South Asian Tax Summit, 2008 FBR’s REFORMS PROCESS

Presentation by USMAN KHALID MIRZA

Member Direct TaxesApril 16,2008

Order of Presentation• Vision, Mission & Values

• The Strengths of FBR• Tax Reform Initiatives: A Chronological Review

• Recommendations for TARP

• Objectives of the TARP

• Structure of Field Offices prior to Reform

• What had to be done under TARP

• Current Status

Vision, Mission &Values Statement• VISION

To be a modern, progressive, effective and credible organization for optimizing revenue by providing

quality service and promoting compliance with tax and related laws

• MISSIONEnhance the capability of the tax system to collect taxes

through application of modern techniques, providing taxpayer assistance and by creating a motivated, dedicated and satisfied, professional work force

• VALUESIntegrity – Professionalism – Teamwork – Courtesy –

Fairness – Transparency - Responsiveness

Organizational Structure FBRCCFR

Secretary General/ Chairman

PRAL

Support Members Functional Members

Direct Taxes

Sales Tax & Federal Excise

Customs

Tax Policy & Reform

Legal

Administration and Coordination

HRM

Audit

Fiscal Research

Information Management System

Facilitation & Taxpayers Education

Line Members

Note: Various DG Positions are also included in the top Management

Strengths of FBR

• A Critical State Institution Collecting nearly 90% of tax revenue of the State Contribution towards federal and provincial total revenue (tax

and non-tax) is around 65% Revenue collected is sufficient to meet 75% to 80% of

Government expenditure needs Generation of resources for smooth economic management of

Federal as well as Provincial and Local Governments Keeping the economy vibrant Monitor Fiscal Policy through tax incentives to encourage flow

of FDI

Tax Reform Initiatives in Chronological Order

• May 2001: Syed Shahid Hussain’s Committee Report

• Aug 2001: IMF Mission Report• Nov 2001: The Strategy Document on Tax Reform• Nov 2001: Presentation to the President of

Pakistan• Dec 2001: Approval of the Strategy Document• Feb 2002: Establishment of Supervisory Council• Jul 2002: Establishment of Cabinet Committee

for Federal Revenues (CCFR)

Recommendations• CBR to have greater autonomy within the Government

structure• Supervisory Council (now CCFR) to monitor & review

CBR performance• Reorganize CBR and its field offices on functional lines• Merger of Income Tax, Sales Tax & Excise functions – a

step towards co-location and integration of internal taxes• Separate handling of Large Taxpayers• Improve HRM strategy with respect to induction,

promotion, training and compensation of Employees• Improve physical infrastructure and introduce One-

window operation• Greater stress on taxpayers’ education, service and

facilitation

Need For Reforms• Stagnant Tax Revenue

• Narrow Tax Base

• Primitive and antiquated tax administration (cylindrical instead of functional)

• Complexity of tax laws and arbitrariness in their application

• Relationship between tax payer and tax collector largely adversarial

Objectives of the Reforms • Mobilize resources as per budgetary projections

for improved economic management• Widen taxpayers base• Streamline tax and tariff rates• Improve voluntary compliance and strive to

minimize adversarial relationship between taxpayers and tax collectors through: Simplification of tax laws and procedures Taxpayer friendly environment Making the system more transparent and efficient Honest Tax Administration

Structure of Field Offices Prior to Reforms

• Direct Taxes (Income Tax Etc.) 5 Regional Commissioners with

34 Zonal Commissioners

• Sales Tax and Federal Excise 6 Collectorates

• Customs 10 Collectorates

• Composite Collectorates 3 Collectorates

What had to be done under TARP

• Policy Reforms Simplification of laws Universal self assessment across all taxes

coupled with effective selectivity and risk based audit of taxpayers

No immunities, fixed taxes and amnesties Minimize dependence on withholding taxes Elimination of exemptions Tax Rates and Tariff reduction and rationalization Effective Dispute Resolution Mechanism

What had to be done under TARP• Administrative Reforms

Re-structuring the top structure of FBR Transform HQ and field offices on functional lines Re-organize and upgrade infrastructure of field

offices (for domestic taxes – Federal excise Duty, Income Tax and Sales Tax) i.e.,-Large Taxpayer Units (LTUs) to deal with

major revenue spinner casesRegional Tax Offices (RTOs) in major cities to

deal with all other taxpayersMedium Taxpayer Units (MTUs) as pilot

projects to test the functional working of Income Tax

Taxpayers’ Facilitation Centers (TFCs) in small towns and cities

What had to be done under TARP• Administrative Reforms - continued

Re-organize and upgrade infrastructure of field offices (for international taxes – Import Taxes) i.e.,- Model Customs Collectorates (MCCs) Trade and Passenger Facilitation Centers (TFCs)

at international borders and dry ports Extensive Business Processes Re-engineering (BPR) Improved Human Resource Management Concept of e-government Automation and optimum use of latest IT Technology Restructuring and training of Human Resources Facilitation, service and tax education

• Simplification of Tax LawsNew Income Tax Law – Income Tax Ordinance,

2001 and Income Tax Rules, 2002 introducedNew Federal Excise Law – Federal Excise Act,

2005 and Federal Excise Rules 2005 introducedCustoms and Sales Tax Law and Rules updated

and improvedIntroduction of GST in VAT Mode to minimize

cascadingZero-rating of five major export oriented sectors

to address the problems of processing of sales tax refund claims and settlements and governance

Current Status Of Policy Reforms

• Universal Self-AssessmentSuccessfully implemented in Income Tax and Federal

ExciseFurther streamlined in Sales TaxPartly implemented in Customs

• Effective Risk Based Taxpayers AuditAll corporate and non-corporate taxpayers (income

above certain threshold) are subject to Desk Audit and if warranted by the facts followed by a detailed audit

• Elimination of ExemptionsTo a large extent exemptions have been eliminated

and is an on-going process

Current Status Of Policy Reforms

• Tax Rates reduction and rationalization – Income Tax Uniform Corporate tax rate of 35% for Public,

Private and Banking Companies (From 35%, 43% and 47% respectively)

Introduction of low tax rate of 20% for small companies

Personal tax rates for salaried individuals reduced and rationalized to 0.25% to 20% from 3.5% to 30%

Non-corporate tax rates reduced and rationalized to 0.50% to 25% from 7.5% to 35%

Current Status Of Policy Reforms

• Tax Rates reduction and rationalization – Income Tax Introduction of fixed/final tax of 5% and 10% on

rental and interest income Withholding tax rates rationalized Gradual enhancement of tax-free threshold to Rs.

150,000 for salaried taxpayers and Rs. 100,000 for non-corporate taxpayers

Current Status Of Policy Reforms

• Tax Rates reduction and rationalization – Sales TaxAdditional Sales Tax of 3% on sales made

to un-registered person withdrawnThreshold of turnover subject to Sales Tax

raised from Rs.0.5 million to Rs.5.0 millionAberrations like turnover scheme and

enlisting scheme abolished

Current Status Of Policy Reforms

• Tariff reduction and rationalization – Customs Maximum standard rate reduced to 25% Number of slabs reduced to five –0% 5%, 10%,

20%, 25% Clear distinction between primary and secondary

raw materials, semi-finished and finished goods Special incentives for capital goods including

plant, machinery, and equipment – reduced rate of duty of 5%

Tariff protection to locally produced goods

Current Status Of Policy Reforms

• Dispute Resolution Mechanism – All Taxes & Duties Withdrawal of all frivolous appeals by the department

before Tribunals, High Court and Supreme Court of Pakistan

All first level appeals (within the department) disposed off within two years (80000 appeals). Now only (3000 appeals) are pending

At the Apex Court level special benches were constituted at the request of FBR and a large number of appeals on legal issues decided (1650 out of 1950) and the remaining are under process (300)

Current Status Of Policy Reforms

• Dispute Resolution Mechanism – All Taxes & Duties At the High Court level the cases are being grouped by

issues and taken up for hearing for speedy disposal of appeals

Alternative Dispute Resolution Mechanism - Introduced A unique system for speedy disposal of disputes between the

taxpayers and tax collectors in an un-conventional manner; By honorary professionals and related business experts Without any cost; and Without foregoing the right of regular appeal process

Current Status Of Policy Reforms

• Others Gradual phasing-out of Federal Excise Duty on

goods Bringing services into tax net (Sales Tax) through

Excise Duty, due to constitutional constraint

Current Status Of Policy Reforms

Current Status Of Administrative Reforms

• Functional MembersFive Members from Private Sector engaged

specializing in their respective fields i.e. Audit, Facilitation and Tax Education, Fiscal Research and Statistics, Human Resource Management and Information Management System

• Re-structuring the Top Structure of FBRFirst Phase has been completed and Second Phase

is to be completed by December 2009

Current Status Of Administrative Reforms

• Transformation On Functional Lines FBR (HQ) is working on functional lines i.e. Line Members

of Custom, Income Tax and Sales Tax/Federal Excise and Support Function Members of Audit, IMS, FRS, FATE, HRM and Legal since 2001

Income Tax department has also started working on functional lines since July 2006

Audit & Inspection, Training, Intelligence, and Valuation Directorates have also started working on functional lines

Sales Tax department is also working on functional lines

Current Status Of IT Initiatives• Pakistan Customs Computerized System (PaCCS)

After Extensive Business Process Re-engineering, the pilot project of (PaCCS) has been launched

PaCCS is a fully automated (state of the art) system whereby WEB based electronic goods declaration is processed and cleared without any human interface

Average clearance time reduced to four hours from five days for imports and one hour for exports

PaCCS at present is handling clearance of imported containerized full cargo load only

PaCCS fully operational and functioning smoothly at KICT, the pilot site of MCC Karachi

Current Status Of IT Initiatives• Pakistan Customs Computerized System (PaCCS)

PaCCS rolled out to PICT & QICT as additional pilot sites

Customs automation and business process re-engineering reforms in the rest of the country to be completed by December 2007. Technical Business Requirements and bidding documents for acquiring automated system are being prepared

In the interim period, homegrown automated system by the name of ‘One-Customs’ has been introduced at major customs stations pending PACCS full implementation to improve the present manual system of clearance

Current Status Of IT Initiatives• Tax Management System (TMS) – A home grown

system Deployed in all LTUs and RTOs in place for efficiency

and transparency

• Sales Tax Management System (STMS) – A home grown system Deployed in all LTUs and RTOs in place for efficiency

and transparency

• The two systems – TMS and STMS will eventually be taken over by Integrated Tax Management System (ITMS) to ensure international standards

Current Status Of IT Initiatives• Integrated Tax Management System (ITMS)

Bidding documents under two-stage bidding procedure forwarded to World Bank for their final approval

It is expected that the invitation to bid will be floated before the end of the calendar year

The final delivery of the ITMS is expected by June 2009

• e-filing of Returns/W.Statements (Income Tax, Sales Tax ) has been successfully launched

• Computerized System of Tax Payment Receipts (CPR) developed in collaboration with NBP and SBP endorsed by MOF, AGPR and CGA and implemented

Current Status Of IT Initiatives

• Other projects in hand Data Warehouse Human Resource Information System Inventory Management System Wide Area Net Work (WAN) – Independent for

FBR Procurement of Hardware

Outcome of Reforms

• Gaining Stakeholders’ Respect• Substantial reduction of corruption - Transparency

International Report• Improved performance – Revenue targets not only

achieved but surpassed• Creating business friendly environment• Introducing professionalism, integrity, teamwork,

courtesy, responsiveness, transparency and fairness• Facilitating and providing service to the taxpayers• Reducing the cost of doing business• Adversarial relations to mutual trust and confidence

Outcome of Reforms

• Infused confidence among taxpayers through regular facilitation and tax education which has bridged the gap between taxpayers and tax collectors

• Creation of an enabling environment for various stakeholders which is: Promoting Economic Activity Encouraging Investment Spreading Out Commercial Activities Expanding Exports

Outcome Of ReformsIn Terms Of Change In Tax Mix

Direct Taxes %

Sales Tax %

Customs %

Excise

%

Indirect Taxes

%

1990-91 18.0 15.4 45.7 20.9 82.0

1995-96 29.2 18.6 33.2 19.1 70.8

1997-98 35.1 18.4 25.4 21.1 64.9

99-2000 2.5 33.6 27.8 16.1 67.5

2000-01 31.8 39.1 16.6 12.5 68.2

2001-02 35.3 41.2 11.8 11.7 64.7

2002-03 32.9 42.3 15.0 9.8 67.1

2003-04 31.7 42.1 17.5 8.7 68.3

2004-05 30.9 40.6 19.5 8.9 69.0

2005-06 31.0 41.0 19.5 8.5 69.0

2006-07 39.4 36.5 15.6 8.5 60.6

Outcome Of ReformsIn Revenue Collection

(Rs. Billion)

YEARS

Budget Estimates

Revised Estimates

Collection

Achievement (%)

B.E. R.E

1990-91 123.3 120.6 110.5 89.6 91.6

1991-92 149.5 145.0 139.8 93.5 97.8

1992-93 174.8 160.0 153.2 87.6 95.8

1993-94 190.7 180.3 172.6 90.5 95.7

1994-95 259.9 225.0 226.6 87.2 100.7

1995-96 270.5 264.8 268.0 99.1 101.2

1996-97 328.0 286.0 282.1 86.0 98.6

1997-98 324.0 297.6 293.6 90.6 98.7

1998-99 354.0 308.0 308.5 87.1 100.2

1999-00 362.5 351.7 347.1 95.8 98.7

2000-01 430.0 406.5 392.3 91.2 96.5

2001-02 457.7 414.2 404.1 88.3 97.6

2002-03 458.9 No Revision 460.2 100.3 NA

2003-04 510.0 No Revision 518.00 101.7 NA

2004-05 580.0 590.0 591.085 100.2 NA

2005-06 2006-07

690.0 835.0

690.0 835.0

712.6 847.2

102.1 101.5

NA NA

NA means Not Applicable

Broadening of Tax Base Number of Taxpayers filing the returns up to December, 2007 is 2.04

million.

FBR has already taken some far reaching measurers to expand the tax base, under which number of taxpayers and revenue are continuously increasing such as :

• Universal Self Assessment Scheme • Reduction in tax rates• Enforcement of filing of statements by exporters, importers,

contractors, suppliers & salaried class

Taxpayers Population

Conducting sectoral studies for the purpose of detecting leakages and for tax gap analysis etc.

Providing incentives / benefits to those who duly pay taxes and file returns to encourage filling.

Strategy

Thank You