he Federal Board of Revenue cannot currently identify the sources of the wealth parked in more than 80 percent of the bank accounts in the country. The recent revelation has left the government bewildered and grabbed the attention of Prime Minister Shahbaz Sharif. The country of 240 million people is currently facing one of the worst economic crises in its history. It has been forced to seek back-to-back bailout packages from the International Monetary Fund. The tax-to-GDP ratio is dismal.

The IMF recently published a report titled, Pakistan Tax Policy Diagnostic and Reform Options. The report provides a detailed analysis of Pakistan’s tax policy, highlighting its complexity, inefficiencies and underperformance. The severity of the situation has been emphasised by comparing Pakistan’s tax-to-GDP ratio of around 10 percent with the average of 18.3 percent for the Upper Middle-Income Countries and 17 percent for the Lower Middle-Income Countries in 2020.

According to the reports, only about 2.4 percent of the people file tax returns. Pakistan’s current tax-to-GDP ratio stands at 11.4 percent. According to a recent World Bank report, Pakistan’s fiscal deficit is projected to rise to 8 percent of the GDP.

The government appears to be spending a lot more than its income. The new government has laid out an ambitious plan to reforming the FBR and improve the tax-to-GDP ratio. The central theme of the reform plan is the separation of Customs and Internal Revenue. Both the organisations can continue to work under the Revenue Division.

The restructuring plan also envisages establishment of a board to be headed by the finance minister to deal with the tax policy issues, digitialsation, setting of revenue targets, coordination, integrity policy, consultation with industry and the valuation policy. So far the government has faced stiff resistance to the implementation of its ambitious plan to plug the loopholes in the tax system.

On April 23, in a rare development, the prime minister took notice of the “deliberate” delay in deciding the tax cases and ordered suspension from service of Commissioner Inland Revenue, Islamabad, and some other officials. The prime minister, according a statement issued by his office, took serious notice of the “wilful” delay in the pending cases and directed the FBR to suspend the Chief Commissioner Large Taxpayers Office, Islamabad, as well as other relevant officials.

The prime minister also directed the relevant authorities to initiate an inquiry against them. “The prime minister has ordered reforms in the FBR and has decided to oversee the process himself,” the statement read.

More than 145,000 tax cases are pending in various courts. These involve disputes amounting to Rs 4.23 trillion. 19,528 cases, involving Rs 740 billion, are pending before the high courts. The Supreme Court is reviewing 3,455 cases involving Rs 1.4 trillion. Tax disputes at lower levels have another Rs 2.23 trillion tied up.

The restructuring plan also envisages establishment of a board to deal with the tax policy issues, digitalisation, setting of revenue targets, coordination, integrity policy, industry consultation and valuation policy. 

The prime minister has requested the chief justice of Pakistan to facilitate an early disposal of the pending in the courts. The FBR bureaucracy, on the other hand, has shown little interest in the disposal of such cases. The prime minister took notice of one of the pending cases last week in which an FBR counsel had sought adjournment. The prime minister observed that the national exchequer had been suffering due to the pendency of such cases.

The prime minister’s action amounts to lack of confidence in the FBR chairman, Malik Amjad Zubair Tiwana and the inland revenue member, Mir Badshah Khan Wazir.

A day before the prime minister’s action, the chief justice of Pakistan had expressed displeasure with FBR chairman for appearing to be trying to protect an official. In April 2022, an SC bench led by Justice Qazi Faez Isa had directed the government to launch an inquiry to identify the FBR officers responsible for awarding the contract for real-time tracking and monitoring of cargo in the Afghanistan transit trade.

The FBR had lodged an appeal against the order. During the hearing on April 22, the chief justice asked whether the sole concern of the FBR chairman was to protecting corrupt officers. “As a public organisation funded by taxpayers, the FBR should not endorse corrupt practices,” he said.

Caretaker finance minister Shamshad Akhter had tried to restructure the FBR, saying that this could help raise the tax-to-GDP ratio to 15 percent. In December last, it was revealed that more than half of the FBR’s employees were non-filers of income tax returns in 2023.

On January 3, the Special Investment Facilitation Council approved restructuring of the FBR. It proposed implementation of the decision in one month. However, some FBR employees have approached the Islamabad High Court against the proposal.

According to official data, the FBR missed tax targets for the last three months. Last year the number of income tax return filers came down to 4.2 million from the previous year’s 5.7 million.

Last year, the FBR also missed its tax collection target by Rs 496 billion, collecting Rs 7.144 trillion against the target of Rs 7.640 trillion. The target was missed despite the imposition of nearly Rs 800 billion additional taxes, including a mini-budget introduced in February 2023.

The prime minister has now issued directions for the hiring of international consultants to modernise the system and introduce cutting-edge technologies to boost revenue collection.

Sources in the FBR say that the deep-seated systemic obstacles threaten to derail the reform agenda. “Bureaucratic inertia and fear of change threaten to stymie the process and progress. The old guard are against digitalisation,” a senior official told TNS on the condition of anonymity.“93 percent of the tax revenue was either paid voluntarily or collected as withholding tax. A meagre 7 percent was collected by the FBR. Over the last three years, the board has sent Rs 600 billion tax notices but recovered less than Rs 4 billion. The status-quo suits the FBR,” he adds.

“It will not be easy for the government to implement its reform agenda… No reforms can be implemented in the FBR unless the finance minister has his own team. No one in the ministry is sure whether the current leadership of the FBR is part of the solution or part of the problem.”

The writer is an Islamabad-based researcher and journalist with interests in health and taxation policies