Support for Good Governance – tax reform

Project description

Title: Support for Good Governance – tax reform
Commissioned by: German Federal Ministry for Economic Cooperation and Development (BMZ)
Country: Pakistan
Lead executing agency: Economic Affairs Division (EAD)
Overall term: 2014 to 2015

Context

To be able to finance its public services and state building in a sustainable way, Pakistan needs to increase its tax revenues. At 8.9 per cent (2014), the country currently has one of the lowest ratios of tax to gross domestic product in the world. Potential exists to increase revenues through sales taxes levied on goods and services, and through income tax collected at both federal and provincial level. At present, shortfalls in the capacities of the tax administration hinder efforts to broaden the tax base and to enforce and collect taxes more efficiently. Lack of transparency, clarity and accountability concerning taxation is causing discontent among citizens, thereby threatening the fiscal social contract.

Objective

The performance and transparency of the tax administration is enhanced at federal and provincial level.

Approach

With the 18th Amendment to the Constitution of Pakistan, powers for revenue collection were redistributed between the federal level and the provinces. This programme supports the Federal Board of Revenue (FBR) as well as the tax authorities of Khyber Pakhtunkhwa and Punjab in strengthening revenue collection, including income and sales tax on goods and services. This involves providing support for evidence-based inputs for policy formulation and for harmonised intergovernmental fiscal relations.

The programme is strengthening the capacities of the tax administrations to facilitate the registration of tax payers. Together with its partners, GIZ is developing and implementing procedures to support audits and tax enforcement. The capacity development approach includes the adjustment of organisational structures and procedures, as well as strengthening the system for training tax officers.

By enhancing taxpayer education and public relations measures, the programme contributes to a constructive dialogue between the tax authorities and citizens. Thus taxpayers can learn about their rights and obligations, and the expectations of the different actors are clarified.

Results

  • Distortions in the sales tax system have been removed, resulting in an increase in the number of registered taxpayers and a 0.3 per cent rise in the tax-to-GDP ratio in 2012.
  • The Federal Board of Revenue and the tax authorities of four provinces have initiated a dialogue aimed at harmonising their approach to broadening the tax base.
  • The process of registering new taxpayers for both sales and income tax has been simplified.
  • Staff of the Inland Revenue Services working in all the field offices of FBR has fostered their communication skills. This is helping citizens to understand their rights and obligations.
  • Advice and training of 50 officers enhanced the quality of audits in the field of international taxation. It improved their understanding of double taxation agreements and transfer pricing, and enhanced their capacity to carry out audits.
  • Building on a taxpayer perception survey, and with advice and training from the programme, the Facilitation and Taxpayer Education Department of FBR has developed a set of media handling guidelines. It now interacts more effectively with the media.
  • The Directorate of Research and Training of FBR has made specialised auditing and media courses part of the standard training curricula for tax officers.