ISLAMABAD: The government has given a commitment to the Asian Develo­pment Bank (ADB) to approve and commence with effect from January 1, 2022 the implementation of National Carbon Pricing Strategy under the country’s overall tax policy to raise tax-to-GDP ratio to 10pc by FY2025 from 8.5pc now.

This is part of about $200 million loan — Resource Mobilisation Reforms programme — of the ADB that has to begin on January 1, 2023 and be completed by end-March 2024, primarily by the Federal Board of Revenue. Under the programme, the government would also expand the track and trace system (TTS) for improved tax recoveries to large number of sectors including petroleum, pharmaceuticals and beverages.

The FBR has availed a series of loan programmes over the past 10-15 years including those from the World Bank to increase tax-to-GDP ratio to 10pc but failed to sustain tax ratios after some initial progress. The tax-to-GDP ratio over this period has fluctuated between 8 and 10 per cent.

The programme is designed by the ADB to promote an inclusive and evidenced-based institutional framework for tax policy and administration for which the government will create a new tax policy wing (TPW) in the Ministry of Finance that would “guide inclusive tax policy design and associated public consultation”.

This wing would undertake legal drafting to ensure that policy objectives are reflected in laws and regulations, conduct revenue and economic impact analysis with specific attention to its implications for gender and guide the government and negotiate tax policy and treaties with other countries.

Under the loan programme conditions, the federal cabinet will approve the submission of the proposed harmonized Inland Revenue (IR) Code to the Parliament and the FBR will roll-out improved products and services for taxpayers based on the results of the independent third-party survey, particularly for women, disabled and vulnerable groups, and people in remote or rural areas.

The FBR will finalize and submit proposed amendments to the legislation on the taxation of cross-border transactions to the federal Cabinet which will align this legislation with international standards and best practice, including the G20’s and OECD’s domestic tax base erosion and profit shifting.

The FBR would also fully operationalize and roll-out SWAPS (an automated financial system of incoming and outgoing transactions including profits etc) through integration in telecom companies and listed companies covering at least 50pc of their transactions as done with methodologies for tax gap analysis in the past for core taxes (import duties, income tax and sales tax).

The system electronic monitoring (TTS) of pharmaceuticals, petroleum, and beverages sectors would be expanded by operationalize a control room for the TTS system to enhance tax revenue collections, reduce counterfeiting, and prevent smuggling of illicit goods.

The FBR will also deploy upgraded software architecture for inland revenue information system (IRIS-2) to integrate modules for taxpayer declaration (income tax and sales tax), refund application, withholding statement, and computerized payment receipt correction and then align the sales tax platform of IRIS-2 with WeBOC system, and Pakistan Single Window (PSW) system and fully roll-out modules under the governance risk and compliance framework for 2022-24.

The FBR will establish and fully operationalize the client-based reporting system (CFRS) by recruiting and deploying adequately skilled staff including at least one gender expert according to approved organizational chart in line with an already completed diagnostic study. Under the programme, the FBR will also introduce the gender and social inclusion policy and action plan and begin implementation of key measures that will support the recruitment promotion and retention of women, transgender persons, persons living with disabilities, and minorities for inclusive and diversified workplace.

In order to improve taxpayer integrity and compliance, the FBR will approve ann­ual compliance improvement programme based on the recommendations from tax gap analysis and sectoral benchmarks.

The loan programme will help the government address major binding constraints to mobilise larger resources to enhance productive investment by improving domestic revenue mobilisation; quality of public expenditure and cash management for improving allocation efficiency of scarce public resources; and mobilisation and utilisation of domestic savings and foreign direct investment (FDI).

Prior to finalising the loan, the ADB had approved a technical assistance to Pakistan to prepare the improved domestic resource mobilisation reform programme to ensure fiscal sustainability and generate fiscal space to finance critical investments in human capital, infrastructure and poverty alleviation.

With a large informal economy, macroeconomic shocks such as the Covid-19 pandemic in 2020 and the global supply chain disruption in 2021 have pushed the country’s poor deeper into poverty. According to the ADB, the country’s ability to mobilise adequate domestic resources, including the creation of fiscal space through better expenditure management, remain critical to ensure quality investments in essential public services such as health and education and promote equitable development across its provinces.

Published in Dawn, August 15th, 2022