FBR reforms, again?
Prime Minister Shehbaz Sharif’s warning against resistance to tax reforms has once again put a spotlight on the efforts to restructure the Federal Board of Revenue (FBR). The warning came after a pen-down strike call by the Inland Revenue Service Officers Association (IRSOA) in opposition to the reforms and subsequent punitive action against several officers. Since 2000, successive governments…
Shehbaz Sharif's warning against resistance to tax reforms has drawn attention to the ongoing efforts to restructure the Federal Board of Revenue (FBR). Since 2000, successive governments have borrowed millions of dollars from the World Bank to restructure tax administration, but persistent weaknesses in compliance, audit and enforcement raise concerns about the effectiveness of repeated reforms over the past two decades.
The first major reform initiative began in 2000, followed by a $102.9 million World Bank-funded project in 2004. By 2012, the project established upgraded facilities and provided equipment, but manual procedures persisted, limiting efficiency gains. The World Bank's 2012 completion report rated the project as "moderately unsatisfactory," warning of a high risk to its sustainability.
The 2024 caretaker government proposed separating Customs and Inland Revenue into distinct organizations with independent oversight, but the proposal faced resistance from tax officials. International experience shows that there is no single organizational model for tax authorities, with India maintaining separate central authorities for direct and indirect taxes, while Australia and Britain operate integrated revenue administrations.
Tax experts argue that technology is necessary, but it cannot substitute for fundamental institutional changes, such as separating tax policy from collection, implementing merit-based recruitment and promotions, and evaluating performance through various metrics beyond gross collection. The FBR's revenue composition shows that withholding taxes account for 58.2% of gross direct tax collection, while demand collection contributes only 4.6%, highlighting the challenge of minimizing the tax gap in the sales tax, which is reported at over Rs3 trillion.
Despite previous reforms, audit effectiveness remains a concern, as risk-based audits introduced in 2019 have not been implemented across all functional levels, and manual interventions and poor recovery continue to weaken enforcement.
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