South Asian Tax Summit, 2008
FBR’s REFORMS PROCESS
Presentation by
USMAN KHALID MIRZA
Member Direct Taxes
April 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
• MISSION
Enhance 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
• VALUES
Integrity – Professionalism – Teamwork – Courtesy –
Fairness – Transparency - Responsiveness
Organizational Structure FBR
CCFR
Secretary General/
Chairman
PRAL
Line Members
Support Members
Direct Taxes
Tax Policy & Reform
Sales Tax &
Federal Excise
Legal
Functional Members
HRM
Audit
Fiscal Research
Customs
Administration and
Coordination
Note: Various DG Positions are also included in the top Management
Information
Management System
Facilitation &
Taxpayers Education
Strengths of FBR
• A Critical State Institution
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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:
Report
• Aug 2001:
• Nov 2001:
• Nov 2001:
Pakistan
• Dec 2001:
• Feb 2002:
• Jul 2002:
Syed Shahid Hussain’s Committee
IMF Mission Report
The Strategy Document on Tax Reform
Presentation to the President of
Approval of the Strategy Document
Establishment of Supervisory Council
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 Onewindow 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:
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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 cases
 Regional Tax Offices (RTOs) in major cities to
deal with all other taxpayers
 Medium 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
Current Status Of Policy Reforms
• Simplification of Tax Laws
New Income Tax Law – Income Tax Ordinance,
2001 and Income Tax Rules, 2002 introduced
New Federal Excise Law – Federal Excise Act,
2005 and Federal Excise Rules 2005 introduced
Customs and Sales Tax Law and Rules updated
and improved
Introduction of GST in VAT Mode to minimize
cascading
Zero-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-Assessment
 Successfully implemented in Income Tax and Federal
Excise
 Further streamlined in Sales Tax
 Partly implemented in Customs
• Effective Risk Based Taxpayers Audit
 All 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 Exemptions
 To 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 Tax
 Additional Sales Tax of 3% on sales made
to un-registered person withdrawn
 Threshold of turnover subject to Sales Tax
raised from Rs.0.5 million to Rs.5.0 million
 Aberrations 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
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A unique system for speedy disposal of disputes between the
taxpayers and tax collectors in an un-conventional manner;
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By honorary professionals and related business experts
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Without any cost; and
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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 Administrative
Reforms
• Functional Members
 Five 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 FBR
 First 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 reengineering 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 Reforms
In 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 Reforms
In Revenue Collection
(Rs. Billion)
YEARS
Budget
Estimates
Revised
Estimates
Collection
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
123.3
149.5
174.8
190.7
259.9
270.5
328.0
324.0
354.0
362.5
430.0
457.7
458.9
510.0
580.0
690.0
835.0
120.6
145.0
160.0
180.3
225.0
264.8
286.0
297.6
308.0
351.7
406.5
414.2
No Revision
No Revision
590.0
690.0
835.0
110.5
139.8
153.2
172.6
226.6
268.0
282.1
293.6
308.5
347.1
392.3
404.1
460.2
518.00
591.085
712.6
847.2
NA means Not Applicable
Achievement (%)
B.E.
R.E
89.6
91.6
93.5
97.8
87.6
95.8
90.5
95.7
87.2
100.7
99.1
101.2
86.0
98.6
90.6
98.7
87.1
100.2
95.8
98.7
91.2
96.5
88.3
97.6
100.3
NA
101.7
NA
100.2
NA
102.1
NA
101.5
NA
Broadening of Tax Base
Taxpayers Population
 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
Strategy
 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.
Thank You