA and Training.
The project management requested the audit on April 28, 2010 and July 2, 2010 to carry out necessary verification, etc. The audit informed on July 13, 2010 that the verification will be conducted during the course of next audit of the accounts of the project for Financial Year 2009-10.
In view of the position stated above, audit para is suggested to be settled, FBR added.