RECORDER REPORT

ISLAMABAD: Finance Minister Ishaq Dar has constituted a high-powered committee to supervise implementation of the combined recommendations of Federal Board of Revenue (FBR) and Tax Reforms Commission (TRC).

According to a notification by the FBR, the finance minister has constituted a high-powered committee to implement and monitor the proposed recommendations of “Tax Reforms Commission”. The committee would comprise Haroon Akhtar Khan, Special Advisor to Prime Minister on Revenue (Chairman); Nisar Muhammad, Chairman, FBR would be Member; Syed Masoud Naqvi CA (Chairman TRC Committee) Member; Ashfaq Tola, FCA (Member TRC Committee) Member; Abid H Shaban, Advocate (Member TRC Committee) Member; Dr Muhammad Irshad, Member (IR-Operations) Member; Nasir Masroor Ahmad, Member (Customs) Member and Rehmatullah Khan Wazir Member (IR-Policy) would be Member/Secretary of the high powered Committee.

The ToRs of the committee will be to supervise implementation of the combined recommendations of FBR and TRC subject to the approval of Federal Government and constitute sub-committee(s) to supervise the implementation of the recommendations approved by the Federal Government.

The TRC final report has recommended devising measures to enhance the Tax Payers’ cost of evasion and enhance the penalties of UGE [Underground economy] activities. The rationalization of differential withholding taxes for compliant and non-compliant taxpayers and the mechanism to identify the non-compliant has to be developed.

It recommended reforming the entire tax collection system preventing the tax dodgers from going underground.

Strengthen Tax Administration to increase potential of discovering non-compliant taxpayers by field survey, better data-mining and analytics, it said.

It recommended that all income irrespective of source has to be tapped and taxed.

Need for declaration of Assets including Bank Accounts held by Resident Pakistanis out of Pakistan and undisclosed income outside Pakistan under a special law and regularize declared assets by payment of tax at specified rate [The Undisclosed Foreign Income and Assets Act], it said.

It stated that in case of non-declaration of assets outside Pakistan, the assets of equivalent value in Pakistan should be forfeited under the provisions of the law along with other severe penalties.

A high-level commission/committee has to be set up to develop a specific action plan defining KPIs and time frame to reduce the level of informal economy, it said.

It recommended that FBR should put in place effective law to the property investments and speculations. Rules for the sections 113A and 113 B of Income Tax Ordinance 2001 should be announced in the Finance Bill 2015 or Finance Bill 2016.

It is stated that change the attitude of tax collectors there has to be an urgent change in culture at the FBR.

Promote the idea that paying taxes is an honour, whereas evading taxes is disgrace, it said.

It recommended that the relationship culture between FBR and Tax Payers has to be customer-based rather than Adversarial. Emphasis has to be on Tax Payers’ Facilitation and incentivization for honesty and integrity for both Tax Payers and FBR.

A separate committee should be constituted with a mandate to simplify Income Tax Ordinance, Sales Tax & Federal Excise Duty to ease the tax compliance. A period of six months should be given for this task considering the urgency, it said.

It is stated that all tax laws should be translated in URDU language and moving forward all FBR circulars, instructions should be released both in Urdu and English.

It recommended that a separate committee should be formed to review and simplify tax return forms with a mandate to reduce the level for compliance effort by 50% in two years. Three months should be given to the committee to complete its task. An ethics line, tax payer grievance redressal system needs to be setup, it said.

It is stated that make all financial transactions transparent, eliminate money power and corrupt administrative structure.

Overhaul the structure of FBR and build its’ capacity with HR specifically trained for Tax and related services. In medium to long term, there could be a separate service cadre for FBR, it said.

It recommended that other than LTU and jurisdiction of corporate sector, for next five years FBR field formation should operate on territorial jurisdiction basis .LTU and corporate sector should operate on truly specialized functional basis. The results could be reviewed over a period of 5 years.

For next five years, deploy 50 percent of the FBR IRS staff assigned to territorial jurisdiction for broadening the tax base with specified KPIs and timeline, it said.

It recommended that there should be separate and effective policy making forum. The FBR should only be a Revenue Collection and policy implementation body.

It is stated that The policy forum should be an independent body and its Board of Governance be comprised of Chairman FBR, nominees of parliament, economists, other professionals which should develop an effective and dynamic strategy and monitor implementation of the tax policy. The forum should on a periodic basis report to Ministry of Finance and Standing Committee of Parliament on implementation of the Strategy.

It recommended that two biggest issues in FBR that have been communicated by different stake holders are skill sets of FBR personnel and FBR IT System. TRC agrees with the above.

The IT system of the FBR and PRAL including e-filing platform IRIS should be independently audited. TRC feels that the current IT system is a big drag on FBR and a significant cause of difficulties being faced by tax payers in tax compliance, it said.

It recommended that FBR has to massively invest in IT and the current IT backbone of FBR provided by PRAL should be put under an independent board and run by IT specialists. In case this does not substantially improve the performance of PRAL then its functions may be outsourced in the medium to long term. TRC envisions this as mission critical for the new FBR.

In medium to long term, there is a need to set up National Tax Agency (NTA) to collect all taxes (Federal, Provincial and Local) and the robust IT technology should support the resource allocations to federation, provinces and Local Bodies, it said.

It is stated to create severe deterrence for non-disclosure, non-compliance and evasion of Tax.

Establish a stronger institutional set up consisting both of FBR officials and those from private sector and professionals for monitoring implementation of the Reform Agenda as all efforts for Tax Reforms have been a failure in achieving overall objectives of these reforms due to unsuccessful implementation. A tax reform implementation committee should be constituted, it said.

It recommended that the entire appeal vertical (dispute resolution vertical) should be made independent from FBR and put under Ministry of law. The growing perception of un-warranted FBR influence on first appeal stage brow beating has recently stirred very serious reaction from the tax professionals and the business community. There is a need to change this perception. FBR Chairman and Members have however categorically denied any such influence which TRC disputes as the evidence is to the contrary.

The burden on compliant tax payer for withholding of taxes is enormous and these are not compensated. The FBR should simplify the tax withholding regime and compensate the withholding agents at least @0.1% of the tax withheld, it said.

It is stated that there is a need to change the present system of Sales Tax which is not only cumbersome and difficult to comply but is full of leakages and abuse. Single stage, non-adjustable Sales Tax (with provision to cater to special needs of exporters) is a strong way forward. But more time is needed to make definite recommendation to implement it. TRC recommends more study till end June 2016. In the interim, some changes in Sales Tax Rules and Law need to be implemented which have been recommended in the report.

The cost and time of tax compliance has to be drastically reduced. This has to be achieved through better design of tax forms, changes in tax laws, optimize the information required to be filled in the forms, better using of data and IT, it said.

It recommended that a specialized but an independent unit should be created to conduct audit. This unit should have professionals who have been trained in audit skills, relevant tax laws and accounting standards. Desk audit of taxpayers should continue to be done with FBR field structure. The new structure needs further articulation and by June 2016, the dialogue with stakeholders should be completed and firm recommendations for new audit structure, processes etc. will be made but TRC considers that setting up of a separate unit for audit be announced in the budget and necessary enabling provisions are included in the Finance Bill.

Section 122 (5A) of the Income Tax Ordinance 2001 which empowers the Commissioner to exercise revisionary jurisdiction is at present being massively misused and there are serious complaints about this misuse. The section needs to be re-worded so that it is only invoked when there is erroneous application of law. This power should only be exercised by the Commissioner without any power to delegate to other officers. This change should be made vide Finance Act 2016, it said.

It recommended that with Provincial Revenue Board having been constituted, the provinces should seriously consider assigning the task of collection of agriculture taxes to these boards. Collection of labour welfare taxes should similarly be assigned to the Provincial Boards.

To encourage exports and discourage imports various fiscal measures to be taken. In Finance Bill, rate of the deduction on consumer goods as defined under Customs Act 1969 by commercial importers should be increased by 1 percent.

The current tax structure with heavier reliance on WHT (which constitutes 70% of total direct taxes) may pose a serious challenge in reaching the threshold of 15% tax to GDP ratio. The tax mix has to change with very serious efforts on broadening and deepening the tax base.

Field units of FBR hide behind the façade of withholding taxes to show overall tax collection of their unit. This misrepresents the actual effort of the field units in tax collections. TRC recommends that tax withholding credit should be centralized and field units should only be given credit for tax collected through their efforts. FBR may consider some proportionate allocation to field units to account for their efforts in the withholding tax while evaluating their performance, it recommended.

Non-issuance of refunds and delayed issuance of refunds has seriously eroded the confidence of tax payers in FBR and this non-issuance and delayed issuance of refunds has impacted cash flow of businesses and slowed down the economy. Issuance of refunds has also resulted in significant corruption at FBR field offices and beyond. The FBR should ensure refunds are determined and issued within the timelines given in section 170 of the Income Tax Ordinance 2001, section 10 of Sales Tax Act 1990 and periods mentioned in the Customs Law and FED. Serious accountability should be instituted for officers breaching these timelines, it said.

It recommended that TRC has been receiving conflicting data from FBR and at times the integrity of the data so received is questionable. The quantum of determined refunds outstanding and of undetermined refunds is a highly disputed figure. TRC strongly recommends that an independent audit of FBR need to be conducted so that the true state of financial affairs of FBR gets crystallized and the nation knows the correct liability of refunds payable.

TRC strongly recommends that determined refunds which according to one estimate range between Rs.200 billion to Rs 300 billion needs to be reflected as a liability and not as revenue. The figures of refunds outstanding (determined and those claimed) have to be reported by FBR field unit wise every year. The nation has a right to know about this liability, it said.

Serious Unethical practices have recently developed in issuance of RPOs in Sales Tax, even in LTUs. Serious notice of this unacceptable phenomenon has to be taken by FBR and a strong solution to this is a robust automated IT system and a strong risk management system.

It recommended that maybe time has come to introduce a consolidated tax code where the procedures and collection mechanism for all taxes are harmonized. This would lead to ease in compliance and collection. In view of lack of enforcement and extremely low level of compliance being the main reason for the failure of various tangible efforts, TRC in this report included a separate Chapter 3 on Increasing Tax Payers Compliance to ensure that it attracts the due importance, it said.