he debate around the federal budget for 2024-25 has once again brought the Federal Board of Revenue under public scrutiny. The budget has been criticised for a heavy reliance on indirect taxes. These taxes, inherently regressive, are favoured by the FBR for their ease of collection, despite their disproportionate impact on lower-income people. Individuals earning Rs 25,000 a month and those earning Rs 25 million, for instance, pay the same amount of tax when topping up their mobile phone credit.

The government has set itself an ambitious tax revenue target of Rs 13 trillion for the current fiscal year. This represents a 40 percent increase over the previous year and is admittedly aimed at facilitating negotiations with the International Monetary Fund. “We have had to prepare this budget with the IMF in mind because that is what the circumstances demand,” Prime Minister Shahbaz Sharif said last month.

The raises in the tax targets include a 48 percent increase in direct taxes and a 35 percent hike in indirect taxes over the revised estimates for the previous year. Non-tax revenue, including petroleum levies, is expected to rise by 64 percent. The current government, mirroring the practice of its predecessors, is focusing on short-term IMF proposed goals, rather than long-term FBR reform. Those already in the tax net are set to bear heavier burdens. Some of the tax evaders will remain protected.

Successive governments in Pakistan have made several attempts to reform the FBR. They have encountered significant resistance from within the organisation. The FBR has failed to implement effective track and trace systems in critical sectors such as sugar, cement, fertiliser and tobacco, despite considerable financial investments.

Defence Minister Khwaja Asif is reported to have said that the new taxes imposed on exporters under pressure from the IMF will end up benefiting only some corrupt FBR officials.

One of the reasons FBR reform is difficult is grouping in the board. Two-thirds of the senior officers in the FBR are from the Inland Revenue Service and the remaining from the Customs service. The officials from the Inland Revenue Service occupy crucial positions and are leading opponents of the reform agenda.

Given its track record, achieving the collection targets will be a significant challenge for the FBR. In the fiscal year 2023-24, the FBR managed to collect Rs 9.285 trillion, slightly exceeding the downward revised target of Rs 9.252 trillion (the originally target was Rs 9.415 trillion). In the year 2022-23, the FBR had missed its tax collection target by Rs 496 billion, collecting Rs 7.144 trillion against a target of Rs 7.640 trillion.

The target was missed despite the imposition of nearly Rs 800 billion new taxes and a mini-budget introduced in February. The FBR’s ability to collect Rs 13 trillion is being doubted.

The ongoing World Bank and Asian Development Bank sponsored reform programmes in the FBR were supported by a $700 million (Rs 200 billion rupees) loan. Some of this amount was spent on luxury vehicles for FBR officers.

With more than 23,000 workers and officers, the FBR is accused by some of being the primary obstacle to Pakistan’s economic growth. Characterised by its vast bureaucratic structure, the board is routinely accused of rampant rent-seeking and tax evasion that severely undermine the tax collection efforts. Its practices are often blamed for a hostile environment for businesses, discouraging income disclosure and perpetuating undeclared wealth. Its culture of harassment not only tarnishes Pakistan’s reputation but also deters investment.

Despite a general recognition of the need for FBR reform, previous efforts have lacked substance. Key reforms must prioritise addressing core issues such as rent-seeking and harassment.

While simplifying tax policies and integrating technology are crucial steps, effective reform will hinge on restructuring the FBR to operate as a lean, efficient and customer-centric organisation. The revamped entity should focus on serving the taxpayers while leveraging technology to combat tax evasion. Conversely, the FBR’s role should shift to expanding the taxpayer base. Its performance should be judged in terms of the number of new taxpayers brought into the system.

Successive governments in Pakistan have failed to reform the FBR. Caretaker finance minister Shamshad Akhter famously tried to restructure the FBR with a plan to separate policy from enforcement and establish Customs as an independent board. The minister said she had wanted the tax-to-GDP ratio to rise to 15 percent from around 9 percent where it has stagnated for several decades.

However, the reform measures faced staunch opposition from the FBR workers. Shabbar Zaidi, the former FBR chairman, has said that out of its 23,000 officers only about 8,000 were needed. Significant changes in the FBR structure could not be expected, he had said back in 2022, until the staffing level could be brought down.

More than 90 percent of the tax revenue in Pakistan is either paid voluntarily or collected as withholding tax. In the last three years, the board sent tax notices for Rs 600 billion. Against those, the actual recovery was less than Rs 4 billion.

It is claimed that since 2016, the tax burden on corporate taxpayers has increased by more than 40 percent. Experts argue that this is discouraging people from entering the tax system and promoting corporatisation.

Prime Minister Shahbaz Sharif has expressed a strong commitment to FBR reform. The government recently engaged McKinsey and Company to digitise the tax system. The effort is being funded by a grant from the Bill and Melinda Gates Foundation.

The new initiative raises questions about the effectiveness of the current reform efforts, including the World Bank’s $400 million project and the Asian Development Bank’s $300 million reform programme. The introduction of yet another reform programme suggests dissatisfaction with previous outcomes.

The ongoing World Bank and ADB reform programmes in the FBR were supported by a $700 million (Rs 200 billion) loan. Some of this was spent on luxury vehicles for FBR officers.

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