PRR loan fails to revamp Pakistan’s tax system: report

ISLAMABAD: Despite utilising 80% of the $400 million World Bank-funded Pakistan Raises Revenues (PRR) loan, the Federal Board of Revenue (FBR) has failed to address longstanding issues in Pakistan’s tax system and machinery.

This was the conclusion of a joint report by the Friedrich Naumann Foundation and PRIME, an economic think tank, titled “World Bank’s PRR Loan: Did It Help Increase Tax Revenues and Tax Machinery Efficiency? A Prospective Analysis,” launched on Friday.

The report, authoured by economist Shahid Mehmood, highlights significant shortcomings in achieving the loan’s objectives.

The report points out that multilateral donors have provided 16 foreign loans and technical assistance packages to reform Pakistan’s tax system.

However, an FBR official, when contacted, argued that the report inaccurately included funding allocated to provinces as part of the FBR’s financing. The official clarified that the FBR itself had only secured three foreign loans.

Speaking at the report’s launch, the World Bank’s lead economist, Tobias Akhtar Haque, emphasised the urgent need to bring all forms of income, at both federal and provincial levels, into the tax net.

He said that Pakistan’s economy was on the brink of default 18 months ago but has now entered a stabilisation phase. However, bridging the revenue gap remains critical.

"In the short term, emergency measures are necessary, but the country must ultimately broaden its tax base. Pakistan needs to consider moving toward a flatter, broader, and more equitable tax system,” Haque added.

Responding to questions about policy loans for addressing external financing gaps, Haque highlighted that provinces also secured foreign loans, underscoring the need to assess their actual benefits. On the digitisation of the FBR, he said that efforts were underway to develop state-of-the-art data centres and analytics to broaden the tax base. However, he conceded that the tax-to-GDP ratio remains unsatisfactory. Haque also stressed the importance of balancing revenue collection with necessary spending in a country where 80% of children face learning poverty, and 40% experience stunting.

The report warns that the PRR loan risks repeating the failures of previous initiatives, such as the World Bank’s Tax Administration Reform Project (TARP). Despite partial improvements, fundamental issues persist due to a lack of institutional learning and consideration of ground realities.

The loan’s main objective was to sustainably increase tax revenues by broadening the tax base and facilitating compliance. The first component outlined four goals: creating a simple and transparent system, ensuring taxpayer obligations, facilitating compliance, and promoting institutional development. However, none of these goals have been fully achieved.

“With 80% of the loan already utilised, major improvements with the remaining funds seem highly improbable,” the report states. Core issues, such as the lack of institutional development, a stagnant tax-to-GDP ratio, declining filer numbers, and ineffective efforts to bring retailers and non-compliant groups into the tax net, remain unresolved.

The report also criticises the use of technology under the loan’s second component, aimed at equipping the FBR with modern IT systems and tools. It references Robert Solow’s famous 1987 observation, “You can see the computer age everywhere but in the productivity statistics,” to underline the minimal impact of technology on improving FBR’s efficiency.

The report concludes that outdated bureaucratic structures, political pressures, and entrenched inefficiencies continue to hinder the FBR’s performance, rendering technological upgrades insufficient to achieve meaningful reforms.