Questions and Answers on the Pakistan Tax Administration Reform Project

Transcription

1 Questions and Answers on the Pakistan Tax Administration Reform Project Q: What is the Pakistan Tax Administration Reform Project (TARP)? A: At the request of the Government of Pakistan, the World Bank approved the Tax Administration Reform project on December 12, 2004 to assist the Federal Board of Revenue (FBR) in implementing its own reform strategy. The project s development objective was to fundamentally reform the FBR into a more efficient and effective revenue administration system. This included measures to increase tax collection, promote voluntary compliance, and guarantee fairer and more equitable application of tax laws. Q: How is the Project financed? A: The total cost of the project is $149 million. The project is financed by a $78.5 million credit from the International Development Association (IDA), a $24.4 million loan from the International Bank for Reconstruction and Development (IBRD), a $23 million grant from the UK s Department for International Development (DfID), and the Government of Pakistan ($23 million). Q: Why does the Government of Pakistan want to reforms its tax administration? A: Reforms of tax policy and administration are among the most crucial economic reforms for any developing country, and Pakistan is no exception. Pakistan s tax to GDP ratio at around 10 percent is among the lowest in the world, severely jeopardizing national goals of reducing poverty and improving vital public services such health care and education. Moreover, the structural weaknesses of the tax system have heightened Pakistan s vulnerability to economic shocks. As Pakistan faced a mounting economic crisis in 2008, the need to increase tax revenues became the single most urgent priority of the Government. There was a broad recognition that the failure to improve revenue generation jeopardized the country s development efforts by limiting the resources necessary for planned investments. Q: What is the scope of tax reforms pursued by the Government of Pakistan? A: A comprehensive tax reform strategy titled Pakistan Tax Administration Reform: Comprehensive Medium and Long Term Strategy was approved by the Government of Pakistan in The strategy set out a clear objective to shift from a type of tax organizational structure to a functionally integrated tax administration. In a type of tax structure, each tax sales tax, income tax, and excise tax has its own administration. Taxpayers face a confusing array of different rules, processes and procedures to obtain tax registration, file returns, make payments, manage audit, and dispute controversies. This creates an unnecessary duplication of services that should be common across all tax types. More importantly, by increasing the number of points of contact between tax collectors and taxpayers and multiplying rules across different taxes, a type of tax structure opens greater opportunities for discretion in the application of tax laws, and hence, corruption. 1

2 A tax administration based on functional lines entails the development and application of standard and unified business processes across all tax types including on audit, enforcement, collection, and registration. Taxpayers have a single point of con tact with the tax authorities. This reduces overlap, enhances economies of scale, and ensures a fair application of tax legislation. Q. Did the World Bank play a role in designing the tax reform strategy? A: The tax reform strategy was developed by the Federal Bureau of Revenue (FBR) and was articulated in its May 2003 strategy document (see previous question and answer). The World Bank s entire engagement on tax administration in Pakistan has been based on the FBR s own reform strategy. Consequently, the Government of Pakistan requested the World Bank to support this strategy through TARP, which was approved by the Bank on December 12, Q: What are the likely economic benefits from tax administration reforms? A: The impact of a higher revenue performance cannot be overestimated. It will boost resources to finance much needed investments in education, health care and infrastructure, and reduce Pakistan s dependence on external aid. Specifically, the main economic benefits of tax administration reforms can be summarized as: An increase in government revenues as a result of widening of the tax base. Improvement in customs procedures will reduce the cost of doing business since it will cut the number of days importers need to borrow from banks to finance imports. Improving voluntary tax compliance rates implies early revenue generation for the government, saving interest payments and administrative costs related to enforcing compliance. Economy wide gains to the private sector as an increasing number of economic agents operate under the same set o f rules and taxes Greater predictability of tax liability and lower costs of doing business for the private sector. Q. Has the TARP resulted in improved revenue mobilization? A. With the support of the TARP, the Government of Pakistan has achieved some notable changes in tax administration. The form of interface between taxpayers and tax collectors has changed with the introduction of a new system of self assessment for paying income tax, the development of a new set of user friendly tax forms, guides, a modern web site, and the construction of 21 Taxpayer Facilitation Centers. The organization of tax administration across the country has been consolidated through the establishment of a network of 13 Regional Tax Offices (RTOs), 3 specially designed Large Taxpayer Units (LTUs), and 6 Model Customs Collectorates. New IT systems have been developed to improve efficiency, including a data warehouse, e portal, payments and refunds system, and taxpayer accounts, along with the implementation of a single Tax Identification Number for all taxpayers for effective functioning of these systems. With the support of the project, the FBR has also developed, for the first time, an integrity strategy, including a taxpayer charter and a code of conduct and ethics. 2

3 Though important to a well functioning tax administration, these outputs have not yet translated into the critically important outcome of demonstrably higher tax revenues. The new processes and systems have only recently been supported by institutional reforms to create a functionally integrated tax administration that are necessary to change behaviors in the way that taxpayers and tax collectors interact. Starting in January 2009, the Government took a series of administrative measures to reorganize the FBR along functional lines a reform that had been part of the Government s strategy since This meant merging the administration of sales, income and excise taxes and integrating common functions for collection, enforcement, audit and IT systems across all these taxes. Inspection Panel Q: What is the Inspection Panel? A: The Inspection Panel is an independent vehicle for people who believe that they have been, or are likely to be, harmed by World Bank funded projects. The Panel reports directly to the World Bank s Board of Executive Directors. The Board created the Panel in 1993 to promote accountability at the World Bank and to ensure that the voices of people who may be adversely affected by Bank financed projects will be heard. Since it was established, the Panel has registered 58 Requests for Inspection out of which 24 have been investigated (as of June 30, 2009) The Panel carries out this mandate through its work as an impartial fact finding body, independent of Bank Management. In response to requests by affected people, the Panel has the power to review Bank funded projects and determine whether Management is following its own operational policies and procedures. These policies and procedures are designed to ensure that Bank financed projects provide social and economic benefits, and avoid harm to people or the environment. The Panel is composed of three members of different nationalities who serve five year terms. Members of the Panel are selected based on their ability to deal thoroughly and fairly with requests brought to them, their integrity and their independence from Bank s Management, and their exposure to developmental issues and to living conditions in developing countries. Members of the Panel may not be employed by the Bank Group, following the end of their service on the Panel. Q: What are the steps in the Panel review process? A: Under the Panel procedures, two or more individuals affected by a World Bank financed project can request an investigation provided they meet the Panel s technical eligibility criteria. In responding to a Request for Inspection, the Panel process consists of two phases: the Eligibility Phase and the Investigation Phase. The Eligibility Phase starts when the Panel receives and registers a Request for Inspection and requests the World Bank Management for a response. After receiving Management s Response, the Panel reviews the Request against its technical eligibility criteria and the response prepared by Management, and it assesses whether the alleged violation of the Bank of its policies and procedures potentially is of a serious character. A visit to the borrowing country by a small team is normally conducted at this time to 3

4 meet with the requesters and relevant institutions involved. Based on this review, the Panel may recommend to the World Bank s Board of Executive Directors to authorize an Investigation. The Panel s report, together with the Management Response, is made public after the Board has decided on the Panel s recommendation. In the Investigation Phase, a larger team composed of Panel members, staff of the Panel Secretariat, and hired specialists visits the country and meets with the Requesters and affected people to learn in detail about the issues, concerns, status and potential harms. As part of its fact finding responsibilities, the Panel also meets with and interviews World Bank staff, government officials, civil society organizations, experts and others so that it can fully understand and investigate the claims in the Request and make its findings about Bank compliance and harm. An investigation may take a few months or more in complex cases. On the basis of its investigation, the Panel completes and submits its Final Investigation Report to the Bank s Board of Executive Directors. Bank Management then has six weeks to prepare an Action Plan, agreed with the Borrower, in response to the Panel s findings. In the preparation of the Action Plan, Management is required to consult with the Requesters and affected parties. The Board meets to discuss the Investigation Report and the proposed Action Plan. The Panel s report is then made public, together with an Action Plan approved by the Board. Q. Can the Panel provide recommendations and remedies? A. No The Panel is strictly a fact finding body. The Investigation Report will not contain recommendations to the Bank or the borrower on ways to remedy any harm identified. It is the responsibility of World Bank Management, in cooperation with the borrower, to propose actions in response to the Panel s findings. Q. Does the Panel investigate the borrower's performance? A. No The Panel's role is to investigate the Bank and not the borrower. Q. Is there a request for an Inspection Panel investigation into the TARP? A. Yes on December 22, 2009, a Request for Inspection was submitted by members of the Officers of Customs and Excise Group Association, which was registered by the World Bank on January 19, To read the request, visit: K: ~piPK: ~theSitePK:380794,00.html Q. What was the outcome of the Request for Inspection? A. Following a review of the Request for Inspection, the Panel concluded that an investigation is not warranted. Although noting the importance of the issues raised in the Request, the Panel holds the view that the proposal to create the IRS was not a departure from the original project objectives of TARP. The Panel also concluded that the issue of the potential impact of administrative reforms on 4

5 career prospects for promotion and professional development did not raise issues of compliance with the World Bank s operational policies and procedures. Moreover, the Panel clarified in its report that it is not addressing matters of legality under domestic law. The Panel did, however, note that the implementation of TARP could have benefitted from more extensive consultations by the World Bank team with relevant stakeholders. Recognizing the importance of communication and consultation for all significant institutional reforms, the World Bank Management has proposed to offer additional support to the Federal Bureau of Revenue (FBR) on human resource development and change management through TARP. The Inspection Panel welcomed this proposal for enhanced support.administration reforms currently undertaken by the FBR. For more information about the Inspection Panel, visit: For complete Q and A on the Inspection Panel, visit: K: ~pagePK: ~piPK: ~theSitePK:380794,00.html 5