$3 million World Bank-aided revenue mobilisation project planned

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The government is planning to launch a new revenue mobilisation project for the Federal Board of Revenue (FBR) with the World Bank (WB) technical assistance of $3 million for continuation of tax reforms to raise revenue collection by improving effectiveness, accountability and transparency of tax machinery through institutional changes in the FBR.

Sources told Business Recorder here on Thursday that one-year Revenue Mobilisation Project is expected to be launched in March 2012 which would be concluded in March 2013.

The WB-funded Tax Administration Reform Project (TARP) was closed on December 31, 2011 and Revenue Mobilisation Project would be a new project for the FBR for continuation of reforms in the tax machinery.The new project aims at improving Tax Policy and revenue forecasting; strengthening the core functions of tax administration to support a performance- based management and enhancing accountability and transparency of tax administration.

Other objectives of the project included moving towards fully Integrated Tax Management System (ITMS) to support a modem performance -based and co-ordinated tax administration and ensure the sustainability of reforms already made under Tax Administration Reform Project (TARP).Sources said that FBR's Board-in-Council headed by FBR Chairman Mumtaz Haider Rizvi has decided to compile a proposed list of activities under Project Preparation Facility (PPF) of US $3 million offered by the World Bank for launching of Revenue Mobilisation Project.

The FBR will present the draft concept paper and activities to be done under the PPF to Abdul Hafiz Sheikh Advisor to Prime Minister on Finance on February 21, 2012 for execution of the Revenue Mobilisation Project from March 2012.Sources said that tax reforms are continuous and complex processes.

After global economic and financial crisis that changed the role of state necessitated review of the economic structures, the economies of the world are undergoing consequential changes in their respective economic paradigms.

Taxes are major determinants of the economic growth in view of their impact on savings, investments, competitiveness, entrepreneurship and productivity and financial stability by keeping tax generated misallocation within its bounds.

Therefore, the tax policy needs to be factored in the overall growth strategy of the country that evolves continuously so that tax system operates in conformity with economic policy objectives.Such elements bring in broad agreement on the need for tax reforms and also prompt the Government of Pakistan that has no choice but to support the tax reforms effort for achievement of the ultimate objectives thereof.

Hence, it is imperative that the process and themes of tax reform as encapsulated in the broad tax initiatives of tax agencies around the world improve both the tax policy and tax administration under the modern concept of establishing a tax system that helps generate appropriate level of tax revenue by increasing the effectiveness in achieving the most desired goals.

Domestic revenue mobilisation is essential for curtailing Pakistan's rising fiscal deficit.

To ensure increase in tax collection a continuous tax reform effort is needed.Sources said that the proposed project is being conceived by keeping in mind such and the other important aspects that require the continuity of tax reform in a developing country like Pakistan.

Accordingly, a Revenue Mobilisation Program with the World Bank is being planned keeping in mind the above and the other important aspects that require the continuity of tax reform in a developing country like Pakistan.

The broad objectives of the program are to raise tax revenue by improving the effectiveness, accountability and transparency of tax administration through institutional changes.The previous Tax Administrative Reforms Program (TARP) that stood completed in December 2011 has been reviewed.

A three members committee comprising of three members of FBR has reported about certain tasks that could not be completed under the said program, particularly the customs components, Training, Physical and ICT infrastructure, Data Ware House and major end-to-end integrated tax management system that is required after merger of Inland revenue.

Even otherwise those areas where objectives of tax reforms were achieved, the process needs to be continued to ensure the sustainability of reforms and to realise the broad & major expected outcomes such as improvement in the tax to GDP ratio and establishment of an effective enforcement environment in country like Pakistan where basic tax culture is still wanting.

It is expected that a special meeting of the Concept Clearance Committee is held for approval of the concept of the paper, sources explained.In order to achieve the stated tax reform objectives, World Bank has agreed in principle to offer a project preparation facility advance of US $3 million for financing the preparation and pre implementation activities which will prepare the ground work for a new project.Sources said that on the government's request, a World Bank mission for the joint elaboration of the Project Preparation Facility (PPF) on Revenue Mobilisation visited Pakistan during January 24- 31, 2012.

The PPF will assist the Government of Pakistan (GOP)'s Authorities to finance expenses related to the preparation of a proposed Revenue Mobilisation Project.

The Mission visited FBR central and field offices in Islamabad and Lahore.The WB's mission's central objective was to jointly prepare with the FBR and Ministry of Finance's authorities the content of the PPF.

More in particular, the mission intended to define the preliminary goals and components of the loan, the loan-related activities to be included in the PPF and their timeframe, the implementation arrangements, the counterpart team and remaining features of the PPF.

Based on information received from FBR, Federal Tax Ombudsman (FTO) and Sindh Revenue Board, the WB mission had finalised the findings for execution of the Revenue Mobilisation Project.Sources said that overall objective of the project is to consolidate the revenue mobilisation reform initiated under the support of the Tax Administration Reform Project (TARP).

Such reform aimed to build a modern tax system and an effective tax administration that facilitates and improves tax compliance with tax laws.

The TARP project closed last December 31, 2011.

Under a performance-based strategic framework, FBR would like to use the new project to raise tax revenue by improving the effectiveness, accountability and transparency of tax administration through institutional changes that favour a performance-based management.Sources said that the PPF should give detailed attention to joint project design with the authorities regarding the project's main features, main components, key indicators and results (outcomes linked to disbursement) expected to be achieved.

At present, the preliminary components of the reform program to be included in the PPF and their justification are next.Sources said that as per WB the improvement in tax policy and revenue forecasting is also one of the objectives of the project.

Including a tax policy component is an important feature of the new proposed project.

Despite TARP, the tax to GDP ratio declined to single digits in fiscal 2010-2011.

In addition, forecasting of tax (and FBR) revenues have suffered major and increasing deviations from their target, thus contributing to higher fiscal deficits than budgeted.

Continuous changes in the tax regime, the persistence of significant number of remaining tax exemptions and zero-taxes and failure to introduce a fully-fledged VAT mainly explain such outcome.

Lessons from tax reforms world-wide also suggest that the impact of tax administration on tax collection is small and requires several years of sustained reform effort to materialise.

Thus, if a significant effort is expected in raising revenue, it cannot rely exclusively on tax administration measures, but on a comprehensive effort at eliminating tax exemptions.

Hence, a dedicated tax policy component-besides those on tax administration is required.

In so doing, it should aim to strengthen the unit in FBR (and/or Finance) in charge for revenue forecasting, linked to strategic planning office with performance indicators geared to measure its capacity.

And as additional features, this component will also support provincial revenue boards in their new function in collecting the GST on services and in FBR efforts to avoid competitive taxation among provincial governments through facilitating harmonisation of taxes.Sources said that many FBR priority administrative measures supported under TARP require consolidation under a redesigned and performance-oriented FBR Tax Administration Strategy Reform program.

Such Strategy should contain the new vision for the institution, integrate all key functional areas, help define KPEs and enjoy full internal ownership and be publicly known.

The activities selected include not only the design of the strategic areas where the project achieved important progress, like registration, refunds and e-filing; areas where important steps were being undertaken, like auditing, appeals; or areas that would require a self-contained reform program, but still are important for consolidating reform in inland revenues, like Customs.

Whereas imports represent about 17 percent of GDP, Customs collects about 40 percent of total FBR tax revenue.

And its impact is critical on trade facilitation, security and logistic operations.

Hence, the PPF has identified activities aimed to consolidate the introduction of centralised risk-based auditing, one of the weakest areas under TARP, sectoral manuals on auditing, and introduction of joint auditing between Customs and Inland revenues, especially focused on large taxpayers.Sources said that the Revenue Mobilisation Project cannot move ahead unless a solid Monitoring and Evaluation (M&E) system.

FBR lacks an adequate M&E.

It already has a broad set of key performance indicators, but it suffers from many deficiencies: they are too numerous, targets are set vertically and without consultation to LTUs and RTOs (often quite unrealistic), their tracking is done manually through interaction of several non-interconnected IT systems, and have very little reliability and internal use.

In sum, KPEs are users' unfriendly and barely a management tool.This component aims at supporting their review and ensuing design of a proper M&E.

And furthermore, to improve external accountability, it also aims at supporting FTO in its role of correcting maladministration by FTO.

In this latest regard, activities proposed aim at enhance collaboration and accountability, especially in appeals, an area where FTO has played a very positive "check and balance" role.Sources said that the FBR has to use the Integrated Tax Management System (ITMS) to support a modern and performance-based administration.

There can be no effective M&E system without a supporting IT system.

Perhaps one of the most important pending actions under TARP is the design and rolling out of the Integrated Tax Management Systems (ITMS).

FBR authorities are fully aware of this.

A recent FBR users' survey on PRAL systems developed internally found that despite the significant investment in hardware and software, the present systems are often not used, and staff passively resist them.

Senior managers at LTUs also claim that dedicated managerial reports are absent and training provided by PRAL is insufficient.

And as a result, no less than twenty non-conversant software applications persist in FBR, which explains the difficulties for timely consolidating managerial reporting on the KPEs.

The PPF aims at supporting the strategic redefinition of the Core Business Domain Team, a central activity proposed by PRAL and FBR official, new users' surveys and training (including the one focused on senior management), the WB said.Sources said that the main counterpart and beneficiary of the loan proceedings is the FBR.

However, the loan has identified a set of activities that would benefit the Ministry of Finance, the FTO and the Sindh Revenue Board.Lessons from TARP and reviews strongly lead to the need for some intermediary outputs, preferably quantifiable, to allow proper decision on whether FBR is ready to proceeds toward a Revenue Mobilisation Project.

A possible list of outputs follows: (1) dissemination of FBR Strategic Reform Program; (ii) reduction in the gap between FBR (gross or net) revenue collection as a percentage of tax revenue targets (income and sales tax); (iii) increase in FBR total tax collection./GDP (annual); (iv) establishment of the M&E unit within the strategic planning office, and approval and dissemination of the reviewed KPEs; (v) improved perception by taxpayers based on FBR survey results; (vi) decrease in stop-filers as percentage of registered active taxpayers; (vii) publication of an annex on tax expenditure in the 2012/13 budget including further reduction in the number of tax exemptions and their expected fiscal impact; (viii) increase in the number of risk-based tax audits; (ix) increased number of business registered taxpayers; and (x) completion of the review of the ITMS and certified training of senior management.

The quantifiable outputs should be in line with FBR's own targets and PPF priority activities, WB maintained.Sources said that the government agrees to create an Implementation Unit.

This Unit will be composed by specifically appointed members to manage and co-ordinate project preparation.

Additional resources for financial management and procurement functions will also be hired from under this component.

The mission indicated that prompt appointment of a dedicated implementation team will be a critical element of the preparation of the Revenue Mobilisation project.Sources said that the financial management arrangements for the project are under discussion.

A focal person needs to be identified for the PPF which can either be from the existing staff or a dedicated person hired as part of the implementation unit.

For FBR to receive funds in a designated account, it is essential that a PC-I be in place at the earliest.It was discussed that the procurements identified shall be formulated in the procurement plan.

The Bank's procurement procedures shall be applicable to all procurements.

The FBR shall identify a procurement focal point also responsible for contract management.

The procurement arrangements shall be agreed subsequently.Sources said that the WB mission informed that once the bank receives the Letter of Request for the PPF advance through EAD, the next steps until approval are: (a) preparation of the PPF memorandum for management approval; (b) the elaboration (and negotiation) of the PPF Agreement; (c) the Country Director's approval; and (d) the countersigning of the PPF Agreement by an authorised representative of the country.

This process should last about 4-6 weeks, the WB added.

Courtesy: Business Recorder

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