February, 22, 2024
Tax Collection Overhaul: FBR Dissolution & Restructuring

Tax Collection Overhaul: FBR Dissolution & Restructuring

Infostani International: Pakistan is on the brink of a major tax service restructuring, signaling the end of the longstanding Federal Board of Revenue (FBR). Finance Minister Dr. Shamshad Akhtar is spearheading the separation of the Federal Customs Board (FCB) and the Federal Inland Revenue Board (FIRB), pending cabinet approval. This shift follows negotiations involving the finance minister, the Internal Revenue Service (IRS), and the Customs Group, aiming to redefine roles and oversight in the country’s revenue collection framework.

Overhaul of Tax Collection Structure in Pakistan: FBR Dissolution and the Emergence of FCB and FIRB

On Tuesday, Prime Minister Anwaarul Haq Kakar will lead a federal cabinet meeting to sanction the restructuring of the Federal Board of Revenue (FBR). All stakeholders have agreed to substantial concessions, paving the way for a separation between the Inland Revenue Service (IRS) and the Customs Group.

The separation of the two service groups responsible for tax collection is set to bring an end to the FBR, the parent body established in 1944. Finance Minister Dr. Shamshad Akhtar has abandoned the demand for the appointment of independent individuals as heads of oversight boards for the Federal Customs Board (FCB) and the Federal Inland Revenue Board (FIRB). Pending cabinet approval, FCB and FIRB will emerge as offshoots of the FBR, which will cease to exist.

Akhtar has now endorsed the idea that FCB and FIRB should be attached departments of the Revenue Division, in contrast to her earlier suggestion that both should report to the oversight boards. The IRS has supported the separation of the two services, with the Customs Service agreeing to function as an attached department of the Revenue Division, akin to the Inland Revenue.

The secretary of the Revenue Division will now be either from the Customs Group or the IRS, contrary to the initial proposal that the secretary should be from a third service group. Currently, 40% of total taxes are collected by the Customs Group, while the remaining 60% is managed by the Inland Revenue. A year ago, the Customs Group’s share was 54% when imports faced no restrictions.

Customs Group Concessions and Restructuring Overview

The Customs Group has conceded that human resources management and integrity management may fall under the purview of the Revenue Division. Additionally, the Customs Group has agreed to act as a withholding agent for income and sales tax collection at the import stage on behalf of the Inland Revenue.

The Revenue Division, established in 1944 and maintaining the same structure post-partition until the 1970s, underwent restructuring to become the Central Board of Revenue (CBR) and eventually the FBR in 2007.

A resolution was reached among three key stakeholders—the finance minister, IRS, and Customs Group—after military intervention facilitated a breakthrough. The FBR chairman submitted a summary for approval by the federal cabinet.

The restructuring, approved by the Special Investment Facilitation Council (SIFC) on January 3, faced delays due to differing views between the FBR chairman and the finance minister. The reconciled proposal introduces a Federal Policy Board chaired by the finance minister, with the Revenue Division secretary acting as the board’s secretary.

Tax Collection Overhaul: FBR Dissolution & Restructuring
Restructuring the tax system

Restructuring of Tax Collection Entities and Governance Framework: Key Changes and Implications

The Customs and Inland Revenue organizations will be separated, each headed by a director general appointed by the federal government for a fixed term. The position of FBR chairman, along with the FBR, will cease to exist. The new director generals will have administrative, financial, and operational autonomy, with powers over their respective budgets, including the authority to make transfers and postings, marking a significant gain for the Customs Group.

Under the reconciled proposal, oversight boards chaired by the finance minister will be established, comprising secretaries of finance, revenue, commerce, NADRA chairman, and domain experts. The director generals will report to their respective boards, while their organizations will be attached to departments of the Revenue Division.

      Organizational Restructuring:
    • Customs and Inland Revenue organizations will be separated.
    • New director generals are appointed for each entity by the federal government.
      Oversight and Autonomy:
    • Oversight boards chaired by the finance minister.
    • Director generals to have administrative, financial, and operational autonomy.

The oversight boards will set performance targets, monitor performance, and approve administrative policies of the Customs and Inland Revenue establishments. Customs will act as a withholding agent for Inland Revenue taxes at the import stage. However, concerns have been raised among Customs officers regarding potential access by Inland Revenue officers to their ports.

The Revenue Division will hold extensive powers, overseeing matters related to international taxes, valuation of goods and assets, information technology, digitization, and policies related to data exchange between the two new organizations. Additionally, integrity and human resources management responsibilities for the new organizations will rest with the Revenue Division, raising concerns for the Customs Group.

Joint Functions and Asset Division: Collaborative Determination of Imported Goods Values and FBR Asset Allocation

Certain functions will be jointly performed by the two bodies, such as the determination of values of imported goods through valuation rulings, with equal representation from Customs and Inland Revenue. The Inland Revenue has expanded its role into an area previously solely managed by the Customs Group. The FBR’s assets will be divided between the two new organizations.

The finance minister will establish an implementation committee to ensure a smooth separation and the establishment of the new organizations. This committee will propose legal and regulatory amendments, with the FBR chairman proposing that these changes be completed within two weeks, aiming to conclude the entire process before the end of the caretaker government.