Lessons from FBR's tax reforms.

Byline: Salamat Ali

Increasing tax collection to reduce the fiscal gap and expand investment on the socio-economic development has been a priority for successive governments. Therefore, the Federal Board of Revenue (FBR) has undergone a series of policy and administrative reforms over the years.

As a result, revenue collection increased in absolute terms from Rs200 billion in 1994-95 to around Rs4 trillion in 2017-18. Despite the substantial increase, the low tax-to-GDP ratio (13 per cent), narrow tax base (1.4 million taxpayers in a population of 208m) and high reliance on border taxes (around 50pc of tax revenue) suggest large untapped potential for domestic revenue mobilisation.

This year, Pakistan is witnessing a historical tax collection shortfall. This can partially be attributed to a slowdown in economic activity as well as strategic and managerial issues. To address these constraints, the government has embarked upon an ambitious tax reform agenda. It has bifurcated the operational and policy functions of the FBR and is negotiating another tax administration reform project with development partners.

The government should create a separate entity within the FBR to administer VAT

The earlier set of reforms, implemented from 2005 to 2011 under the umbrella of the Tax Administration Reform Project (Tarp) of the World Bank, met with partial success. It is time we critically analysed its impact and incorporated insights in the new programme.

Besides other elements, Tarp rightly focused on expanding the coverage of the Value Added Tax (VAT), commonly called sales tax in Pakistan. VAT is a major source of revenue in around 120 countries. It raises about $18tr in taxes roughly one-quarter of all government revenue, according to the World Bank. Being a general tax imposed on both imports and domestically produced goods, VAT possesses two advantages: first, it is less distortionary it generates distortions only on the consumption side whereas a tariff induces distortions on both production and consumption sides and second, it has more revenue potential than import tariffs.

Before the reforms under Tarp, the Customs was administering VAT at both domestic and import stages. Later, the country shifted the collection of VAT at the domestic level to the Inland Revenue Services (IRS) while the collection at the import stage remained with the Customs. This policy shift aimed at the functional integration of income tax, sales tax and federal excise...