Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
In the light of dynamic shifts in business and advancements in technology, it is opportune for the Federal Board of Revenue (FBR) to get on a transformation journey. This entails updating its tax administration framework to enhance efficiency and tackle challenges like evasion and counterfeiting. Embracing digital solutions can be important in overcoming these hurdles and promoting transparency in tax processes. By harnessing modern technology, the FBR can streamline operations and fortify its revenue collection efforts. This evolution is essential for aligning with the evolving business environment and unlocking maximum revenue potential. In order to achieve these objectives, proactive steps must be taken to implement innovative solutions and optimize tax management practices. Through such endeavours, the FBR can position itself as a forward-thinking, people-friendly and service-oriented institution adept at meeting the demands of the modern economy.
An exemplary endeavour by the FBR is the Track & Trace system (TTS), aimed at monitoring goods’ supply at all points and tax compliance. Initially implemented in key sectors like sugar, tobacco, fertilizer, and cement, TTS ensures accurate tax payments. This system meticulously tracks the production and distribution of goods, ensuring tax adherence at every stage. With TTS, the FBR aims to enhance transparency and combat tax evasion effectively.
The implementation of the TTS by the FBR represents a significant step towards modernizing tax administration. Through this system, taxable goods are endowed with Unique Identification Markings such as barcodes and QR codes, embedding crucial data like origin, manufacturer, and tax information. Furthermore, the system incorporates high-security physical tax stamps on unit packets to bolster tax verification and product authentication efforts.
Data from the markings and stamps are meticulously recorded into databases, facilitating monitoring and verification procedures. For ensuring effective real-time monitoring, monitoring devices are strategically installed at various checkpoints, manufacturing facilities, and retail outlets. This proactive approach enables the prompt detection of irregularities and unauthorized diversions in the supply chain, ultimately fortifying tax compliance and transparency efforts.
According to FBR, comprehensive coverage has been attained across the sugar sector since November 2021, ensuring that all products leaving manufacturing sites are duly stamped and labeled. Similarly, industry-wide coverage has been realized in the fertilizer and tobacco sectors since June 2023 and March 2024, respectively.
As for the cement sector, full industry-wide coverage is slated for completion in the second quarter of 2024. This achievement marks a significant milestone in the implementation of the TTS improving tax compliance and ensuring regulatory oversight across these vital industries.
The FBR must persist in expanding the scope of TTS to encompass additional sectors, aligning tax collection with the revenue potential of each sector. Pakistan’s revenue generation has consistently fallen short of its expenditure profile, a challenge exacerbated by ineffective tax administration and financial misconduct. Addressing this chronic issue demands a multifaceted approach, with digitization and technological integration playing a pivotal role. By embracing digital solutions, the FBR can streamline tax administration processes, mitigate human error, and combat corruption more effectively.
The strategic shift towards modernization holds promise for fostering greater transparency, efficiency, and accountability within the tax system, thereby facilitating sustainable economic growth. Expanding the tax net to encompass the retail and informal sectors stands as a fundamental challenge for the FBR, necessitating a holistic approach and leveraging modern technology.
With the help of data scientist and by harnessing technological tools, such as data from banks, withholding statements, and tax returns of compliant entities, the FBR can effectively assess the tax potential of businesses within these sectors. This strategic utilization of technology enables the identification of potential taxpayers and facilitates the issuance of compliance notices to encourage tax adherence. Adopting innovative solutions empowers the FBR to enhance its outreach and engagement with previously untapped segments of the economy, thereby fostering broader tax compliance and revenue generation.
The FBR’s recent endeavour, the ‘Tajir Dost Scheme, 2024’ [Traders’ Friendly], is designed to outline the tax scope, filing procedures, and assessment criteria for small traders and shopkeepers with fixed business premises. These establishments, including shops, stores, warehouses, and offices, situated within specified territorial limits, such as Karachi, Lahore, Islamabad, Rawalpindi, Quetta, and Peshawar, fall under the scheme’s purview. Under this initiative, every eligible individual is mandated to remit a monthly advance tax, constituting the minimum tax liability for business income covered by the Tajir Dost scheme. The computation of this monthly advance tax is prescribed in accordance with specified guidelines.
In cases where the advance tax obligation amounts to zero, a minimum annual payment of Rs. 1200 remains applicable as advance tax. This scheme aims to streamline tax compliance procedures for small traders and foster a culture of regular tax payments within this sector. By providing clear guidelines and standardized procedures, the Tajir Dost Scheme seeks to facilitate ease of tax compliance and contribute to enhanced revenue collection for the government.
FBR’s focus extends to enhancing efficiency in its litigation and appellate processes, essential for resolving high-stakes tax disputes. The government’s recent enactment of the Tax Laws (Amendment) Act, 2024, marks a significant step in this direction. This legislation introduces amendments to key tax statutes, including the Income Tax Ordinance of 2001, Sales Tax Act of 1990, and Federal Excise Act of 2005. These amendments aim to address complexities and streamline procedures, fostering a more expeditious resolution of tax-related disputes. Such reforms are essential in reposing confidence in the tax regime and promoting fairness and transparency in the adjudication of tax matters.
The Sales Tax Act has been amended to delineate the appellate process more clearly. Under the revised framework, appeals to the Commissioner (Appeals) are permissible for tax assessments or refunds valued up to Rs. 10 million. Conversely, matters exceeding this threshold fall under the purview of the Appellate Tribunal Inland Revenue. This amendment introduces a tiered approach to appeals, aligning the adjudicative process with the magnitude of the tax assessment or refund in question. By providing distinct avenues for resolution based on the financial stakes involved, the amendment aims to enhance efficiency and expedite the resolution of tax disputes.
The above measures would contribute to instilling confidence in the tax regime and ensuring equitable access to justice for taxpayers across different scales of financial engagement. The amendment is made in the Income Tax Ordinance 2001, defining the pecuniary jurisdiction for appeals. It specifies that income tax appeals shall be directed to the Commissioner (Appeals) if the tax assessment or refund value does not exceed Rs. 20 million. Appeals surpassing this threshold are to be lodged with the Appellate Tribunal Inland Revenue. The amending law also reduces the appeal period to the High Court from 90 days to 30 days, expediting the adjudication process.
From FBR’s historical performance, a recurrent pattern emerges, where a tendency to implement uniform solutions. The inclination leans towards modifying withholding rates or instituting fixed rates to augment revenue streams. However, this approach often exacerbates the financial strain on businesses, particularly when coupled with provincial sales taxes. To mitigate this strain, a comprehensive strategy leveraging technology and data on potential taxpayers is important. Such an approach can bolster revenue generation while alleviating the burden on segments subjected to excessive taxation.
Since the imperative reforms within the FBR are being taken, it is important to acknowledge the legislative responsibility in this regard. Comprehensive laws are indispensable for effective tax administration, and the lack thereof often hampers the FBR’s efforts. The absence of coordination mechanisms among various institutions, including the State Bank of Pakistan (SBP) and Securities and Exchange Commission of Pakistan (SECP), exacerbates the challenges faced by the FBR.
For moving forward, Pakistan must prioritize financial inclusion and the documentation of the economy to enhance revenue generation. Preferential treatments to specific sectors should cease, and a uniform application of the law is essential for fostering a fair and equitable tax regime. By addressing these fundamental issues and embracing modern technological solutions, the FBR can truly evolve into a forward-looking institution capable of meeting the demands of the contemporary economic environment.
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Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima & Ikram, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have coauthored a book, Pakistan Tackling FATF: Challenges and Solutions
