TARP unable to achieve results due to insufficient tax policy reforms: World Bank

The World Bank (WB) has observed that the Tax Administration Reform Project (TARP) of the Federal Board of Revenue (FBR) was unable to achieve its full results due to insufficient tax policy reforms to expand tax base and simplify tax system, as introduction of a modem value-added tax (VAT) or reformed general sales tax (RGST) and other tax policy measures did not materialise.
Sources told Business Recorder here on Wednesday that the WB review mission has issued its final supervision report on the TARP before the closure of the project on December 31, 2011. According to the final supervision report, the original environment, which TARP was operating in, was more volatile than originally estimated.
There has been a mix of unfavourable economic circumstances, a challenging political environment with frequent changes of political authorities and FBR staff at senior levels, and problems with basic infrastructure such as electricity. All these factors contributed to an environment that was not favourable to meeting the project's reform objectives.
It should be highlighted that the main risk factors identified during project design occurred during TARP execution and affected its results. On the one hand, 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) precise identification of the risks to the project.
On the other hand, the project features that had negative impact on the project were: (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); (b) some of the project's tax policy assumptions were optimistic, such as the introduction of a VAT (RGST); (c) some of the project's performance indicators were inadequate; (d) the effect of some legal constraints had been underestimated (for both enforcement activities and FBR's restructuring of its organisation), and importantly (e) the resistance to FBR's integration initiatives from staff of the Customs and Excise Group (CEO) and the Income Tax Group (ITO) was underestimated.
The final supervision report of the WB said that the TARP was not able to achieve its full results due to inconclusive implementation of a functionally integrated organisation. The organisational reforms introduced by FBR in early 2011 appeared to depart from the functional model envisioned by TARP. The lack of an adequate framework to follow up the reform action plan, monitor progress, detect deviations and propose short-term corrective actions limited the effectiveness of the reform program.
Sharing the shortcomings in the TARP, the WB final supervision report said that the significant turnover in senior management, lack of follow-up on reform actions, and lack of co-ordination among areas at FBR House and field formations had undermined the effective implementation of the reform program at different stages.
The insufficient tax policy reforms to expand tax bases and simplify the tax system, along with a rigid and inappropriate legal framework - the introduction of a modern VAT--did not materialise, while restrictions to adequate assign core functions to the appropriate organisation level severely affected appointment of managers, it said.
The lack of management conviction to implement key institutional measures - reforms proposed and agreed to by FBR and Ministry of Finance were not fully implemented and lack of leadership and accountability - relevant managers were not held accountable for implementing HQ instructions.
The report said that lack of ownership on the project had made it more difficult to hold staff accountable for progress on the TARP program tasks. There were internal fights among FBR staff to bring their vision of TARP to the field, regardless of the sanctioned reform initiative, reflecting weak implementation capacity of the department to implement reforms.
The WB report further highlighted lessons learned from the TARP. The report said that the policy assumptions should be carefully evaluated to ensure, as part of the project monitoring system, that policy assumptions are well documented and that effective mitigation strategies are in place to identify when one of these assumptions is proved incorrect. The suggested corrective actions may be used to provide some guidance on how to minimise the impact of the change in the project's environment.
The policy changes were required to increase revenues - tax policy reforms may be indispensable to increase tax administration effectiveness and tax revenue. If tax policy reforms cannot be introduced, mitigating measures should be planned, the WB report said.
It further said that legal constraints should be carefully evaluated as part of the project assumptions. When organisations are being redesigned it is important to know ahead of time what constraints are in the law that would affect the anticipated changes. The necessary legal changes need to be made early in the project to ensure that there are no legal impediments when structural changes are being introduced.
The final supervision report said that major increase in tax administration effectiveness required steady fundamental organisational change - a fundamental change in the way business is conducted within the organisation, especially when it affects field workers and the way they do their job has the potential to be extremely disruptive. A plan that ensures that all staff are at least well informed and understand what changes are being made and addresses the concerns of rank and seniority must be in place in the early stages of the program. Ongoing monitoring to ensure buy-in or to find a way to address perceived or actual inequalities in the transition needs to be actively undertaken. Corrective actions need senior management participation and a contingency plan should be in place if resistance to the change is indicated.
The WB observed that the new IT systems are ineffective unless they are complemented with new operating procedures and training. The FBR should ensure, as part of the project monitoring system, that whenever a new IT application is being introduced into the field (a) it has been field tested, (b) adequate training in the use of the new procedures has been provided to the users, (c) the requirement to adopt the new procedures are identified in SOPs, and (d) that procedures to reward or recognise staff for adopting the new processes are in place.
The WB said that the centralised systems are easier to implement because, in the Pakistani context, they facilitate management monitoring and control - where technology permits, ensure that processing is done through a single central location.
The performance should be linked to staff compensation and merit in promotions -sending the right message to the staff with regard to changing the organisation is most effective when staff are rewarded for their change in behaviour. The projects should have as part of their early objectives to implement a different compensation and promotion program that rewards staff based upon their performance in adopting the new processes and promotes staff based upon merit, it said.
The project risk mitigation measures should be identified as part of project design -in addition to identifying and rating potential risks that projects may face, recommended mitigation procedures and strategies should be included as part of the project design documentation.
The WB report said that the frequent technical supervision by the Bank helped to keep the project on track - if project tasks are not progressing as planned, the use of frequent technical visits will help the project break down the tasks into smaller steps and offer guidance on how to proceed with the tasks.
The final supervision report further stated that the TARP had made important strides during the last 2-3 years. While TARP has not fully achieved all its objectives, it has made significant progress in enforcement, IT, organisation and HR, which have established the foundations for future and deeper reforms. Before TARP, even with maximum political will and best management capabilities, the FBR would not have been able to increase tax administration effectiveness (ie to reduce the tax gap) due to technical constraints. Now, once the main management and legal issues are resolved, the FBR is well positioned to jump ahead to significantly improve its operations and, as a result, increase tax revenues.
As far as achievements of the TARP are concerned, the report said, improvement in service to taxpayers by FBR has been significant and is changing the image of FBR in society. The implementation of a new functionally integrated organisation, as opposed to the previous tax type based, will allow for improved operations at FBR. A fully functional organisation will be achieved once training activities on new business processes are completed and the reforms introduced by FBR in early 2011 at field formations do not deviate from the functional approach envisioned and supported by TARP.
The amount of sales tax refunds processed increased dramatically. Refund payments in 2010-11 were Rs 106.4 billion. This represents an increase of 233 percent above the 2009-10 level and is equivalent to 0.59 percent of GDP (the highest in recent years). It should be noted that improving the refund system is an indispensable precondition to the introduction of the RGST.
The enforcement activities have improved significantly. This has been achieved by introducing the new taxpayer registration system, increasing the number of active registered taxpayers by 24.8 percent since 2008; substantially reducing non-filers for sales tax and corporate income tax as a result of the introduction of e-filing; reducing tax arrears (the total amount of arrears was reduced by 22 percent in 2011) and developing audit activities, which were virtually suspended at FBR for about four years. Also, several measures, such as the implementation of withholding systems and the application of the 'Active Taxpayers List' (disallowance of input credits for sellers not on the Active Taxpayer List) have been implemented under TARP to reduce evasion, combat the underground economy and increase compliance.
The FBR infrastructure was drastically improved. At the beginning of TARP, basic infrastructure was in severe need of improvement and TARP provided fundamental assistance to modernise buildings, furniture and expand communications and computerisation. Today, FBR staff work in reasonably comfortable offices and the IT infrastructure has been improved considerably with the introduction of the 'Integrated Tax Management System' (ITMS), which is available to all field formations, the report said.
The Human Resource Management (HRM) policy framework was approved last year by the FBR Board. It covers several areas and defines rules for working at FBR. Draft job descriptions for positions at field formations reflecting the integrated structures of RTOs/LTUs have been prepared. Training of staff has been slowly but continuously developed, final supervision report of the WB on the TARP concluded.