Federal Board of Revenue (Pakistan)

The Federal Board of Revenue (more commonly known by its initials as FBR) is the
semi-autonomous, supreme federal agency of Pakistan that is responsible for
auditing, enforcing and collecting revenue for the government of Pakistan. FBR has
the responsibility for (i) formulation and administration of fiscal policies, (ii) levy and
collection of federal taxes and (iii) quasi-judicial function of hearing of appeals. FBR
is estimated to be the largest federal bureaucracy in Pakistan. As the agency
conducts audit of taxpayers regularly, it's regarded as the guardian of national
treasury in Pakistan. FBR primarily operates through its main collection arms, its
field formations, the Regional Tax Offices (RTOs) and Large Taxpayer Units (LTUs)
across the country. FBR has two major wings: the Inland Revenue Wing (Income Tax
Department) which brings in about 54% of FBR's total collection and Customs Wing
now called as Pakistan Customs Service. Mostly in the media, the acronym 'FBR' is
also often mentioned when speaking in relation to Inland Revenue Officers
(previously Income Tax Department officials) in Pakistan. Income Tax Officers (now
Inland Revenue Officers) are considered some of the very powerful officers in the
country. For the purpose of collection of revenue and pursuing tax evaders, FBR's
powers & functions also include but are not limited to: carrying out inquiries and
audits/investigations into the tax affairs, commanding arrests, attachment as well
as public auction of movable and immovable assets of a non-compliant. Tariq Bajwa
is the current chairman of FBR; he was appointed by the Prime Minister.
History and description
The Central Board of Revenue (CBR) was created on April 1, 1924 through
enactment of the Central Board of Revenue Act, 1924. In 1944, a full-fledged
Revenue Division was created under the Ministry of Finance. After independence,
this arrangement continued up to 31 August 1960 when on the recommendations of
the Administrative Re-organization Committee, CBR was made an attached
department of the Ministry of Finance. In 1974, further changes were made to
streamline the organization and its functions. Consequently, the post of
Chairman CBR was created with the status of ex officio Additional Secretary and
Secretary Finance was relieved of his duties as ex officioChairman of the CBR.
In order to remove impediments in the exercise of administrative powers of
a Secretary to the Government and effective formulation and implementation of
fiscal policy measures, the status of CBR as a Revenue Division was restored under
the Ministry of Finance on October 22, 1991. However, the Revenue Division was
abolished in January 1995, and CBR reverted to the pre-1991 position. The Revenue
Division continued to exist since from December 1, 1998; however, owing to the
recent controversy which arose when the federal government appointed the new
CBR Chairman of the seventh common, bypassing several senior-most officials in
the Customs & Federal Excise department, Prime Minister of Pakistan gave an
additional charge of Revenue Division, Government of Pakistan to the then
Secretary Finance and now the chairman of the agency Salman Siddiq, Government
of Pakistan, thereby violating Federal Board of Revenue Act, 2007 as the senior
officials in the then Customs & Excise Group now Pakistan Customs Service (PCS)
refused reporting to a junior officer.

By the enactment of FBR Act 2007 in July 2007 the Central Board of Revenue has
now become Federal Board of Revenue. The status of FBR as Revenue Division has
again been restored.

Notable former chairmen

First Ex Officio Chairman of FBR was Sir Victor Turner from August 14, 1947 to
February 1, 1950. Ghulam Ishaq Khan also who later became the president of
Pakistan served as the board chairman from May 31, 1966 to September 8, 1970.
The then Finance Secretary A G N Kazi also served as Chairman CBR from 1970-71
until his Additional Secretary M Zulfiqar took over as the first full-time Chairman of
the Board.
Tax collection trend
This is a chart of trend of taxes collected by the Central Board of Revenue of
Pakistan with figures in millions of Pakistani Rupees.
Year

Total

Direct Taxes

Indirect Taxes

1996

129,282,087

658,485,060

211,597,027

2000

982,392,277

251,124,585

124,5267,692

2005

429,282,087

129,282,087

611,597,027

Since the mid-1990s, Sales Tax has grown dramatically in significance to the
exchequer while Excise collection has stagnated.

Chart of functions

To identify the Withholding Agents;

To facilitate issuance of NTN/FTN to unregistered Withholding Agents in respective Regional

Tax Office through Pakistan Revenue Automation Limited;

To assist FBR in developing an accounting policy for appropriation of the deduction to the
Regional Tax Offices / Large Taxpayers Unit having jurisdiction over particular taxpayer(s);

To review and recommend suitable (automated) processes and filing structure of withholding
statements that is compatible with income tax environment;

To suggest to Federal Board of Revenue modification / amendments. Required in the Withholding

Tax Regime under the Income Tax Ordinance, 2001, to make them responsive and in accordance
with the universally acknowledged principles of direct taxation and best practices.

To monitor the certificates of exemption from withholding taxes, issued by concerned tax
authorities, for their proper utilization by all concerned.

To adopt ways and means to educate and facilitate the prescribed persons (Withholding
agents)and other stakeholders in meeting their withholding tax related obligations;

To collate information on withholding taxes withheld / collected and deposited for various
purposes, by identifying non-NTN holders for broadening of tax base;

To perform any other work incidental or necessary to achieve the objectives of the organization
and discharge of above functions;

To perform such other functions as may be assigned by the Federal Board of Revenue;

To check, supervise, ascertain, monitor, reconcile and properly enforce, in whole of Pakistan, the
Withholding regime and other relevant provisions of the Income Tax Ordinance, 2001 and Sales
Tax of 1990.

To adopt ways and means to monitor deduction, collection and payment of tax collected /
withheld to ensure their correctness as per law and timely deposit in the Government treasury /
State Bank of Pakistan / National Bank of Pakistan;

To
control
possible
leakages
of
Withholding
14. To investigate cases of non-deduction / short-deduction of Withholding Taxes;

To enforce the prescribed statements in respect of taxes withheld and take appropriate action
under the law in the cases of defaulters;

To maintain proper record of Withholding Taxes and prescribed persons;

To verify and cross match the monthly statements of Withholding Taxes with tax deposits /
collection, returns / statements / book of accounts / declarations and other information on
taxpayers.

To get the orders passed under relevant provisions of the Income Tax Ordinance, 2001,
imposition of additional tax and penalty and to ensure the recovery of tax not deducted / collected
by the withholding agents.

Taxes;

Function of FBR / Revenue Division

In the existing setup, the Chairman, FBR, being the executive head of the Board as well as Secretary of the Revenue
Division has the responsibility for
(i) Formulation and administration of fiscal policies,
(ii) Levy and collection of federal taxes and

(iii) Quasi-judicial function of hearing of appeals.

His responsibilities also involve interaction with the offices of the President, the Prime Minister, all economic
Ministries as well as trade and industry.

FISCAL POLICY Presented by: SIDRA ASAD RAHMA HASEEB TAYYABA ASHRAF

2. LAYOUT FISCAL POLICY GOVERNMENT BUGDET NFC AWARDS

3. Fiscal Policy with reference to public income and public expenditure is the strategy
which guarantees the economic stability and development of country

4. Economic Stability Increased Savings Control Inflation Stabilized Price Level

Desirable Level Of Consumption Distribution Of Wealth

5. Reduction in Burden Of Foreign Debts Control on the Concentration of Wealth

Trade and Industrial Development Financial Assistance to Lower Income Group

6. REVENUE TOOLS direct taxes indirect taxes SPENDING TOOLS Government

expenditure: current spending capital spending transfer payments

7. There are two types of fiscal policy Expansionary Fiscal Policy Contractionary Fiscal
Policy

8. Government purchases Government Taxes The goal of expansionary fiscal policy is to:
Close a recessionary gap Stimulate the economy Decrease the unemployment rate

9. Government Purchases Government Taxes The goal of contractionary fiscal policy is to:
Close an inflationary gap Restrain the economy Decrease the inflation rate

10. Direct Taxes: Direct taxation is defined as the tax which is directly levied on the
citizens of a country All individuals and business concerns have to pay direct taxes to the
government on a regular basis During the fiscal year 2011-2012, the Federal Bureau of Revenue
(FBR) expects to collect Rs 738.8 billion in direct taxes The direct taxes in Pakistan Include
income tax, wealth tax, property tax.

11. Indirect Taxes An indirect tax is a tax collected by an intermediary (such as a retail
store) from the person who bears the ultimate economic burden of the tax (such as the customer)
During the fiscal year 2011-2012, the Federal Bureau of Revenue (FBR) expects to collect Rs
1,144 billion in indirect taxes In Pakistan, indirect taxes include sales tax, value added tax, GST
and excise and custom duty

12. The FBR has provisionally collected taxes worth Rs.1940 billion during last financial
year 2012- 2013, which may go to Rs. 1950 billion when figures get finalize, said Ansar Javed
(retired chairman of FBR) http://www.nation.com.pk

13. Outline Budget Components Types of Budget Government Budget Budget

2013-2014 Revenue and Expenditure 2013-2014 June 14 |Dacb| Rahma haseeb| 16

14. BUDGET Budget is the annual statement of the expenditures and revenues of the
federal government with the laws and regulations that approve and support those expenditures
and taxes Major objectives include: Finance activities of government Encourage economic
growth and stability June 14 |Dacb| Rahma haseeb| 17

15. Components of Budget Revenue Budget Capital Budget Revenue Budget: It

consists of revenue receipts of government and its expenditures Revenue receipts include tax
and non tax revenue Revenue expenditure includes payment for day to day running of
government and services it offers to citizens. June 14 |Dacb| Rahma haseeb| 18

16. Capital budget: The capital budget is different from the revenue budget as its
components are of a long-term nature It includes capital receipts and payments Capital
receipts are government loans raised from the public, government borrowings from the Reserve
Bank and treasury bills, loans received from foreign bodies and governments Capital
expenditures are Capital payments are capital expenditures on acquisition of assets like land,
buildings, machinery, and equipment June 14 |Dacb| Rahma haseeb| 19

17. DEFICIT BALANCED SURPLUS June 14 |Dacb| Rahma haseeb| 20

18. GOVERNMENT BUDGET: Includes revenue and expenditures for capital and revenue
budget. Revenue budget The Receipts for this budget includes: a)Tax Revenue 1.Tax on Income,
profit and wealth Levied on income, profit and property of people Have different rates for
different income groups and property owners June 14 |Dacb| Rahma haseeb| 21

19. 2. Taxes on Goods and Services Excise Duty Levied on production of selected
industries Industries which have enjoyed tariff preferences and have stability in market are
subjected to excise duty Also levied on services provided by hotels, restaurants and
advertisements. Sales Tax Levied on sale price of goods and services Rate varies with the
nature of commodity Luxury goods have high sales tax then necessities. June 14 |Dacb| Rahma
haseeb| 22

20. Sub charge Difference between maximum sale price and production cost or import
price of petroleum, natural gas etc. is realized by government and the surplus is the source of
revenue. 3. Custom Duty: Source of indirect tax Tax on import and export of commodities is
custom duty Rates vary with nature of commodity and government policy Luxury items have
high rate to discourage import. June 14 |Dacb| Rahma haseeb| 23

21. b) Non Tax Revenue Income from Property and enterprises - Income from owned
land, forests, mines etc. Trading: - Earned by Pakistan trading corporation Interest and
dividend: - Interest and dividends from investment Minor head: - Receipts from civil

administration - Miscellaneous : passport fee, copy right fee etc. June 14 |Dacb| Rahma haseeb|
24

22. The expenditures for this budget includes: 1. Civil Administration - Expenditure on civil
departments of federal government. 2. Defense - Expenditure on maintenance and operation of
defense services 3. Law and Order - Expenditure on operation of police and courts for maintaining
law and order June 14 |Dacb| Rahma haseeb| 25

23. 4. Community Social And Economic Services - Performed by government for welfare
of people such as construction of roads, railways, education etc 5. Subsidies - To increase
production and keep prices stable, government helps producers financially through subsidies 6.
Debt Servicing - Includes payment of interest and repayment of principal amount of debt June 14 |
Dacb| Rahma haseeb| 26

24. Capital Budget: The Receipts for capital budget includes: 1.Surplus from Revenue
Budget: Measured as: Government savings= Government Revenues Current Expenditure
2.Domestic Borrowing: It includes Bank borrowing and non- bank borrowing 3.External
Borrowing: External borrowing can increase investment and growth If amount is not used for
productivity purpose, it will not generate revenues. June 14 |Dacb| Rahma haseeb| 27

25. The Expenditure for this budget includes: Expenditures for agriculture Water and
power Education Health Transport and communication Development of factories June 14 |
Dacb| Rahma haseeb| 28

26. June 14 |Dacb| Rahma haseeb| 29 BUDGET PAKISTAN 2013- 2014

27. BUDGET 2013-2014 The budget 2013-14 has the following salient features: The total
outlay of budget 2013-14 is Rs 3,985 billion. This size is 24.4% higher than the size of budget
estimates 2012-13. The net revenue receipts for 2013-14 have been estimated at Rs 1,918
billion indicating an increase of 7.9% over the budget estimates of 2012-13. The net capital
receipts for 2013-14 have been estimated at Rs 493 billion against the budget estimates of Rs 478
billion in 2012-13 i.e. an increase of 3.2%. June 14 |Dacb| Rahma haseeb| 30

28. The external receipts in 2013-14 are estimated at Rs 576 billion. This shows an
increase of 50.1% over the budget estimates for 2012-13. The current expenditure is Rs 3,196
billion and development expenditure is Rs 789 billion. Current expenditure has been estimated to
be higher than the revised estimates for 2012-13 by around 9.9%, while development expenditure
by 37.7% in 2012-13 over the revised estimates of 2012-13. The size of Public Sector
Development Program (PSDP) for 2013-14 is Rs 1,155 billion. Out of this, Rs 615 billion has been
allocated to provinces. Rs 115 billion to New Development Initiatives and Rs 10 billion to
Earthquake Reconstruction and Rehabilitation Authority (ERRA). June 14 |Dacb| Rahma haseeb|
31

29. Standard rate of sales tax increased from 16% to 17%. Hybrid cars appear to be
fortunate to have been granted reduction in taxes. Curiously, the relief is envisaged for cars over

1800cc!! FED at 40 paisa per kg on imported seeds and at Rs 1 per kg on locally produced oil
imposed. June 14 |Dacb| Rahma haseeb| 32

30. June 14 |Dacb| Rahma haseeb| 33

31. June 14 |Dacb| Rahma haseeb| 34

32. June 14 |Dacb| Rahma haseeb| 35

33. June 14 |Dacb| Rahma haseeb| 36

34. June 14 |Dacb| Rahma haseeb| 37

35. June 14 |Dacb| Rahma haseeb| 38

36. KEY TARGETS Fiscal deficit to be reduced to 6.3 percent by 2013-14 compared to
8.8 percent in the outgoing year. Rs. 2.6 trillion to be collected as taxes. Inflation to be
contained in single digit. Tax on the GDP ratio to be raised to 15%. June 14 |Dacb| Rahma
haseeb| 39
37. NFC AWARDS

38. DEFINITION The NFC Award or National Finance Commission Award, is the
distribution of financial resources among the provinces of Pakistan by the federal government on
annual basis.

39. FEATURES The main charter of NFC is to recommend on the following: The
distribution of specified taxes, duties between federation and provinces. The disbursement of
grants to provincial governments. The borrowing powers exercised by federal and provincial
governments. Any other financial matter referred to commission.

40. WORKING Certain types of taxes collected in each province are pooled and then
redistributed according to the NFC formula. Taxes included in the pool are income taxes
general sales tax wealth taxes capital gains taxes custom duties

41. BACKGROUND 1971 incident: separation of East Pakistan from West Pakistan
Major issue arose about the Distribution of Resources among the provinces.

42. PROVINCIAL SHARE IN 1970 AWARD Punjab Sindh Khyber- Pakhtunkhwa

Balochistan 56.50% 23.50% 15.50% 4.50%

43. FINANCIAL ARRANGEMENTS IN 1973 CONSTITUTION It was made obligatory for

the government to compose NFC at an interval extending not more than 5 years resource
distribution among the federation and their respective units.

44. In this award fewer taxes were included in the divisible pool which consisted of
income tax, sales tax and export duty while the criterion used for resource redistribution was
recommended to be population. THE FIRST NFC AWARD 1974 Punjab Sindh KhyberPakhtunkhwa Balochistan 60.25% 22.50% 13.39% 3.86%

45. THE 2ND NFC AWARD 1979 Punjab Sindh Khyber- Pakhtunkhwa Balochistan 57.97%
23.34% 13.39% 5.30%

46. THE 3RD NFC AWARD 1985 The third NFC award 1985 as of its previous 1979 award
failed to produce any fruits. The resource distribution from divisible pools remains same as of
1974 up to 1990.

47. THE 4TH NFC AWARD 1990 After almost 16 years of break in declaring a
consensus NFC award, the 1990 NFC award came up with some positive recommendations in
April 1991 under the democratic government of Prime Minister Nawaz Sharif. The most
significant development under this award was the expansion of the divisible pool. Still population
remained the sole element for revenue sharing criteria in the NFC award.

48. The sharing of the divisible pool between federal and provincial governments
continued to remain at 20:80 percent, respectively. Punjab Sindh Khyber- Pakhtunkhw a
Balochistan 57.88% 23.28% 13.54% 5.30%

49. THE 5TH NFC AWARD 1996 The shares in 5th NFC awards remained the same
Punjab Sindh Khyber- Pakhtunkhwa Balochista n 57.88% 23.28% 13.54% 5.30%

50. THE 6TH NFC AWARD 2000 Provinces were demanding for higher share in the
divisible pool (up to 50 percent) as well as the diversification of the distribution criteria.

51. THE 7TH NFC AWARD

52. THE 7TH NFC AWARD 2010 Provincial share of the divisible pool would increase
from the present 47.5% to 56% in the first year of NFC (2010-2011) and 57.5% in the remaining
years of the award under the vertical distribution of resources Share of Provinces was
approximately Rs.39 billion The federal government has agreed to cut tax collection charges
from 5.0 per cent to 1.0 per cent and this amount would also be added to the divisible pool

53. MEASURES TO BE TAKEN (1) Backwardness and development gap (2) Inverse
income distribution (rural urban income disparity) (3) Natural resource endowment (4) Revenue
generation/revenue collection (5) Population density (6) Poverty (7) Area (8) Non-formula
transfers (9) Environmental consideration

54. REFERENCES www.finance.gov.pk www.fbr.gov.pk www.statpak.gov.pk

www.wikipedia.com Economy of Pakistan, Saeed M. Nasir

Tax reforms

Tax Reforms in Pakistan Brief Prepared for Policy Symposium on Tax Reforms in
Pakistan 29th November 2013 1
2. Taxes matter. Taxes affect citizens, economy of the country, businesses, and
delivery of public services. If a government is unable to collect adequate taxes and
use them effectively then the result is economic instability and poor service delivery
to the public. Pakistans taxation system has been receiving increased attention due
to its inability to collect enough revenues required for improving lives of Pakistanis.
Pakistani government spends around 0.7 percent of GDP on health. This is less than
half of what other governments in lower middle-income countries spend on health.
On elementary education, Pakistan spends less than 2 percent of GDP. This is also
low when compared with other regional countries. One of the main reasons for low
investment in social services is low revenue collection. Total revenue collected by
the Pakistani Government, using tax and other measures, is around 13 percent1 of
GDP, which is the lowest among all emerging economies. World Development
Indicators 2013 The revenue collected is not nearly sufficient to meet public
expenditure, which has averaged 20 percent of GDP over the past five years. The
result is high government borrowing that has led the country into a debt-trap (in
2012-13 the Federal Government paid over 60% of its revenue as interest on loans).
Expenditure beyond revenue has also created economic imbalances, forcing
Pakistan to repeatedly seek assistance from the IMF. In its latest programme, the
IMF has advised the Pakistani government to reduce its budget deficit. Without
radical increases in revenue, this must mean spending cuts and further
deterioration in public service delivery. The Government collects more than 80
percent of total revenue by imposing taxes. This is around 10 percent of GDP, of
which 9 percent of GDP is collected through Federal Board of Revenue (FBR).2This is
amongst the lowest rates of tax collection by Federal Government in the World
excluding oil-producing countries. The tax to GDP ratio has decreasedfrom around
14 percent in the mid-eighties to 10 percent. By contrast, China has increased its
tax to GDP ratio from 10 percent to over 20 percent since the early nineties. The
Constitution of Pakistan specifies the type of taxes that the Federal and Provincial
1World Development Indicators 2Average of past 5 years. For 2012-13 the FBR
collected tax equivalent to 8.3% of GDP 2
3. Governments can collect. For example, taxes on individual incomes and on
company profits are Federal taxes, while taxes on property and agriculture are
provincial taxes. At the provincial level taxes are collected by provincial Excise and
Taxation departments (that collect taxes from urban areas), Boards of Revenue (that
largely collect taxes from rural areas), and Revenue Authorities / Boards in Sindh
and Punjab (that were recently established to collect sales tax on services).
Provinces have struggled to increase their own tax revenue in recent years. On
average 0.4 percent of GDP is collected through provincial taxes. The three main
reasons for low revenue generation are: 1) politicians find it difficult to justify
increase in taxes to their constituencies, primarily because of poor public services,
and hence there is lack of political will; 2) provincial tax collection machinery
especially in rural areas - lacks administrative skills; and 3) the 7th NFC Award3

increased the provinces share of FBRs taxes from 47 to 57.5 percent, with the
rather mild condition that provinces should work with Federal government to
enhance national taxes. This condition was never taken seriously and the
agreement with the provinces under the Award to increase taxes to 15 percent of
GDP by June 2015 is highly unlikely to be met. The new government has announced
its intention to increase the tax to GDP ratio to 15 percent by 2018. This is a big
challenge and will require considerable effort by both federal and provincial
governments. To achieve this target, fundamental shifts in tax policy and tax
administration will be required. We highlight three key issues: 1. Exemptions,
Concessions and Preferential Treatment For many years, different governments
have allowed extensive tax exemptions, concessions and preferential treatments.
Exemptions are provided in the tax laws, and through a legal instrument called
Statutory Regulatory Order (SRO) issued by the Federal Board of Revenue. To date
FBR has issued 1,920 SROs. Independent studies estimate revenue leakage at 3-4
percent of GDP due to: 1) the amount of tax liability faced by taxpayers that is not
paid on time; and 2) revenue loss resulting from preferential treatment. Losses in
2012 are estimated at between Rs.600 and Rs.800 billion. If tax evasion - also
estimated at 3-4 percent of GDP - is added to this, the total loss in the present
taxation system is roughly equal to total government borrowing each year. As per
Article 77 of the Constitution, Federal taxes will be levied by an Act of Parliament.
However, the tax laws grant the government power to give exemptions, concessions
and preferential treatment without Parliamentary approval. This is almost unheard
of inother parliamentary systems, meaning parliament can be over-ruled by
bureaucrats and Ministers. There is not even a requirement in the law to report the
total value of these exemptions to Parliament. What is needed is a phasing out of
these exemptions and concessions. A number of exemptions were removed in the
Budget 2013-14 and the government has agreed to review and remove all
exemptions through SROs within three years. We recommend an exemption phaseout plan to be designed by the Government, including necessary amendments in
taxation laws. We also recommend that that any proposed future exemptions and
concessions should be subject to Parliamentary approval so that public
representatives have a say in matters that affect tax revenue. 3The mechanism
through which tax revenues collected by FBR are distributed between Federal and
Provincial governments, applicable from July 2010 3
4. The value of exemptions and concessions should be calculated using
internationally recognised methods and reported in the budget each year so that
Parliament and the public are aware of the resulting revenue losses. 2. Weak and
Inefficient Tax Administration Tax collection in Pakistan remains non-transparent
with substantial instances of rentseeking. A 2004 World Bank study found that the
FBR suffered from deep institutional and management weaknesses. The 2005 Tax
Administration Reform Project had largely failed to achieve its objectives by 2012.
Tax administration organisations (both federal and provincial) have suffered from
inefficient and fragmented management, weak human resources, lack of supporting
systems, and excessive scope for discretion and rent seeking behaviour. Weak tax
administration results in high tax avoidance and opens avenues for corruption as
indicated in the figure below. SDPIs Household Survey conducted in May 2013

reveals taxpayers lack of trust and perceived corruption in tax administration as

major reasons for not paying taxes. Why we do not pay taxes Others Cumbersome
tax filing Lack of trust regarding tax utiliation Corruption in tax administration
Declining real incomes Why we give informal gifts to tax officials 9% Reduce time
towards tax matters 2% 20% Curtailing harrasment 29% 40% 51% Prevent arbitrary
levies 18% We recommend that; 1) consideration should be given to full autonomy
of FBR along the lines of State Bank of Pakistan having its own human resource
structure and management to create a professional workforce independent from
the direct influence of the Government, 2) FBR should be restructured to create
functional expertise, 3) FBR should upload its medium-term strategic plans on its
website and monitor and report key performance indicators on a regular basis, and
4) at the provincial level, newly formed provincial revenue authorities should take
over the functions of existing excise, revenue and board of revenue departments
and focus on enhancing collection of agriculture tax and property taxes. 3. Narrow
Tax Base Very few Pakistanis pay income taxes. Out of a total workforce of 58
million less than 2 million are registered taxpayers, and last year only 0.7 million
people actually paid income tax. This is roughly 2 people in 100 employed. Of all the
lawmakers in the National and Provincial Assemblies 61 percent did not pay taxes in
the year they contested the elections. 51 percent of Senators did not pay tax. 62
percent of Cabinet 4 37%
5. Ministers did not file tax returns.4 Of the total income tax collected, more than 60
percent is collected through withholding tax5. Withholding tax is not a good
international practice. Pakistans exceptionally high dependence on the tax signifies
an unusually high proportion of hard-to-tax individuals. Only 28 percent of income
tax is collected through deduction at source, or through voluntary payments by
taxpayers. The remaining 12 percent is collected through tax inquiries by the tax
officials. Pakistan ranks 162nd in the global paying taxes index compiled by the
World Bank.There are many reasons why people do not pay income taxes. As per
the survey, it takes an average of 560 hours (highest in South-Asia) to comply with
tax. Another reason is rent-seeking behaviour of tax officials. SDPIs survey of
informal sector businesses in 2013 found that almost 22 percent do not intend to
register with the tax authorities, with a large proportion afraid of intrusion by tax
officials. Why we do not register with FBR 37% 30% 27% 3% Registration will curtail
growth Afraid of Intrusion Compliance is Lack costly understanding on tax matters
Another reason is weak enforcement. Hardly anyone gets convicted for tax crimes.
In 2011 the FBR announced that it had access to a list of around 3 million people
who do not pay taxes yet enjoy a lavish lifestyle including frequent foreign visits,
more than one bank account, and number of vehicles and property registrations.
The lack of convictions, discretion for tax officials and lack of documentation
togethermake it easy for people to evade taxes. Independent studies point to losses
due to tax evasion of between 3-4 percent of GDP each year. It is essential that
Pakistans tax system should be seen as fair, adequate, simple, transparent, and
administratively easy to comply with. Peoples perceptions regarding revenue
collecting authorities and the Government that provides them with services are also
important. Tax avoidance must be made costly and compliance cheap. If tax
leakages (as identified above) are removed, an extra 6 8 percent of GDP of

revenue can be realised. But Pakistan has a long way to go to improve its tax
system and until this is accomplished one cannot expect much improvement in
poverty and welfare at grassroots level. 4This was reported in the international
media and strongly criticised in the UK Parliament. 5A system in which advance tax
is collected at the time of a transaction e.g. when paying a mobile phone bill and
it is assumed that the person paying has an income of more than Rs.400,000 per
annum the minimum amount above which income tax is applicable 5

KARACHI: Tax authorities have observed that the Pakistan Tax Administration Reform
Programme (TARP) has failed to produce desired results due to weak supervision of the
World Bank.

World Banks supervision was strong at the beginning of the project but overtime became weaker,
the Pakistani authorities noted in the project completion report on TARP released by the World Bank.

The World Bank supported a Tax Administration Reform Programme (TARP) on request of the Pakistan
government in 2004, which concluded December 2011.

Feedback and requests for clearances took longer, leading to many procurement delays, the report
said.

The authorities said 58 percent of expenditure occurred after restructuring; moreover, during the first
five-and-a-half year of the project, total expenditure was Rs2.1 billion ($30.8 million), while after
restructuring (18 months) it was Rs3.4 billion ($41.6m).

The authorities, however, rated the World Banks performance as highly satisfactory.

On the other hand, the World Bank, rated the borrower as unsatisfactory.

The quality at entry was affected by major shortcomings, such as insufficient identification of critical
risk factors and mitigation measures, inadequate technical support on key reform areas, and
misclassification of environmental category, the World Bank said.

The government of Pakistan, however, responded that overall rating of implementation performance
on Tax Administration Reform Programme was downgraded to moderately unsatisfactory on account of
non-implementation of 15 of the 22 priority measures agreed in April 2011.

In the report, the World Bank has criticised the government of Pakistan for inconsistence commitment
to tax administration reform agenda, which affected projects implementation.

During the initial years of TARP, the government took several steps to show its strong commitment to
the project, including: establishment of LTUs/MTUs; confirming the chairman FBR for three years and
renewing the terms of the members responsible for functional areas; granting FBR greater autonomy
under the oversight of the Cabinet Committee on Finance and Revenue (CCFR); and preparation of a
rationalisation plan for FBR staff, the World Bank said.

In line with the governments commitment to the reform agenda, the FBR Act 2007 was enacted.

The Pakistan government also provided relatively adequate counterpart funds until the restructuring,
the World Bank added.

However, the governments commitment to major tax policy reforms wavered over time, especially
during the boom years (2005-2008) when higher economic growth generated modest revenue gains,
despite limited results on its tax administration reform programme, it said.

The security of tenure of key and senior FBR officials of at least three years was a desirable
requirement to move the reform agenda forward. Yet, during the nearly seven years of project life,
four chairmen were appointed, with some of them coming from outside the income tax and customs
services which did not go down well with some of FBRs staff, it added.

World Bank Statement on Tax Administration Reforms in Pakistan

Contacts:
In Islamabad: Mariam Altaf (9251) 2279641
mariamaltaf@worldbank.org
In Washington: Erik Nora (202) 458 4735
enora@worldbank.org

Islamabad, February 22 The World Bank wishes to clarify recent news reports in
relation to the Government of Pakistans ongoing Tax Administration reform
program. The World Bank remains fully behind the Federal Bureau of Revenues
(FBR) strategy to develop a functionally integrated tax administration, which is
critical for a more efficient and transparent revenue administration system.
The FBR has demonstrated a strong commitment to increase the efficiency of tax
collection, to improve the level of service to the taxpayers, and to ensure a fairer
and more equitable application of tax laws, said Yusupha Crookes, World Bank
Country Director for Pakistan.
The World Bank is committed to continuing our support to the FBR for the
implementation of this ambitious reform strategy, primarily through the Tax
Administration Reform Project
(TARP).
He stressed that reforms of tax policy and administration are among the most
crucial economic reforms for Pakistan. Pakistans tax to GDP ratio at around 10
percent is among the lowest in the world, severely jeopardizing national goals of
reducing poverty and increasing and improving vital public services such as health
care, education, and infrastructure. Moreover, the structural weaknesses of the tax
system have heightened Pakistans vulnerability to economic shocks.

Article on Reforms
Pakistan continues to face deep fiscal crisis which cannot be resolved easily. Taxes are insufficient to meet Pakistan's
debt servicing and defense needs. The tax-to-GDP ratio does not enable Pakistan to counter inflation or improve
governance, deliver quality public services or improve human resource to reach a take-off stage for economic
development. To address these issues, GoP initiated a Tax Administration Reforms Program (TARP) in FBR in the
year 2005 to achieve objectives to include overall increase in the revenue collection for achieving fiscal targets;
increase in tax to GDP ratio through broadening of the tax base; strengthening audit and enforcement procedures
through professional capacity building of FBR officials; ensuring more equitable & transparent application of tax laws
through provision of high quality tax services. By completing TARP in 2011 FBR has substantially achieved the
desired objectives despite various obstacles in the existing operational environment. The successful completion of
TARP rests upon Government's firm resolve to reform FBR's Tax Administration
In June, 2000 when GoP appointed a Task Force on Reforming the Tax Administration. This Task Force presented its
report in May, 2001 which was shared with stakeholders to include trade bodies, accounting institutes, tax bar
associations and donor agencies for framing an implementation strategy in the light of viable recommendations from
the concerned stakeholders.
Subsequently, on the request from the GoP for input on FBR's reform effort, an IMF Mission visited Pakistan in
August, 2001 which carried out in-depth discussions with various stakeholders including Ministry of Finance,
Establishment Division, Federal Public Service Commission and trade bodies. The Mission presented its draft report
in August, 2001 which was condensed with other similar studies to extend recommendations for a tax system having
simpler laws and efficient procedures for promoting self-assessment, reducing physical controls and creating reliance
on audit & risk assessment.

Consequent to these reports and discussions with various opinion makers FBR prepared a tax reform strategy, which
was approved by GoP in November, 2001. The reform strategy had three main planks (a) policy reforms, (b)
administrative reforms and (c) organizational reforms. Policy reforms included simple laws, universal selfassessment, elimination of exemptions, less dependence on withholding taxes, effective dispute resolution
mechanism.Administrative reforms aimed at (I) transforming income tax organization on functional lines (ii) reengineering of manual processes of all taxes with the aim to reduce face to face contact between taxpayers and tax
collectors, increasing effectiveness of FBR and improve skills and integrity of the workforce and facilitation of
taxpayers. Organizational reforms also included re-organization of FBR on functional lines, reduction in number of
tiers and reduction in workforce.
With a view to supplement the level of skills in FBR for meeting the above said objectives, the Government in MarchApril, 2002 appointed professional Members from private sector for (i) Human Resource Management (HRM), (ii)
Information Management System (IMS), (iii) Audit, (iv) Facilitation and Taxpayers Education (FATE) and (v) Fiscal
Research & Statistics (FR&S). FBR prepared new recruitment policy (with greater emphasis on skills that match FBR
needs), incentive & merit based remuneration, promotion mechanism and extensive training.
In 2002, FBR received a Project Preparation Facility (PPF) of US $ 2.9 million from World Bank which was used for
hiring of international consultants, namely M/s Maxwell Stamp PLC, UK, and establishing Large Taxpayer Unit &
Model Sales Tax House at Karachi and a Medium Taxpayer Unit at Lahore. M/s. Maxwell Stamp prepared a
Comprehensive Medium and Long term Tax Reform Strategy including an implementation time-table defining the
precise reform steps and their time frame.
To bridge the financial gap between the PPF and the funding for main phase of Tax Administration Reform an amount
of US $ 6 million was also allocated out of World Bank funded "Public Sector Capacity Building Project" which was
later utilized for completion of Pilot Projects i.e. Large Taxpayers Unit at Lahore, 5-Medium Taxpayers Units at
Karachi, Peshawar, Rawalpindi, Quetta and Faisalabad and a Dispute Resolution Complex (DRC) & Model Customs
Collectorate at Karachi, capacity-building & training of FBR's employees, Taxpayers Education Programs, introduction
of Universal Self Assessment Scheme (USAS) and holding of Change Management Workshops. Part of this funding
was also utilized for appointment of M/s. NESPak Pakistan as Consultants for preparation of design layouts,
procurement support and supervision of works at sites for LTU Lahore, 5 MTUs at Karachi, Quetta, Peshawar,
Rawalpindi & Faisalabad, DRC and Care Pilot Project Karachi.
To achieve Reforms objectives, FBR established Large Taxpayer units (LTUs) and Regional Tax Offices (RTOs) to
test the re-organized structure of income tax & Sales Tax and various Taxpayers Education and Facilitation Centres
to improve voluntary compliance. Customs processes were also re-engineered by initiating Customs Administration
Reform (CARE) which aimed at minimizing the clearance time of goods and reducing the cost of doing business. Reengineered business processes were automated for e-filing of Income Tax returns and Goods Declarations, followed
by establishment of an FBR website for information dissemination and a helpline for taxpayers.
Executive Committee of the National Economic Council (ECNEC) in its meeting held on 25.02.2005 approved the
main phase of TARP with a capital cost of Rs. 9,501 million. Completion period of this main phase of TARP was five
years starting from 01.01.2005. During the World Bank Mid-Term Review Mission in August-September 2007, the
Bank reviewed the implementation progress of this project in detail and on the basis of slow utilization of funds mainly
due to problems in development of Information Technology Systems during first two and half years, recommended
restructuring of TARP budget for remaining life of the project on the basis of anticipated expenditures. Accordingly, a
detailed exercise was undertaken on the basis of which a revised PC-I with reduced capital cost of Rs. 6,473 millions

was prepared and submitted to the competent forum i.e. CDWP/ECNEC. Revised PC-I was approved by the CDWP
on 30.04.2009 and ECNEC on 20.08.2009.
TARP has so far gained Stakeholders respect through improved performance and creating business friendly
environment. Imbuing professionalism, integrity & responsiveness, and introduction of transparent ssimplified
procedures have reduced the cost of doing business. Moving towards optimum use of automation and IT,
professional training and better working conditions have further infused confidence among tax collectors who intend
to strive hard for increased taxpayers facilitation in the areas of Income Tax and Customs.
TARP has been closed by 31.12.2011 at a cost of Rs. 5,528 million against revised project cost of Rs. 6,472.817
million. All the physical progress has been achieved. i.e. (a) establishment of 57 RTOs, MCCs, TFCs & Transit
accommodations, (b) four soft wares i.e., Integrated Tax Management System (ITMS), Human resource Information
System (HRIS), SAP Materials Management (MM) & Financial (FI) Modules, & Data Warehouse software have been
completed and are functional (c) 11,445 machinery & equipment as per PC-I target were procured and distributed.
Tax revenue of Rs. 1,558 billion has been collected during 2010-11 against PC-I set target of Rs. 1,350 billion. TARP
PMU, during this process, through professional training and hands-on exposure, has gained sufficient professional
capability to utilize the same for achieving any future project development objectives in terms of project planning,
procurement of works, Goods and services and subsequent monitoring & evaluation.
FBR has successfully achieved the objectives of reforms. The last five years revenue collection Flow Chart reflects
the greater revenue collection as follows;